Canada’s financial regulator has been hard at work for the past two years stress testing the banks but ordinary investors can forget about ever seeing the results, according to a senior official there.

Speaking at an investor conference in Toronto on Tuesday, Mark White, assistant Superintendent of Financial Institutions, justified the decision, saying that the Canadian bank regulator doesn’t want to get involved in what it sees as a public relations exercise.

In the aftermath of the financial crisis regulators around the world carried out stress tests on their banks and published the results. The idea was to allay fears that some banks were holding back information about losses and were not as strong as they appeared. By making the results of the tests public, regulators hoped to rebuild confidence so that the financial system could start functioning normally again.

The United States, Britain and Europe all adopted the practise — in fact, most of the developed world — but not Canada.

Other countries had legitimate reasons for trying to boost confidence in their banks because so many lenders had to be rescued by government, Mr. White said.

“We don’t believe we have that situation [in Canada],” he said.

Canadian banks emerged from the crisis mostly unscathed with none requiring direct government bailouts.

Nevertheless OSFI has been hard at work digging through bank balance sheets, trying to gauge what would happen in a range of scenarios.

Rather than relying on the banks’ own internal tests OSFI in partnership with the Bank of Canada have developed a sophisticated “macro” stress test that can be applied to all the lenders so the results can be easily compared. The work has put this country at the forefront of “macroprudential” testing, said Mr. White.

Some observers say that at least some of the results of Canadian bank stress tests should be made public in the interests of transparency.

Back in 2008 G20 leaders agreed that part of the cause of the crisis was lack of transparency around the financial system and they promised to boost the level of disclosure.

While that has happened in this country, standards could go a lot higher, said Peter Nerby, an analyst at Moody’s Investors Service.

If the regulator is not going to publish the results of its stress tests, it should at least ensure that investors have some ability to make their own assessments, Mr. Nerby said in an interview.

Moody’s recently began putting together its own bank stress tests but it’s been stymied because some of the information it needs is not provided.

The low level of disclosure around the quality of consumer loan portfolios is a good example, he said.

“You have to accept on faith a lot of black box numbers,” Mr. Nerby said.

For instance the risk around many of the loans is described as exceptionally low, but “what drives the classification of ‘exceptionally low’? I think I have a good idea but it’s not exactly clear here,” he said.

The problem is that when it comes to properly understanding the kind of risks that banks are exposed to, investors are little better off now than they were before the meltdown. Only the banks themselves and the regulator know the real situation.

But according to Mr. White, it would be a mistake to compel the regulator to announce to the public the results of its stress tests. In most countries they were ultimately a public relations exercise designed to boost confidence in the banking system. As such, the process puts enormous pressure on the regulator to present institutions in a positive light.

“I think the Irish banks all passed the tests,” he said, adding that something must have gone wrong with the process because may have since lined up for government support.

Financial Post

jgreenwood@nationalpost.com