Actions of American policy makers have averted financial disaster, says head of Royal Bank

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THE CANADIAN PRESS

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CALGARY - The global financial system has been "pushed to the brink" in its most severe downturn since the Great Depression, although the actions of American policy makers have averted disaster, the head of Canada's largest bank said recently.

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Selling sweeps Wall StreetPatrick Kenny, left, of Lehman Brothers MarketMakers talks to fellow traders on the floor of the New York Stock Exchange last week in New York. Selling swept across Wall Street for a second straight session on news that the economy shed jobs for the eighth straight month in August. At the Toronto Stock Exchange, experts suggest stocks will continue to fall.

"Not since the (Second World War) has the financial system itself been in such a state of dysfunction," said Royal Bank chief executive Gordon Nixon told a room packed with prominent business leaders.

However, "decisive actions" such as the bailout of investment bank Bear Stearns, which was bought by JPMorgan in a deal orchestrated by the U.S. central bank, prevented a potentially disastrous ripple effect from taking place.

"Had Bear Stearns not been rescued on that fateful Sunday, the implications on Monday would have been disastrous and placed far too much risk into what was already an unstable financial system," Nixon said.

"Time is certainly critical to working through this and I think that's one of the accomplishments of the central bankers."

The effect of the credit crisis that began in the United States last year has created a "new normal" in the financial sector, Nixon said.

"The days of cheap money enabling the most aggressive or even the dumbest guy in the class to succeed are gone," he said.

"A much greater value will be placed on those organizations whose core businesses are client-focused and are diversified away strictly from areas such as proprietary trading or balance sheet activities."

The chair of Germany-based Deutsche Bank said there is reason to be optimistic in the current economic gloom.

While financial markets remain "volatile and fragile," the underlying credit environment is "relatively benign," Josef Ackermann told the panel.

Bank writedowns related to the credit crunch are continuing but investment and clients are beginning to return to the industry, he said.

While challenges remain, the "market is not dead."