REGINA -
Canada's central banker is calling for major changes in the Canadian and world financial systems, saying troubles in core credit markets helped trigger the recession, and added that the recovery will be "muted."
Bank of Canada governor Mark Carney told a business audience in Regina on Thursday that Canada's financial system is sound. But Carney also said there's still room for improvements that would help the country absorb shocks in the global economy.
"Canada has a strong system, but this crisis has proven that even the best is not good enough," said Carney.
"Policy-makers, just like farmers (who must plan for the worst), need to continue to innovate. We need to innovate to make our financial system more resilient and efficient."
Carney is among the strongest advocates in Canada for what he calls a new "macroprudential" - whole system based - approach to regulating financial markets and has voiced concerns in the past about how the system responded to the global financial meltdown before.
Carney said while Canada's banks were adequately capitalized and have experienced relatively moderate writedowns, he notes they too came under pressure during the downturn and tightened credit just when more lending was needed to keep the economy afloat.
"The performance of core funding markets . . . during the crisis intensified the financial panic and helped trigger the recession. The fact is the financial sector helped trigger the recession," he said.
"This is totally unacceptable."
The central banker said the crisis has undermined the credibility and demonstrated the ups and downs of the current bank capital regulatory regime.
"This too is unacceptable," he added, referring to the tendency of financial institutions to lend when money is easy and re-capitalize when risk appears, thereby magnifying the problem. The result, he said, was that it became harder and more costly for businesses and households to get loans - just when they were needed to stimulate investment and spending.
Carney said one of his top priorities in reform is to create more robust core funding markets, and offered several avenues for doing this, including implementing "through-the-cycle margining."
