Finance Minister Jim Flaherty says the country’s chartered banks should exercise more prudence over their lending practices to households rather than publicly calling on Ottawa to intervene on their behalf.

Nevertheless, he said in a year-end interview with the National Post he stands ready next year to curb Canadians’ insatiable appetite for debt, which hit another record high level in the third quarter of 2010.

“We have a regulatory role and if we need to tighten the rules because the banks don’t — and it is necessary to do so — we would,” Mr. Flaherty said.

Cracking down on the lines of credit that people can take out against their homes is one of several options the Finance Minister mentioned in an interview with Postmedia News.

In its latest outlook on Canada, released on Wednesday, the International Monetary Fund identified bloated consumer balance sheets as the biggest risk to the domestic economy.

Two big-bank chief executives, Ed Clark of Toronto-Dominion Bank and Bill Downe of Bank of Montreal, in interviews with the National Post this month called on the federal government to take steps to curb consumer access to bank loans. Mr. Flaherty should consider, they said, reducing maximum amortization periods on mortgages to 25 years from 35 years and further toughening the criteria to be eligible for government-backed mortgage insurance — which is generally a prerequisite before acquiring a loan to buy a house.

“I find it just strange that I get some of the financial institutions telling me to mind my own business on regulatory matters — and then we have some worries about the level of consumer debt, and the banks are saying the government needs to move in and tighten standards,” said the Finance Minister, who last February toughened mortgage eligibility rules after non-stop warnings about the possibility of a housing bubble in Canada. (Since then, activity in the real estate market has slowed.)

“It seems to me the banks ought to be prudent in their lending practices and that’s one of the reasons the Canadian banks have a good reputation around the world,” Mr. Flaherty added.

New measures from the government — targeted at consumers or the banks that lend them money — could emerge in the 2011 budget, sometime in February or March, or earlier if conditions warrant. The latest Bank of Canada data indicate the pace of consumer borrowing has slowed in recent months, but is nonetheless growing faster than personal income.

Mr. Flaherty said any tweaks would likely be along the same lines of what the government has already done. But he said he’s concerned by the popularity of so-called home-equity lines of credit, which allow people to borrow money from their mortgage lender using their home as collateral. All of Canada’s biggest banks offer such loans, often with flexible repayment terms.

“There’s one other area that concerns me, and that is the home-equity loan market, which has grown significantly,” said Mr. Flaherty, who added that the government hasn’t decided if it will take further action on mortgage rules.

Meanwhile, he reiterated the need to stick to the Conservative government’s plan to reach a balanced budget by 2016 through slower program spending growth and public-sector budget freezes, while at the same time reducing rates of corporate income tax from the 18% rate this year to 15% starting on Jan. 1, 2012.

The Finance Minister said it is no longer good enough to measure Canada against its industrialized peers, such as the United States and Britain, which have started to raise taxes, or will be forced to “over time” to deal with their troubled balance sheets.

“If we stay on track we will not have to” raise taxes, Mr. Flaherty said. “We can continue our plan to reduce business income taxes over the next two years. That will leave us with a significant tax advantage over our competitors.

“And we need to do that,” he added, “because of what I see in the emerging economies. We have to be part of the new economic order and not part of the old one.”

The past year further highlighted the divide between advanced economies — whose households and governments are mired in paying down debt accumulated in the previous decade — and emerging markets in Asia and South America that are recording robust growth. Canadian companies are now heavily investing in productivity-enhancing machinery and redesigning product lines in recognition they can no longer rely on traditional markets to buy their wares.

Cutting business taxes further would help promote productivity growth and boost competitiveness — the key themes Canadian policymakers need to focus on in the coming years, the IMF said.

Mr. Flaherty said a budget surplus could emerge a year ahead of schedule if there’s “significant” economic growth in the years ahead — and that’s possible after legislators in Washington agreed to extend the Bush-era tax cuts for another two years.

The Finance Minister, however, expressed caution, saying Europe’s sovereign debt worries might intensify in 2011 as fears that Portugal and Spain might succumb to bond-market pressure.