Canada’s financial system is well positioned to weather the current financial storm because it has been prudent and soundly capitalized, said Bank of Canada Governor Mark Carney on Thursday.

And turmoil in global financial markets may be a catharsis toward restructuring markets, prompting decisive policy responses and speeding the reordering of the financial system to make the world more stable, he added.

Carney outlined in a speech to the Canadian Club of Montreal how the upheaval in global financial markets and the slowdown in the U.S. economy have been important international factors affecting the Canadian economy. High global commodities prices have benefited the Canadian economy, Governor Carney said, noting that continued volatility in commodities prices can be expected.

Carney stressed that global markets are now at a critical juncture. Many foreign financial institutions need to raise capital, but their ability to do so has been reduced.

“In this environment, the U.S. government’s initiative to buy distressed assets is critically important. The plan announced by Treasury Secretary Paulson and being developed through discussions in the U.S. Congress is bold and timely,” he said.

Outside Canada, he reflected, it may be necessary for other countries to follow suit with public capital to complete the necessary deleveraging process.

Carney stressed that Canadian financial institutions “are in considerably better shape than their international peers,” which has allowed credit growth to remain strong in Canada. He also detailed the actions taken by the Bank of Canada to ease strains in Canadian financial markets and saluted international efforts, stressing that the G-7 “is ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system.”

Carney noted that the nature of the slowdown in the U.S. economy — with weakness in the housing and auto sectors — poses particular problems for Canadian exports. In addition, with credit conditions tightening, “a fall in U.S. domestic demand seems likely,” he said. The recent further weakness in the U.S. financial sector has made the risk that the U.S. economic recovery will be delayed more probable.

Carney cautioned that while international events will have an important influence on our economy, “they must be considered in tandem with domestic factors, including the strength of domestic demand, the evolution of potential growth and the health of our financial system.”

The Bank of Canada will continue to monitor economic and financial developments carefully and “will continue to set monetary policy consistent with achieving the 2% inflation target over the medium term,” Carney added.