in the dollar over recent months which should tend to reduce the risk of a sudden correction of global imbalances, another of the key vulnerabilities we have been monitoring in recent years. but the story of the sub prime market is not yet over and it certainly does point to some vulnerabilities in modern financial markets which need to be factored into financial firms ’ risk management. first, this was a layered market in which many originators had an incentive to maximise volumes, where the loans were then securitised and the securities were in turn combined into cdos for onward distribution. one risk in such markets is that there is a loss of information along the chain and that incentives become misaligned ; in particular the quality of credit monitoring and credit assessment declines. it is difficult to avoid the conclusion that occurred in 2006 in the sub prime markets. chart 6 shows the arrears on successive tranches of loans and shows that the quality declined over time particularly in 2005 and 2006. second, the new derivatives markets change the way in which credit losses hit balance sheets. in the world of on - balance - sheet lending, when defaults begin to turn up, there can be scope for rescheduling and for discussing with your accountants what provisions are prudent. we saw that impact on a few of the big banks earlier this year. in the securitised markets, the pace can look slower to begin with but then comes in a rush. chart 7 shows the spreads on different tranches of the abx index, the main benchmark index for sub prime securities. what is remarkable here first is how slow the spreads were to move at all. of course, the predicted losses on particular tranches do no move smoothly with rising defaults, but throughout 2006 the economic press was a buzz with worry about the us housing in particular, the high - grade structured credit enhanced leverage fund and the higfh - grade structured credit fund both managed by bear stearns asset management ( bsam ). market ; sentiment changed several times on whether the housing downturn would lead to a general recession. throughout this period the originators continued to write new sub prime loans and the prices of the abx scarcely quivered. but since january the story has been quite different with two dramatic hikes in the spreads first of bbb and then of the a - rated index. in total, the spread for bbb has gone from 500 basis points at the turn of the

met gave me a warm handshake or a hug. i recall washing my hands very carefully afterward, so awareness was rising. life has been a blur since that day in toronto. i recall the significance of the shock really hitting me at a special meeting of major central bank governors hosted by the bank for international settlements ( bis ) on sunday, march 8. there we heard the first - hand experience of governors from china, italy and south korea. i also attended a memorial service for a friend later that day. that was my last social activity, and we were afraid to shake hands or touch the food. i will always recall my dear friend jim ’ s memorial service as the moment when the penny truly dropped. i don ’ t have time to give you a play - by - play of the next six weeks. let me just say that the work, the meetings, the videoconferences, the phone calls were relentless. there were global meetings of groups like the g7, g20, bis and international monetary fund, all at very early hours in our time zone ; bilateral calls with other central bank heads ; and domestic meetings — with the ceos of the big six banks, pension fund ceos, market regulators and other ottawa officials. and of course, many meetings with my own team, adjusting our policies and other programs in 1 / 5 bis central bankers'speeches real time. during those six weeks, the bank would cut its interest rate by a further 100 basis points to 0. 25 percent, which we consider to be the effective lower bound. we have enhanced our liquidity facilities in multiple ways. we have increased our participation in government of canada and provincial money market auctions. we have started large - scale asset purchases of canadian government bonds. we have launched programs for purchasing bankers ’ acceptances, commercial paper, provincial bonds and corporate bonds. it is useful to think of these actions along two dimensions. the first dimension is to ensure wellfunctioning financial markets. when risks rise, financial markets tend to seize up as everybody runs to cash. when this happens, the whole chain of financial intermediation can break down, and credit availability can shrink. central banks can create the needed liquidity by accumulating assets that people don ’ t want and providing the cash they wish to hold. this allows not only for a continued availability of credit, but an expansion of credit as people and firms draw liquidity. when tensions dissipate, the process reverses.