November 22, 2008 / 1:57 PM / 9 years ago

Canada avoided banking pitfalls, central bank gov. says

LONDON (Reuters) - The global financial crisis could have been avoided if every country had had a banking system like Canada's, the governor of the Bank of Canada said on Saturday.

Asked in a BBC interview if the world could have been spared the crisis if everyone had had a banking system "as sober and sensible" as Canada's, Mark Carney said: "Yes, I think, is the short answer."

"What we did was that we had an absolute restriction on how much leverage, how much borrowing our banks could do," he said.

"They didn't like that and they would come in and complain about it regularly because it was stopping them from doing some of the sexier things that their international competitors were doing. But it turns out some of the sexier things that they were doing were quite foolish," he told the BBC World Service.

Canada has the soundest banking system in the world, according to the World Economic Forum.

However, Canada reinforced its banking sector with loan guarantees last month in a bid to mute the impact of a global financial crisis that is forecast to push the country to the edge of recession.

Banks that had got into difficulties had "short-circuited some of the very basic aspects of banking," Carney said.

They had relied on other people to make judgments about loans or felt that as long as they could get rid of a "hot potato" loan quickly it did not matter, he said.

"Well, the music stopped eventually (and) they still had it. And because they had it in such size, it has been a very painful process to work that out," he said. Bankers who had not been on top of their business were gone or going, Carney said. "There is vicious natural selection going on right now in the financial services industry and it's appropriate."

The crisis would probably reinforce the rebalancing of global economic power that had already gathered pace this decade, he said.

"Financial systems in Asia are likely to do relatively better through this period than the financial systems in the West who have some restructuring to do. But it's a healthy thing to have economic growth spread more widely," he said.

Reporting by Adrian Croft; Editing by Editing by Peter Blackburn

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