OTTAWA - Finance Minister Jim Flaherty says he needs a veto over Canadian banks' ability to buy foreign entities because ultimately Ottawa would be left holding the bag if something goes awry.

The finance minister's comment came as he defended proposals to amend Canada's financial institutions act by giving himself expanded powers and increasing penalties for banks' bad behaviour.

The change that has caught the most attention is a proposal to take back ultimate say over whether a large or medium-sized Canadian financial institution can make a foreign purchase that increases its equity by 10 per cent or more.

The concern is that a Canadian bank may use its newfound leverage in the world to purchase a foreign competitor with less rigorous aversion to risk, hence imperilling its own survival should a new financial crisis arise.

"The obligation of the individual bank is not to look at the system as a whole, it's to look at the bank and how they are doing and of course (their) shareholders. The obligation of the government is to preserve the stability of the system overall," Flaherty said.

Canadian Bankers Association president Terry Campbell said in an email response that his organization is looking for clarification because of potential "operational issues." He cited the 12-month window for approval.

Flaherty told reporters after his meeting with Canadian senators that his proposal is not aimed at a specific bank or specific purchase, but to prevent future systemic risk.

In 2008, the failure of Lehman Brothers on Wall Street touched off a financial crisis that froze credit throughout much of the advanced world, triggering the worst recession in six decades.

Flaherty noted that even in Canada, which had no bank failures, the government stepped in to put more funds into the financial system by purchasing billions of dollars in mortgages from the banks as well as backstopping bank debts.

The move was seen as necessary to ensure that Canada's commercial banks had access to funds that they could then lend to consumers and businesses and keep the economy from collapsing.

"Ultimately, it all leads to Ottawa," Flaherty said.

Flaherty said three acquisitions since 2004, when the Conservatives replaced the Liberals as the governing party, would have required his approval if such a proposed amendments had been in place. He didn't specify which ones.

The minister noted the power once rested with the Finance Department before it was transferred to the Office of Superintendent of Financial Institutions in 2001 for what he called "opaque" reasons.

During his testimony, Flaherty praised Canada's banks, describing them as the soundest in the world, and noted that Canada also has stringent regulations and oversight for the industry.

Other proposed changes in the new legislation would require banks with $12 billion of assets, or more, to be widely held. The current threshold is $8 billion.

The legislation also calls for increasing the maximum penalty for violations of the consumer protection provision.

The Canadian Bankers Association said such increases are unnecessary since the current $200,000 maximum penalty is rarely applied. Last year, the total penalties levied on 36 separate violations was $175,000, or about $5,000.