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Carney new rules needed for future financial crisis

OTTAWA — Bank of Canada governor Mark Carney is backing proposed new rules that would make banks, shareholders and creditors — not governments — pay the cost of any future financial crisis.

OTTAWA — Bank of Canada governor Mark Carney is backing proposed new rules that would make banks, shareholders and creditors — not governments — pay the cost of any future financial crisis.

Carney, who heads Canada’s central bank, called on policy-makers to “redouble their efforts” to make the changes to help prevent the need for another massive bailout by governments of big banks.

Speaking to the International Centre for Monetary and Banking Studies in Geneva, the central bank governor called for steps to be taken to build the infrastructure needed.

“A series of concerted measures will be required to build resilient, continuously open funding and derivatives markets and to restore market discipline to financial institutions,” Carney said, according to the prepared text of his speech, which was released in Ottawa.

“There is a firm conviction among policy-makers that losses incurred in future crises must be borne by the institutions themselves.”

Carney’s comments came ahead of this week’s G20 meeting in South Korea where the major rich and developing nations are to discuss reforming the world economy in the wake of the 2008-09 financial crisis.

The G20 leaders, who meet Thursday and Friday in Seoul as a followup to the meeting they held in Toronto last June, are likely to endorse proposals for increasing supervision of large banks and other financial institutions.

The United States, Britain, Germany and other governments poured hundreds of billions into their banks to save them from collapse after they suffered huge losses because of risky loans and derivatives tied to the U.S. housing market.

Canada and its banks fared better than many of its G7 counterparts through a combination of a well-regulated mortgage market, less leverage and a bit of good fortune.

But Carney said Canadians shouldn’t be complacent.

“We would all be advised to remember that pride goes before the fall.”

Carney said Canada’s central bank was working with its partners to establish the mechanisms to help maintain liquidity in the financial markets in times of crisis.

The central bank governor also pointed to a plan that would see financial institutions embed “contingent capital” into unsecured debt and preferred shares that could convert into shares if the institution was in trouble as a promising market-based mechanism to prevent excessive risk taking.

“The scale and complexity of the crisis and the multiple points of failure all demonstrate that there are no panaceas. Wholesale reforms of regulation, changes to policy and adjustment of private behaviour are required,” he said.