Lauren Krugel, 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 Friday

"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."

There will also be a big impact on the ability of companies and everyday consumers to borrow money, he added.

"The days of cheap money are over and credit spreads across the board have and will continue to significantly increase the cost of financing," Nixon added.

"This, in turn, will inhibit the ability of consumers and corporations to borrow and change the economics for investing in growth for companies and for private equity investors"

In addition, bank operations will be focused more on a longer-term sustainable business model and there will be greater regulatory scrutiny on the balance sheets of investment banks and other financial institutions, Nixon said.

Scotiabank CEO Richard Waugh said regulators in Canada have played an important role in stemming the effects of the credit crisis.

While banks and their regulators might butt heads from time to time, fundamentally "regulation is part of the solution," said Waugh.

Because Canadian regulators had set such a high standard ahead of the unravelling of credit markets, this country's banks went into the storm in relatively good shape, Waugh said.

"We went into this highly capitalized. Our regulator had a bar slightly higher and we went higher than that," he said.

But there are some things that the financial institutions themselves can do better in the future, Waugh added.

"We are accountable for what's happening and we have to do something about it," Waugh said.

One of the main underlying reasons for the credit crunch was the fact that liquidity was priced badly - in other words, it became too easy to borrow money at low interest rates or sell equity at high prices.

"When things are mispriced, or liquidity is zero priced, terrible things happen," Waugh said.

Banks need to institute a "strong, enduring risk culture" from the top down, Waugh said. The way executives are compensated also needs to be looked at more deeply, he added.

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."