credit cycle. a prominent example could be a new bank capital regime. it should be dynamic ( with buffers and provisions moving through the cycle ), simple ( including canadian - style leverage caps ), and coherent ( consistent with broader initiatives such as moving over - the - counter derivatives onto exchanges ). given where we are in the current crisis, it should also be augustinian, that is, new requirements should be phased in over time to avoid deepening the recession because of procyclical deleveraging. fourth, all countries must accept their responsibilities for promoting an open, flexible, and resilient international monetary system. responsibility means recognizing spillovers between economies and financial systems and working to mitigate those that could amplify adverse dynamics. it means submitting to peer review within the financial stability board and external review by the international monetary fund. fundamentally, it means adopting coherent macro policies and allowing real exchange rates to adjust to achieve external balance over time. this crisis was caused in part by failures to meet the same challenges that bedevilled the architects of the original bretton woods system. given the current, deeply synchronous global recession, the costs of free riding should be obvious to all. conclusion i would like to conclude with a few words on the impact of this rebalancing for canada. it appears likely that the global economy is entering a period of lower potential growth. the substantial capital misallocation and financial excesses of the boom years will take years to work off. rebuilding globalization will also take time. recognizing the scale of the industrial restructuring and the lower investment over that period, the bank has lowered its estimate for canadian productivity and potential growth. the shifting composition of global growth will also have important implications for canada. the current pattern of u. s. activity, with its weakness in the housing and auto sectors, is proving particularly challenging for our businesses. we expect the u. s. recovery to be relatively subdued compared with historical experience, given the domestic rebalancing requirements in that economy. more positively, the greater proportion of emerging - market growth in the overall growth of the global economy should create new opportunities, particularly by supporting commodity prices. our research indicates that, even in the throes of the crisis, those emerging markets whose demand is most relevant to our exports are also generally the most resilient. these countries can be expected to make up an increasing proportion of global demand going forward. unfortunately, a smooth rotation of demand across economies is

’ s financial system. risks to canada ’ s financial system the process of financial sector repair is continuing and the economic recovery is proceeding at a steady pace in most advanced economies. as expected, however, it is taking considerable time and effort to resolve the underlying economic and financial imbalances. the path to a more resilient global financial system is further complicated by the two - speed j. chapman, s. lavoie and l. schembri, “ emerging from the shadows : market - based financing in canada, ” bank of canada financial system review ( june 2011 ) : 29 – 38. bis central bankers ’ speeches recovery in economic activity, with relatively modest growth in advanced economies and increasing signs of overheating in emerging - market economies. despite the challenging international environment, the canadian financial system remains healthy. for example, asset quality at canada ’ s major banks has improved further in recent months. moreover, the aggregate financial position of our non - financial corporate sector is solid. the main source of concern domestically continues to be the high level of debt carried by households, with the aggregate debt - to - income ratio of canadians at a record high. this raises the risk that the impact of an adverse macroeconomic shock on the financial system could be exacerbated by a deterioration in the ability of households to service their debts. this risk remains elevated and is broadly unchanged since our previous fsr in december. aside from our concern about household finances, the principal sources of risks to canada ’ s financial stability come from the external environment. they are : first, sovereign balance sheets remain strained in many advanced economies. in the near term, the principal threat is that the acute fiscal strains in peripheral europe could trigger a generalized retrenchment from risk - taking in global markets, including markets in canada. second, large current account imbalances cannot persist indefinitely. implementing the structural changes needed to resolve these imbalances will be a lengthy process and the risk of a disorderly adjustment involving sharp movements in asset prices remains high. third, while the majority of banks have made substantial progress in strengthening their balance sheets, some foreign banks continue to struggle, and the risk that further progress may be delayed by the protracted recovery in advanced economies is still elevated. lastly, a long period of low interest rates globally may fuel excessive risk - taking. the “ search for yield ” could cause risk to be underpriced or lead investors to take on exposures that they may not be able to