require a lower policy rate than would have otherwise been the case. we communicate our research and analysis of trends and developments in the financial system, including policy and infrastructure developments, as well as our assessment of systemic risks and vulnerabilities, in our semi - annual financial system review ( fsr ). the next issue of the fsr will be published on 6 december and will examine, among other things, recent developments in the market for asset - backed commercial paper, as well as the current debate around credit - rating agencies. the fsr will be available on our website on that date. lessons from the events of last summer that's a quick overview of the work that we do to strengthen financial system stability. now, let me go on to the third question that i raised in my introduction, which relates to the lessons we've learned from this year's turbulence in global financial markets. while the turbulence is not over, it is not too early to begin to probe its causes and effects and start to draw lessons as to how we can strengthen the ability of the financial system to deal with stress. the recent turbulence was triggered by greater - than - expected losses on u. s. subprime mortgages, which unexpectedly spread around the world because these mortgage loans were re - packaged into opaque structured products funded, in many cases, by short - term asset - backed commercial paper. liquidity evaporated in the market for structured products as investors shunned them. a flight to the safety and liquidity of government securities ensued, and credit spreads increased. many commercial banks were affected, with the impact coming from such sources as their direct holdings of these structures, their commitments to provide funding to conduits, their difficulty in securitizing loans, and the fact that companies began to fall back on their bank lines of credit. at the same time, many banks became reluctant to make loans to one another because of uncertainties around counterparty risk and about their own future funding needs. the effect was to increase the cost and reduce the availability of credit, both in canada and globally. in canada, the abcp problem took on a unique characteristic since non - bank sponsors had issued paper with restrictions on the back - up lines of credit which prevented their access to these lines. this prompted a call for a standstill ( known as the montreal proposal ) to effect an orderly workout for most of these abcp conduits. the standstill period has been extended to 14

of some fundamental aspects of risk management and oversight that were violated by many. as supervisors, we have seen time and time again that financial crises are characterised by the failure to adhere to basic risk management principles, especially during times of financial innovation. this crisis is no different. weakness in fundamental underwriting principles, among other factors, was a key contributor to asset quality problems. so was poor risk management, which at some firms allowed the build - up of massive risk concentrations across the firm that further compounded already shaky asset quality. some banks were caught completely unaware by concentrations to subprime loans that they had in their loan portfolios. others did not fully understand their full exposure to subprime mortgages, particularly when they purchased an exposure that contained dozens of other exposures – i am of course referring here to cdos of abs. poor asset quality and risk concentrations are at the heart of the turmoil involving subprime mortgages which has led to the exceptional uncertainty and volatility that we see today. these problems have been further compounded by uncertainties relating to valuation practices. what should we take away from this? that banks – and supervisors – must redouble their efforts to ensure that sound underwriting standards are in place and that there are adequate, systematic procedures for identifying firm - wide risk concentrations. originate - to - distribute business model what other factors – aside from complacency – have hindered adoption of such basic principles? perhaps one of the stumbling blocks has been the expanded use of the originate - to - distribute model. managing this model ’ s associated risks poses significant challenges and, in some cases, has led to large risk exposures and concentrations that firms ’ senior management failed to detect. the recent problem with the originate - to - distribute model has been one of incentives. instead of the traditional focus on a borrower ’ s ability to repay a loan, many banks focused instead on generating a high volume of loans, and booking as income the fees received to originate the mortgages. many firms chose not to invest the necessary time and resources in thorough credit analysis and underwriting since someone else would be purchasing the mortgage. investors did not perform their own due diligence. instead, they relied on the due diligence of originators and packagers, who lacked interest in exercising this due diligence. they also placed undue reliance on the judgments of the credit rating agencies, and the capacity of modern technology and diversification to manage financial risks. what