DAVOS (Reuters) - Recent policy steps in Europe have "dramatically reduced" the risk of a Lehman-style banking failure there, Bank of Canada Governor Mark Carney said on Wednesday, but he fell short of saying he was optimistic that a worst-case scenario had been averted.
Decisive action by the European Central Bank to provide liquidity to the region's financial system has eased market pressure on Spain and Italy and boosted demand for their bonds, said Carney, who became head of the G20's Financial Stability Board (FSB) in November.
"It is absolutely essential that the financial system, the banking system specifically in Europe, is able to finance itself on a reasonable basis, that we're not worried about a Lehman event in Europe," Carney told Reuters TV in Davos.
"Our view is that, given the measures that the ECB has taken and the heightened focus of the banking regulator in Europe on the health of these institutions, that that tail risk has been dramatically reduced. That's incredibly important," he said.
When asked whether that meant he was now optimistic about a positive outcome for the European debt crisis, Carney said he was merely "realistic".
"Within that context, one is realistic because the judgment has to be made: Have European authorities done enough to take away the more extreme possibilities?" Carney said, defining "extreme possibilities" as serious debt financing troubles in a major European economy.
Carney said global policymakers gathering in the Swiss resort of Davos were realistic in their view that the process of global deleveraging now underway will be a multi-year process, "measured in decades."
As global regulator, Carney often hears complaints that some of the new banking rules are unfair to one country or another and he insists that his job is to make sure they are applied evenly across all jurisdictions.
But as lender of last resort in Canada, he has complaints of his own about U.S. draft legislation known as the Volcker rule, calling it "at best inconsistent and quite probably unwise."
He said that as it now stands the Volcker rule, a key plank of the massive 2010 Dodd-Frank financial oversight law, would reach into the Canadian bond market in such a way that it would weaken the financial market rather than strengthen it.
"We note with interest that the Volcker rule carves out the U.S. Treasury market, it doesn't carve out the Canadian government bond market ... (nor the UK, German markets etc) ... but it reaches into those markets in terms of reflecting what institutions can do," he said. "And we think that is, at best, inconsistent and quite probably unwise."
Carney said he had not had detailed discussions yet with Canadian banks on this issue but was confident his U.S. counterparts would listen to Canada's concerns and tweak the legislation.
Canada's banking regulator and the country's banking industry began publicly pushing back against the Volcker rule earlier this month.
The rule would apply to each foreign bank with a branch, agency or subsidiary in the United States. Canada's five biggest banks all have a notable presence in the United States.
Reporting by Chrystia Freeland and Paul Carrel; Writing by Louise Egan; Editing by Jeffrey Hodgson and Rob Wilson