OTTAWA, Ont. - The European debt crisis has only had a "modest" impact on Canada so far but its effects might not be over, Bank of Canada governor Mark Carney said Thursday.
"It's really only been three weeks of this event and so there's been a modest impact on financial conditions -- a slight tightening of financial conditions in Canada -- and a modest impact on commodity prices," Carney said at a news conference.
"But it's not over. You know, this is serious stuff," he said, adding that it is "incredibly important" to execute the right policies to deal with the situation.
Carney said he's pleased with the measures that European policy makers have taken so far, but he believes that more will need to be done.
This week, the World Bank raised the possibility of a second recession affecting most of the industrialized world if governments don't deal successfully with the unfolding European debt crisis affecting such countries as Greece and Spain.
Although the bank's baseline forecast calls for global growth over the next three years, it says the outlook could darken if European uncertainty persists, and could even result in a second slump next year.
The risk is serious enough that it will likely be the key topic of discussion for leaders meeting in Toronto later this month at a G20 summit.
During his speech to a Montreal audience, Carney said that banks should prepare for radical reforms to the world's financial system that will make it look a lot more like what's already in Canada.
The Canadian banking sector has been held as an example for the international community because its conservative investment practices helped it endure the credit crisis in 2008.
"The rigour of Canadian capital regulation was an important -- although not far from exclusive -- reason why the Canadian system fared so well during the crisis," Carney said.
And he stressed that reforms pose no threat the global recovery, saying the opposite is true -- they will help economic growth.
Once implemented, global financial institutions will be required to retain more and better capital, improve liquidity and reduce risk, and introduce a capital buffer that is sufficiently large to absorb losses encountered in the 2008 crisis that led to a global recession, Carney said.
There is little question reform is needed, he said.
The 2008-09 financial crisis in the United States and several major European economies "exposed the fallacy" that strong financial institutions would collectively act to ensure the soundness of the system for their own preservation.
Although the coming changes will be significant, Carney dismissed critics who believe the requirement for more capital reserves will limit banks' ability to lend and slow down economic activity.
In fact, the opposite will happen, he said.
The reforms will cause banks to shift focus away from trading risky financial instruments and more to conventional lending to businesses and individuals that spur growth, he argued.
And he noted that banks will be given plenty of lead time to meet new standards since the implementation date of key reforms won't be until the end of 2012.
