EDMONTON - The world needs a new way to supervise and regulate financial systems to restore stability, the governor of the Bank of Canada said Monday.
Mark Carney said Canada has weathered the financial storm better than most and the world may want to follow our example.
"Our system is better," he said. "Regulation has been more consistent. Our banks have been more conservative. Credit conditions in Canada remain superior to those in virtually every other industrialized country."
"Canada is in a good position to offer sound advice as leaders of the G20 prepare for this week's summit in London. The core of our system has many -- although not all -- of the elements of a more sustainable, global financial system."
Carney said all financial activities that can pose a major risk to stability should be regulated. However, he disagreed with the idea that banks should be tightly restricted to their core functions -- taking deposits and making loans -- and kept away from financial markets.
"To this way of thinking, banks could not then get themselves into trouble, or if they did, their demise could be safely managed," Carney said.
"But this is impractical, because banks and their roles are vital to the existence of markets. They are agents and underwriters and traders of most government and corporate debt. They provide cross-border financing products which are key services in a world of global corporations."
The better solution, he said, is to expand the perimeter of regulation to better supervise more players.
Carney placed much of the blame for the present financial crisis on the rise of a so-called shadow banking system, which appeared in recent years and usurped many of the functions normally provided by banks.
Mortgage brokers, finance companies, hedge funds, structured investment vehicles and the like grew enormously, but were performing without a safety net. The shadow system was wholly reliant on the continuous availability of funding markets.
As liquidity began to dry up, the whole structure tottered.
"The regulatory system neither appreciated the scale of this activity, nor adequately adapted to the new risks created by it."
"The shadow banking system was not supported, regulated or monitored in the same fashion as the banking system. With hindsight, the shift towards the shadow banking system that emerged in other countries was allowed to go too far for too long."
"It's time to regulate this system and this week's G20 meeting will have to start that process," he said.
"Canada will contribute an important perspective on these issues."
Carney, who grew up in Edmonton, praised what he called Alberta's "can-do" attitude, alluding to the recent merger announcement by Suncor Energy Inc. (TSX:SU) and Petro-Canada (TSX:PCA).
He joked about his failure to work his way out of Alberta's minor league hockey system, suggesting it prevented him from realizing his dream of a high-profile sports career.
John Ferguson, chairman of the board of Suncor, acknowledged Carney's allusion to his company's mega-deal, saying the merger with Petro-Canada has "lifted the spirits of so many people, not only here in Alberta but across the country."
Carney also said he's "looking forward" to Alberta's provincial budget, which will be released April 7. The province has seen a sharp drop in revenues due to losses on the financial markets and because of lower energy prices.
During a brief question and answer session, Carney was asked whether the economic crisis could be partly blamed on firms that didn't act carefully, because they wouldn't have to bear the full brunt of their actions.
"The cause was more, in my view, the way these institutions were managed and problems within them," he responded.
Countries of the G20 have confirmed that no important institution will be allowed to fail but those same commitments could also create an environment where firms may not act carefully, Carney suggested.
There needs to be a way to get out of those commitments when the time is right, he said.
"We have to move away from those commitments when appropriate -- entirely not appropriate in the middle of a financial crisis -- in a way that is credible and sustainable. That will require some of the reforms I was alluding to in terms of making markets themselves more robust and banking institutions more robust," Carney said.
Iris Evans, Alberta's finance minister, said no one knows where the bottom of this global recession might be.
But she said she discussed that with Carney during lunch.
"He made a lovely reference about 'we're seeing less of that scoundrel' and I thought it was particularly hopeful, especially as we're going forward with our budget," Alberta's finance minister said.
She's hoping that things will start to turn around next year, and that there will be a rise in world-wide commodity prices, starting in 2011.
