Commercial banks should cut costs rather than pass along costs of reform to customers, Bank of Canada Governor Mark Carney said in a speech at the German central bank Tuesday.

"Creating more resilient institutions requires more and better capital," Carney said, says in notes of the text released in Ottawa.

That strengthened position would help institutions better weather financial storms and create greater goodwill with shareholders and customers alike.

Unfortunately, increasing capital also makes the operating costs for financial institutions rise, he said at a symposium at the Deutsche Bundesbank in Germany, but the Bank of Canada merely considers that a cost of doing business in a climate where a lack of prudent risk management caused a worldwide financial disaster.

As Carney put it, a key goal in the G20 banking reforms is to "create a system that can withstand the failure of any single financial institution."

He told the symposium, "a financial sector that is less volatile, less prone to debilitating crises, and more robust in the face of adverse shocks is likely to be viewed more favourably by investors and attract the investment needed to continue to expand in a sustainable manner."

That picture of the financial sector sounds ideal as markets continue their slow climb back from the brink, but it comes with a significant cost; namely the amount of capital that financial institutions will have to retain to offset risk.

Carney went on to say that in order to maintain customer and investor confidence, and to ensure that investment continues in the industry, those costs cannot be borne solely by passing them along to consumers.

According to Carney, "if banks were to reduce personnel expenses by only 10 per cent, they could lower spreads by an amount that would completely offset the impact of a 2-percentage-point increase in capital requirements."

While personnel cuts are just one example of many, Carney made it clear that these kinds of internal cost-cutting measures would be the best way to meet the new reform requirements without hurting the integrity of day-to-day operations in banks and financial institutions.