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OTTAWA (Reuters) - A senior Bank of Canada official urged global policymakers on Tuesday to push ahead with financial system reforms despite economic weakness, saying financial stability is an important precondition for growth.
"Some have argued that, given the weak recovery, now is not the time for the broad financial sector reform being promoted by the FSB (Financial Stability Board). That argument is wrong-headed," Lawrence Schembri said in his first speech since being appointed as a central bank deputy governor in February.
He said the FSB, operating under the direction of the Group of 20 leading economies, closely monitors the effects of new regulations for unintended consequences.
Canada's big banks emerged relatively unscathed from the global financial crisis, buoyed by strong capital ratios and conservative lending practices.
They are well ahead of their U.S. and European peers in complying with higher capital requirements under the Basel III global standards.
Still, the Bank of Canada says it has identified some areas of the shadow banking sector, the market-based financing done outside the regulated banks, that merit closer monitoring.
In response to a question from the audience after his speech, Schembri said he saw a "potential vulnerability" in Canada's increasingly popular mortgage investment corporations (MICs).
These entities typically manage a pool of mortgages and many investors are attracted to them because of their higher yields, but the risks are also higher than with some other types of investment products.
Schembri said, however, the MICs were less problematic than mortgage real estate investment trusts in the United States, which tend to be more highly leveraged.
"In Canada, the mortgage investment corporations, one would consider as part of the shadow banking sector but not as tightly regulated as banks. We see this as a potential vulnerability but for the most part it's not as serious as what we've seen in the United States," he said.
"Part of the shadow banking recommendations are looking at ways to address the vulnerabilities these corporations might pose," he said. "At this point in time we don't see a large vulnerability but we are monitoring those corporations quite closely."
Schembri's speech stayed away from any hints about Canadian monetary policy. The Bank of Canada has held its key interest rate at 1.0 percent since September 2010 and market players don't expect a rate hike until the fourth quarter of 2014.
With additional reporting by Randall Palmer; Editing by Jeffrey Hodgson; and Peter Galloway