The era of financial institutions that are too big to fail is over, the head of Canada’s central bank believes.
Bank of Canada Governor Mark Carney said countries must find an orderly way to let failing banks stumble, then work to contain the damage, rather than prop up ailing institutions at all costs.
“We have to create a system where individual financial institutions can fail,” Mr. Carney said.
“It is not politically acceptable, nor in the spirit of the market that there is a broad range of institutions that: heads they win, tails they win.”
His comments, made at a gathering of the financial community in Toronto on Wednesday, come as the G20 countries are set to meet this weekend to discuss global banking reforms.
Canada heads into the Toronto summit opposing the concept of a bank tax put forward by several European nations to pay for recent bailouts, and backstop failures in a future crisis.
Canadian banks, which managed to weather the recent financial crisis better due to higher capital reserves on hand, are pushing for different reforms. They want lenders to be forced to keep more funds on hand to backstop loans, rather than submit to a tax that would cover the cost of bailouts.
A Canadian proposal called embedded contingent capital would see the financial institutions issue debt that would convert to equity in the event a bank is close to failure. However, the idea has not received universal support among the G20.
Meanwhile, the bank tax issue gained momentum this week after Britain, France and Germany said they plan to proceed with various forms of a levy.
Mr. Carney said he is still confident the G20 nations will reach an agreement on bank reforms by November, even as the contentious bank tax issue threatens to dominate meetings in Toronto this weekend.
