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Carney tells U.S. not to resist financial reform

Canada’s Mark Carney waded into one of the most touchy and controversial issues facing the American financial system Sunday, dismissing concerns — or excuses — about banking reform.

Speaking at a financial convention in Washington, the Bank of Canada governor gave a spirited defence of new international rules, and chided resisters as either misconceived or fatalistic.

He noted that such thinking led to abuses and excessive risk-taking that resulted in the recent collapse of the system, leading to a worldwide recession that is still haunting economies today.

“Four years ago, manifest deficiencies in capital adequacy, liquidity buffers and risk management led to the collapse of some of the most storied names in finance and triggered the worst financial crisis since the Great Depression,” he said.

“With about $4 trillion in output and almost 28 million jobs lost in the ensuing recession, the case for reform was clear then and remains so today.”

Carney’s keynote speech Sunday to the prestigious Institute of International Finance follows two days of meetings here in which global policy-makers grappled with the consequences of the recession and sought measures that would prevent economies from stumbling into a second severe downturn.

Canada, along with the U.S. and some other non-eurozone countries, applied pressure on European leaders to commit to an expanded emergency fund that would convince jittery markets they were serious about dealing with their sovereign debt problems and protecting exposed banks. Carney made news by suggesting the fund should be pumped up “in the neighbourhood” of one trillion euros, more than twice the current commitment.

But even as governments attempt to deal with the short-term emergency, Carney said it should not be forgotten what got the world in such a mess in the first place.

“It’s hard to see how backsliding would help,” he said. “Indeed, at a time when the conviction of policy-makers across a range of issues is being called into question, there appears to be little value in feeding this concern.”

Carney said Canada and some other countries that did not suffer a banking collapse expect to be fully compliant with the new rules in the early stages of the implementation period starting in 2013. Some will even adopt stronger rules, he added.

Without specifically mentioning the U.S., which is regarded as the most resistant of major economies to the new rules, Carney tried to shoot down the key objections to reform one by one.

He reserved his scorn for what he called the most often cited objection — that the uncertainty about proposed new requirements for greater bank capital reserves is already drying up credit and contributing to the current economic weakness.

He scoffed at the suggestion. “Really?” he asked.

He pointed out that it is a far greater probability that credit has slowed not because of a reluctance to lend, but because would-be borrowers can’t afford more debt. Countries like Canada that did not experience a home-grown financial crisis, the issue has been of households borrowing too much, not too little, he noted.

“The issue in the crisis economies is primarily one of demand, not supply,” he said.