Canada's banking system is among the world's most highly developed and is in a position to withstand a broad range of shocks, including turmoil stemming from the U.S. subprime mortgage meltdown, says a report by the International Monetary Fund.

"The five large banking groups that form the core of the system are conservatively managed and highly profitable," the report says. "They have achieved strong risk-based capital ratios, modest returns on assets and high returns on equity."

It also gives high marks to the regulatory framework for Canada's securities market, but notes there is room for improvement in some areas.

The report, posted on the IMF's website Wednesday, is part of a review of national financial systems. Canada is the first G7 country reported on by the Washington-based institution.

The IMF noted that the securities market continues to be regulated at the provincial and territorial level and repeated its recommendation that Canada move to a single regulator, which it said would cut costs for investors and allow Canada "to respond more quickly to local and global developments."

The report said while regulatory authorities have developed reasonable systems for supervision of the market and its participants, a co-ordinated approach to enforcement "is still partly missing."

Criminal enforcement 'weak'

"Criminal enforcement appears to be particularly weak," the IMF said. "While comprehensive statistics are not available, market participants commented that very few cases have been taken for criminal prosecution and even less have resulted in criminal sanctions."

The report pointed to an apparent lack of a co-ordinated approach between criminal and securities law enforcement, with clear lines of accountability and benchmarks.

It said while steps taken by federal authorities and provincial regulators in recent years have led to "positive change" in enforcement, "it is still in need of considerable improvement."

The report also made several recommendations for improving the broad financial system, including vigilance in monitoring the fallout from market turmoil and requiring greater transparency on structured financial products and ensurance they are supported by "reliable" credit ratings.