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Fight over financial system pits Dodge against Carney

CARNEY

The slugfest between the Group of 20 and the world's biggest banks over financial regulation appears destined to go a full 10 rounds - and increasingly, it is fellow Canadians who are exchanging the blows.

Bankers used a weekend meeting of G20 finance ministers and central bank governors to amplify their contention that stricter rules are choking the global economy, not to mention their profits.

The politicians were unmoved. When asked if the thought the regulatory push by major countries was hurting economic growth, Finance Minister Jim Flaherty said: "No, I don't, actually. I think this is essential to world fiscal stability."

Three years removed from the Wall Street bailouts that characterized the financial crisis, the debate over financial regulation has shifted to the arcane business of rule-making. In Mexico City, bankers and regulators debated the Volcker rule, the U.S. proposal to limit the trading activities of banks that operate with government guarantees. But that is only one of dozens of technical measures on the table in countries around the world.

Financial institutions say demands that they hold more assets that can be sold easily in the face of a credit crunch will force them to forgo longer-term investments in infrastructure. The list of complaints also includes special surcharges planned for the biggest international banks and definitions of the types of assets that regulators will accept when measuring banks' reserves.

The persistent opposition of the banks is a demonstration of policy makers' biggest fear: an offensive by high-paid, expert lobbyists aimed at slowing down the process. Yet an uninspiring economic recovery is adding new resonance to the bankers' complaints.

What is clear is that each side is losing faith in the other, raising the unpleasant prospect of a protracted struggle between policy makers and the industry they count on to drive investment.

"We seem to have lost trust in each other," David Dodge, the former Bank of Canada governor who is now senior adviser at Bennett Jones LLP, said at conference hosted by the Institute of International Finance (IIF). "That breakdown in trust has been very unhelpful."

Mexico City was the setting for the latest round in this fight, which dates from the G20's pledge in Pittsburgh in 2009 to make the global financial system a safer place. But it could have been Toronto or Ottawa, given the number of Canadians involved.

Flaherty is a regular combatant, and Bank of Canada Governor Mark Carney heads the Financial Stability Board, the international body that is guiding the overhaul of global banking rules. But lining up against them in the Mexican capital were a couple of familiar faces.

Bank of Nova Scotia chief executive officer Richard Waugh was a vocal presence at a conference organized by the IIF, using the opportunity to say new restrictions on lending are stifling enterprise.

Waugh, who is a member of the Washington-based IIF's executive, insisted the threat posed by the G20's regulatory effort had taken on new urgency.

The IIF sent a letter to the G20 that said the reason that ultra-low interest rates in the United States, the euro zone, Japan and Britain are doing so little to stimulate economic growth is because banks are too burdened by regulatory constraints to transmit the low borrowing costs to consumers.

It was a new twist on an old argument by the bankers. But on the weekend, support for their position came from a somewhat surprising source: Dodge, who spent the bulk of his career in Ottawa as a senior public servant before becoming the country's top central banker.

Dodge, who left the Bank of Canada in 2008 and is now a member of Bank of Nova Scotia's board of directors, called the economic impact of the regulatory burden that has been foisted on banks "unhelpful," the same term he once used to describe the Canadian dollar's plunge to below 65 U.S. cents.

The problem, Dodge said, is that too many jurisdictions are going in too many different directions with rules that are overly detailed. As a result, financial institutions are forced to devote talented bankers to the task of regulatory compliance rather than loan-making and investing.

In some ways, the sight of Dodge aligned against Carney and Flaherty is discomfiting, another example of what critics say is a revolving door between government and the banking industry. Yet the presence of so many Canadians in the centre of the ring holds promise of a faster resolution. The distance between Ottawa and Toronto isn't all that great.

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