The secret to success for Julie Dickson, the most-powerful woman in Canadian banking and watchdog for the world’s soundest lenders, is to assume Nouriel Roubini is always right.
“It wouldn’t matter if people gave me reassurance,” said Dickson, who is raising Canadian capital standards faster than others even as lenders such as Toronto-Dominion Bank (TD) are hailed as industry bedrocks. “Some people are glass half-full types and some people are glass half-empty. In this role, I’m a glass half-empty type.”
Dickson has built on a tradition of emphasizing safety over growth in five years as head of the Ottawa-based Office of the Superintendent of Financial Institutions. The policy has helped make world beaters of Canadian lenders.
Canadian banks held four of the top 10 spots in Bloomberg Markets magazine’s annual ranking of the world’s strongest banks, released in May. Canadian Imperial Bank of Commerce placed third, followed by Toronto-Dominion in fourth, National Bank of Canada in fifth and Royal Bank of Canada in sixth.
In a 45-minute interview at her Ottawa office last week, Dickson offered hints to her methods: focus on bearish forecasters like Roubini, the New York University professor who predicted the U.S. housing bubble before the market peaked in 2006; assume the worst; and avoid complacency.
“In my business, I don’t pay attention to all the people who are upbeat; we focus more on what could go wrong,” Dickson said. “What’s the right word for people like Nouriel Roubini?”
Roubini couldn’t be reached for comment on this story.
This focus means OSFI is bolstering stress tests at financial institutions, even while warning them not to take “false comfort” from the results. Dickson also has led a broad review of the country’s six biggest banks and three biggest life insurance companies as part of efforts to augment their governance and risk management.
She recommends banks strengthen the role of chief risk officer, arrange for third-party reviews of oversight functions and appoint board members with financial industry experience.
Under Dickson, “expectations regarding governance and risk management have been and are in the course of being taken to the next level,” said Koker Christensen, a Toronto-based lawyer at Fasken Martineau LLP who specializes in financial services.
Day-to-day monitoring of banks and insurers has also increased, with OSFI burrowing deeper into the books of their units and subsidiaries. Being in close contact with financial institutions allows OSFI to remind them they shouldn’t be “assuming everything will turn out just fine,” Dickson said.
Model Of Success
“Despite what you may wish to see happen, despite how markets are behaving, despite what may be a majority view, things don’t always happen that way,” Dickson said in the interview.
“Julie Dickson truly understands what high-quality, comprehensive supervision means, as well as its critical importance to building and sustaining a strong global financial system,” said Richard Waugh, chief executive officer of Bank of Nova Scotia. (BNS) “The Canadian banking system has been a model of success, particularly over the past several years, and effective principles-based supervision has played a key role.”
It was concern about complacency that led the regulator to make the nation’s banks meet new capital standards ahead of global peers. Dickson is requiring Canadian banks to comply with new capital requirements stipulated by the Basel Committee on Banking Supervision by 2013, even though regulators have six more years to implement the new standards. OSFI also has introduced requirements for “contingent capital” that would help banks cover future losses and limit the need for taxpayer- funded bailouts.
The measures have come as banks complain about regulatory fatigue amid waning profit. In April, the Canadian Bankers Association said policy makers should “hit the pause button” to take stock of rules put in place since the financial crisis.
Dickson “has resisted pressure to go down the path of more prescriptive rules like you find in some other jurisdictions, which I think creates a much better regulatory environment,” TD CEO Edmund Clark said in an e-mail.
While the average return on equity at Canada’s five biggest banks fell to 16.7 last year from 21.8 in 2007, Dickson’s approach has served investors well. The Standard & Poor’s/TSX Composite Commercial Banks Industry Index, which consists of Canada’s eight publicly traded banks, has lost 4.3 percent since the start of July 2007, compared with a 60 percent decline for the 24-company KBW Bank Index of U.S. lenders.
Dickson remains “very highly regarded” in the industry because of her balanced approach, Fasken Martineau’s Christensen said.
Earlier this year, she backed away from proposals requiring home equity loans to be paid off over a specific period amid pressure from lenders, which was part of a broader package tightening mortgage lending practices.
“OSFI and Julie do a good job of maintaining high standards while still dealing with the issues that need to be dealt with in a practical way that takes account of the needs of industry,” Christensen said.
Dickson, 55, born in Saint John, New Brunswick in eastern Canada, is the first woman to be top banking regulator. None of Canada’s six largest banks has had a female CEO. The two largest lenders by assets, Royal Bank and Toronto-Dominion, have female financial chiefs.
Dickson studied economics at Queen’s University in Kingston, Ontario, the alma mater of Royal Bank CEO Gordon Nixon. Before joining OSFI, she worked 15 years at the finance department as Canada revamped industry regulations and legislation following the failure of two small banks and Confederation Life in the 1980s and 1990s. At finance, she worked with Nicholas Le Pan, her eventual predecessor at OSFI.
Dickson joined Le Pan at OSFI in 1999. Their time has been marked by a more hands-on approach after the regulator received additional powers to intervene quickly with troubled lenders. That period also featured the introduction of “real dialogue” with executives and company boards, which has been one of the system’s strengths, said former Bank of Canada Governor David Dodge, who was deputy finance minister between 1992 and 1997.
“It’s not what Julie has done since 2007 and 2008, it’s how things evolved with Nick and her as the leaders,” Dodge said. “That’s what stood us in good stead when things started to run into trouble in the spring of 2007. The strength was to not get into trouble in the first place.”
Dickson’s analytical ability and Canada’s small number of lenders have helped keep the industry stable, according to Dodge.
“We have relatively few banks that occupy a big chunk of the space,” he said. “If you keep that under control and if those operate reasonably efficiently you don’t have a system that goes bananas.”
Dickson replaced Le Pan as OSFI chief on an interim basis in 2006 and began a seven-year term in July 2007. That was just as the U.S. subprime mortgage market was beginning to collapse, profits at Canadian banks were falling and the industry was struggling to sell commercial paper.
Among Dickson’s first tasks was to defend OSFI from criticism that lax rules allowed the collapse of Canada’s market for non-bank administered asset-backed commercial paper.
“Why is it that warnings about risks can be everywhere but when the risks come to pass, people are really surprised?” Dickson said in October 2007 in her first speech after being named head of OSFI. “I do not have the answers to these questions, but it is OSFI’s job to consistently remind the institutions we regulate to prepare for the bad times.”
The system inherited by Dickson had undergone three decades of increasingly stringent regulation and tighter oversight that included the introduction of liquidity leverage ratios in the 1980s, increases in capital provisions in the 1990s and an industry wide ban on consolidation.
It’s a legacy that has helped bolster OSFI’s reputation. Dickson said that one of the most important things she accomplished in the past five years is to found and chair a group of supervisors within the Financial Stability Board. There, she has had the chance to bring the Canadian regulatory style to her global peers -- you don’t always have to be right, but you always have to be ready.
Asked what she thought about Roubini missing the U.S. stock market rally that has seen the S&P 500 Index (SPX) more than double since March 2009, Dickson replied: “You don’t expect perfection.”
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