Bank of Canada governor Mark Carney on Tuesday called for world leaders to come up with a plan to ensure European banks are properly funded should there be a financial crisis, saying the eurozone is “extremely vulnerable” to an economic slowdown and a downturn in financial markets.

In an address in Saint John, Carney said the banks have seen their borrowing costs rise sharply, their ability to access important financial markets curtailed and their shares trading at historic lows.

“If not quickly reversed, this situation could create a damaging negative feedback loop among the banks, lending and the real economy,” said Carney.

“This would occur at a time when the European economy — the largest in the world — is already slowing dramatically.”

Carney made his remarks ahead of upcoming meetings of the G20 finance ministers and International Monetary Fund later this week and as the European Union and the International Monetary Fund also raised concerns over the health of European banks.

IMF cuts Canadian growth forecast

The EU's competition commissioner warned that more than the nine banks that failed the stress tests this summer may need to be recapitalized, and proposed extending crisis rules that make it easier for governments to rescue failing lenders.

Earlier in the day, the IMF cut Canada's projected growth for this year to 2.1 per cent and 1.9 per cent in 2012, while also downgrading economic expectations for much of Europe and the U.S.

With the outlook for the global economic outlook deteriorating, turmoil in Europe, and with markets questioning whether European legislators can respond, Carney said the risks to Canada are “skewed to the downside.”

"The combination of high debt loads and unpredictable politics is toxic," Carney said.

At the same time as the European debt crisis is deepening, he said, the economy of Canada’s biggest trading partner, the U.S., is “close to stall speed.”

Canada not tied to U.S. rate policy

However, the Bank of Canada does not expect a recession in the United States, “although the risk has clearly risen and Canadian net exports are now expected to remain “a major source of weakness … in particular the persistent strength of the Canadian dollar," he said.

Carney signalled that Canadians should not assume interest rates will stay low, just because the U.S. Federal Reserve has promised to keep its rates at record lows into 2013.

“We do not outsource our monetary policy to the U.S. Federal Reserve. What happens in the United States obviously matters for Canada, but this does not mean that our rates are tied to those of the Americans.”

Carney advised Canadian businesses to expand their presence in emerging markets such as China and India.

“Canada will have to look elsewhere to grow our exports,” he said.

“Emerging markets already account for almost one-half of the growth in all imports over the past decade. In a process that can be expected to continue for decades, emerging Asia is rapidly urbanizing. China and India are housing the equivalent of the entire population of Canada every 18 months.”

With files from The Canadian Press and The Associated Press