UPDATE 1-Canada's Flaherty worried about France, European banks

Wed Feb 12, 2014 2:38pm EST

OTTAWA Feb 12 (Reuters) - The biggest risk to the Canadian economy is the financial health of Europe, particularly France, Finance Minister Jim Flaherty said on Wednesday, expressing marked concern about European banks.

Flaherty was speaking at a conference examining the 2014-15 federal budget that he presented the day before, and was asked what he was most worried about, and where his economic projections could go wrong.

"Europe. I'm still worried about Europe. I'm particularly worried about France," Flaherty said. "I think some of the European banks have not come clean. We still don't know what their books actually look like, and this is five, six, seven years into the crisis. And there's going to be some ugliness there, which will hurt the world economy when it becomes apparent."

France's banking regulator has for years insisted that the country's banking system is sound and that its method of regulation, which includes proprietary balance-sheet tests and on-the-spot checks, was vindicated by the lack of major bank failures during the financial crisis.

After euro-zone financial jitters in 2011 highlighted perceived weaknesses in French bank balance sheets, lenders BNP Paribas and Societe Generale sped up plans to sell assets to reinforce their capital strength.

Flaherty has been outspoken in his criticism of the state of European finances and banks throughout the Great Recession and its aftermath.

In an interview on Global News' West Block television show on Sunday he said it was not clear that the French banking system had "gone through the sort of cleansing it needs to go through and that the American system has been through and most of the European banks have been through."

Bank of France Governor Christian Noyer criticized a recent study on the French banking sector on Wednesday and said there are no problems with the country's banks.

Also on Wednesday, French Finance Minister Pierre Moscovici said there was "nothing to fear" from French banks and asset quality reviews.