OTTAWA - Bank of Canada governor Mark Carney is calling for major changes in the Canadian and world financial system, saying core credit markets failed the test last fall and helped trigger the recession.
In a speech prepared for a business audience in Regina on Thursday, the central banker praises Canada's financial system as among the best in the world.
"But this crisis has proven that even the best is not good enough," Carney added.
"Just like farmers (who must plan for the worst), policy-makers 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.
In notes released in Ottawa just prior to his speech, Carney makes perhaps the clearest pitch to date for major reforms, a position believed to have met some resistance from other regulators who fear a diminution of their authority to the Bank of Canada.
In this battle, he received an indirect boost from U.S. President Barack Obama's white paper Wednesday calling for the creation of a powerful Financial Services Oversight Council.
Finance Minister Jim Flaherty, who would have the key say in any changes, appears to have focused his attention on creating a national regulator for the securities industry.
In a scrum Wednesday, Flaherty suggested the Obama oversight council already has a counterpart in Canada in the Financial Institutions Supervisory Committee, of which Carney is a member.
But the central banker has more core reforms in mind.
While Canada's banks were adequately capitalized and have experienced relatively moderate writedowns to date, he notes they too came under pressure during the crisis 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. This is totally unacceptable," he says in reference to world banks, but not excluding Canadian.
"The crisis has undermined the credibility and demonstrated the procyclicality of the current bank capital regulatory regime. This too is unacceptable," he added, referring to the tending 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 loans became harder and more costly to obtain by businesses and households, just when they were needed to stimulate investment and spending.
He said financial institutions need to use "buffers" to support lending during periods of stress, but instead banks added to their capital reserves during the crisis.
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."
"As the ultimate provider of liquidity to the system, the bank is thinking through whether to adapt its facilities to support continuous private liquidity creation," he added.
On the economy as a whole, Carney said the worst is past, but cautioned that the recession is not over and when future growth does return, it will be more muted than in past rebounds.
He repeated earlier forecasts that the bank expects the Canadian economy to stop contracting and begin the recovery later this year, substantially helped by the massive amounts of fiscal and monetary stimulus that has been pumped into the system.
But he said growth will not be as strong going forward as in past rebounds from recession, in part because the U.S. bounce-back will be laboured.
The major bright sport for Canada, he said, is emerging markets, which should rebound more strongly and help Canadian exports, particularly of commodities such as oil and minerals.
