The banking sector is facing liquidity problems, not a solvency crisis, says the CEO of the Bank of Nova Scotia.

“This is not about fighting inflation,” Rick Waugh told a bank CEO conference today in Toronto. “This is just about making sure the system is liquid.”

The bank bosses agree that recent liquidity injections into the market have been a positive push forward for financial markets.

The heads of four of the top five big banks (CIBC chief Gerry McCaughey bowed out after yesterday’s announcement of plans to raise $2.75 billion to help recover from $3 billion in writedowns) all expressed confidence, despite continued volatility.

In general, the CEOs agreed on the importance of how the credit crunch looks to the broader economy.

Royal Bank of Canada CEO Gord Nixon noted that while the financial system and financial markets are improving, “the real world is not necessarily feeling better.” And thus, he concluded that banks will move forward with aggressive risk management and a more conservative approach toward capital growth.

TD Bank Financial Group CEO Ed Clark echoed that sentiment, noting that TD is increasing credit provisions despite the fact that the doom and gloom in the marketplace is not reflected in TD’s numbers.

Waugh says actions like the CIBC recapitalization should “give confidence” to the marketplace and that the strong dollar is “strong for a reason” and “is a reflection of the country’s balance sheet.”

Increases in delinquencies and provisions are expected, but Waugh says he is not “anticipating spikes.”

The Canadian economy will perform better, according to Nixon. “Our expectation is that Canada will continue to buck the trend to some degree with respect to the U.S. slowdown.”

“We are finally going to get paid for liquidity and you are going to get paid for credit risks,” said Waugh. “We are prudently optimistic.”

“One of the big wild cards is still the U.S consumer,” said Sharon Haas, of Fitch Ratings. “Will they continue to spend?” Haas noted that a trickle down from the subprime market toward other asset classes is a vital question if economic slowdowns continue.

On the question of big bank mergers, Bank of Montreal CEO Bill Downe said the political discussion would be better focused on developing a more competitive Canadian market in general. “It’s so driven by the politics of the moment,” he said. “The Canadian banking industry as a whole is well-capitalized.”