European governments need to start taking action in the next few weeks to shore up their banks or suffer a "more severely impaired" financial system, Bank of Canada governor Mark Carney says, adding that Canada will be impacted if the issues aren't resolved.
In an exclusive interview with CBC's Peter Mansbridge, Carney said that while Canada has few direct ties with Europe, the country's financial markets and institutions would be indirectly affected by the region's financial crisis
"Because we're so interconnected in this globalized world, we have a huge vested interest in what happens in Europe, it's not an intellectual curiosity, it's really going to matter ultimately to Canada and pretty quickly if they don't get this right."
Carney said European governments are "going to have to take significant steps in the next few weeks to recapitalize their banks and to substantially increase their firepower."
Carney said if action is not taken soon, the "functioning of the financial system there will be more severely impaired."
Watch the full interview on The National at 9 p.m. ET
Carney's comments come as finance ministers and central bank governors from the world's 20 most advanced economies are gathering in Paris Friday to develop a comprehensive plan to deal with Europe's debt crisis.
"We're not talking about Lehman moments a la 2008, but we are talking about a financial system potentially that becomes increasingly reliant, and in some cases solely reliant on the central bank, in this case on the European central bank — that's not a good place to be in."
Carney said a financial system must take some risks — something central banks avoid.
"It's not consistent to have a financial system effectively funded by the central bank that is going to lend to new businesses that's going to help grow economies, that's going to help people finance new home purchases, and that's the 'what if' that could happen if these bigger steps are not taken," he said.
But Carney said Europe is an incredibly rich continent that can easily afford what needs to be done.
"This is not a question of Europeans out of resources, it is a question of political will, timing, decisiveness."
Carney has previously warned the region is "extremely vulnerable" to recession if bank cash isn't adequate. Those banks hold large numbers of loans made to Greece and other troubled governments, and the value of those assets could drop substantially should Greece default. In September, the International Monetary Fund estimated that the loss in value of those loans may be twice that amount.
Carney agrees with those who believe that the €400-billion bailout fund being considered is insufficient.
"You need to overwhelm the markets. You need to put on the table more than is necessary," he said, adding that a trillion euros is necessary.
Carney said since 2008, Canada's financial system has grown stronger as Canadian banks have built capital, liquidity and taken out risk.
However, he said the "world is in a more difficult place than it was in 2008." Back then, there were big holes in the global financial system, Carney said.
But the consequences of repairing those holes, other policy steps and the aftermath of the consumer debt boom in the U.S., Britain and some parts of Europe, have led to a "much more fragile global economy" and "much greater strains on the government."