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Bank of Canada Governor and head of the Financial Stability Board Mark Carney speaks to the Canadian Club in Montreal, Thursday Nov. 8, 2012.Ryan Remiorz/The Canadian Press

"Too big to fail" just won't go away.

Bank of Canada Governor Mark Carney said Thursday that despite considerable effort to prove otherwise, financial markets still doubt politicians have the courage to allow the biggest financial institutions to go bankrupt.

"It is not clear yet that too-big-to-fail has been ended," said Mr. Carney, who doubles as the chairman of the Financial Stability Board, the Group of 20's designated regulatory watchdog.

Since 2008, the G20 has made a mission of ensuring taxpayers never again will be on the hook for the mistakes of the world's largest financial institutions. Among other things, it strengthened the FSB, which Mr. Carney has led for a year, and ordered about 30 of the biggest global banks to hold extra capital as a buffer against failure.

The focus on what bureaucrats and supervisors call "global systemically important financial institutions," or G-SIFIs, was a response to the collapse of Lehman Brothers Holdings Inc. in 2008. Authorities in the United States failed to organize a sale, and the company's collapse triggered the worst of the financial crisis. In the aftermath, governments around the world poured hundreds of billions of public dollars into private lenders to keep them solvent.

That politicians responded in this way came as little surprise to the investors who buy the debt of the major banks. Credit rating agencies rank the largest institutions as safer investments than smaller financial institutions on the assumption that the biggest ones are privy to implicit government guarantees. Higher credit scores translate into lower borrowing costs. This implicit guarantee saved the 20 largest global banks $70-billion (U.S.) a year ahead of the crisis, or the equivalent of 20 per cent of their profits, Mr. Carney said, citing research by the International Monetary Fund.

Academics call this a "moral hazard," and worry that a perceived safety net emboldens executives to take bigger risks; causes directors, shareholder and creditors to become complacent; and hampers the ability of smaller institutions to compete with the biggest ones.

Yet Mr. Carney said the "implicit subsidy of taxpayers to large banks" probably has only grown since the crisis; perhaps by as much as 10 times, he said, citing estimates.

"Investors seem to think that governments will once again blink when faced with a failing large bank," Mr. Carney told the Canadian Club of Montreal on the same day that the governments of Belgium and France said they would pay the equivalent of $7-billion to take almost full control of Dexia, a former global banking power that now has received three taxpayer-funded bailouts since the financial crisis.

To counter this perception, governments must "legislate, not merely propose," Mr. Carney said.

However, he said "new measures" also could be necessary to bolster the G20's current strategy of higher capital demands, enhanced supervision, and the "living wills" that the biggest financial institutions must write to create roadmaps for resolution in the event of collapse.

Mr. Carney said cross-border agreements among national regulators on how to handle the bankruptcy of an international bank may need improvement. He also said authorities should clearly identify the securities that banks would "bail-in" in the event of a collapse, rather than relying on a "bailout" from governments – a reference to a Canada-backed effort to create debt that would convert to equity when a bank gets into trouble. Mr. Carney said the G20 should consider ordering banks to hold a minimum of such securities.

Canada's biggest banks aren't subjected to the G20's most severe expectations, even though they, too, benefit from favourable credit ratings that are based on the assumption of implicit government guarantees.

The G20 this week agreed that lenders that are systemically important within national boundaries also should face extra scrutiny; the group also left the final decision on how that should be done to local supervisors. In Canada, that decision will be left to the Office of the Superintendent of Financial Institutions. OSFI hasn't said yet how it will apply the G20's newest too-big-to-fail mandate.