UPDATE 2-TD Bank CEO warns on C$ strength, interest rates

Thu Mar 25, 2010 1:50pm EDT

* Says policymakers should tap fiscal, not monetary brakes

* Says strong Canadian dollar hurts industry, exporters

* Reiterates cautious approach to U.S. acquisitions (In U.S. dollars unless noted)

By Andrea Hopkins

TORONTO, March 25 (Reuters) - Toronto-Dominion Bank's (TD.TO) chief executive on Thursday urged Canadian policymakers to use fiscal measures rather than interest rate increases to slow the economy, warning that higher rates could damage the recovery.

The comments by Ed Clark, who heads Canada's second-largest bank, come a day after Bank of Canada Governor Mark Carney hinted in a speech that the central bank may raise rates sooner than expected to counter inflation fears.

Speaking to reporters after TD's annual meeting in Quebec City, Clark said he was concerned that the Canadian dollar, which has approached parity with its U.S. counterpart, is rising so high that it may hurt domestic industry.

"I definitely worry. I think we shouldn't tilt policy to make that problem worse, that's for sure. And that's what I would favor, if you need to put the brakes on the Canadian economy, I'd put them on the fiscal side, not on the monetary side, so you're not impacting the exchange rate," Clark said.

"My preference would be that we move faster to get the deficit down if we decided that we had to do something to slow the economy down," Clark said.

Any move by the Bank of Canada to raise interest rates would likely boost the attractiveness of the Canadian dollar because U.S. policymakers are not yet ready to start tightening monetary policy there. The U.S. economy has lagged Canada's recovery.

"I agree with the concern that the exchange rate in the long run, if it gets above what we think the long-run equilibrium is -- and I don't think most people think it is at par today -- that that's bad for Canadian industry in the long run and it's bad for Canadian exporters," Clark said.

TD Bank has a big personal and commercial banking operation in the United States and has said it would like to expand its market share from the Northeast down the U.S. East Coast.

EYEING SMALL DEALS

Clark reiterated on Thursday that TD is interested in U.S. acquisitions of banks with assets under $10 billion, or FDIC-assisted deals, to build its presence south of the border, but he said he remains cautious about expansion because the U.S. economic recovery is still fragile.

"We believe we can analyze a book of that size ($10 billion) and come to our own view of what the catastrophe risk would be in doing that, so we don't need FDIC insurance because if we were wrong the amount in which we were wrong would not materially impact TD," Clark said.

"We're really right now not anxious to do anything bigger than that until we get a little more clarity about where the U.S. economy is going. And thankfully nothing has come our way that people are knocking down our doors saying 'We want to sell you the bank.'"

TD's other option for expansion is to take part in deals assisted by the regulator, the Federal Deposit Insurance Corporation. FDIC deals offer greater risk certainty because acquiring banks can pick up deposits at relatively low or zero premiums and also be shielded from toxic assets.

But Clark noted that most FDIC deals are not popping up in TD's regional footprint in the Northeast, but rather are concentrated in the markets that were hottest just before the financial crisis -- the U.S. Sunbelt and Northwest.

"We definitely look and say well, could we extend our franchise at economic prices ... and the answer is yeah, I think there might be (opportunities there). But as it happens, lots of other banks have seen that too, so it's a pretty competitive environment, so whether we'll be successful or not we (don't know)," Clark said.

"Right now we're focused on going down the East coast."

(Reporting by Andrea Hopkins; editing by Frank McGurty)