it also leads to a maturity mismatch that creates a fundamental risk for banks. banks hold liquid reserves that are only a fraction of their outstanding obligations. what if a depositor wants his money back, but that money is committed to long - term investment projects? generally, this is not a problem, because banks maintain sufficient liquidity to meet typical demands and can borrow from other banks if the shock is larger than anticipated. but what if many depositors want their money back at the same time? there is a tipping point when the liquidity problem becomes self - fulfilling. to manage this risk, banks rely on two crucial supports. first, deposit insurance gives depositors the comfort that their funds will be there when they need them. 1 second, the bank of canada acts as a lender of last resort to solvent but illiquid institutions. 2 these support mechanisms are carefully crafted to discourage banks from taking inappropriate risks while still providing the necessary support. they are also accompanied by a robust regulatory framework. bankers implicitly accept a social contract that gives them access to liquidity support in times of a stress in return for regulation of their behaviour at all times. banks perform a third essential role of credit intermediation, channelling funds from savers to investors. this allows savers to diversify their risk and all of us to smooth our consumption over time. young families can borrow to buy a house, students can pay for university. canadians can invest in low - risk, interest - bearing accounts for their retirements, and businesses can finance working capital and investment. the canada deposit insurance corporation insures eligible deposits up to a maximum of $ 100, 000 ( principal and interest combined ) per depositor against the failure of a bank or other financial institution if it is a cdic member. canadian chartered banks are cdic members, as are federally regulated trust and loan companies that take deposits and deposit - taking associations governed by the cooperative credit associations act. a more detailed description of the bank's role as lender of last resort can be found in the winter 2004 - 05 issue of the bank of canada review, available at http : / / www. bankofcanada. ca / en / review / winter04 - 05 / daniel. pdf. banks, markets, and the crisis banks are not the only game in town. in recent years, markets have grown to the point that they are now an important alternative for corporate and household finance. from a financial system perspective, the deep

agents supply sufficient liquidity such that injections of central bank liquidity are not needed. financial institutions create liquidity by buying and selling assets to make the markets in which financial institutions fund themselves. the financial system is liquid because institutions regularly borrow from each other, and because they regularly buy and sell each others'short - term paper. there are times, however, when liquidity dries up as confidence erodes in the ability of private agents to remain in markets. when the regular process of lending and transacting slows down or stops, the lack of liquidity means that institutions are unable to transact assets at predictable prices at minimal cost, and financial markets become stressed. at such times, a central bank can help restore liquidity by directly or indirectly providing liquid assets in exchange for illiquid assets, thus helping to restore confidence in the ability of the private sector to generate liquidity. what has happened to market liquidity since august? a review of recent events helps to clarify the principles of liquidity provision. the current situation in securitization markets serves as a good example of how information problems are at the root of market failure and how liquidity, or a liquidity shock, can cascade through markets. the events of last summer represented a severe shock to markets. in particular, the realization of the potential scale of subprime losses and the associated loss of faith in structured products and rating agencies collectively created uncertainty about – and an associated loss of confidence in – counterparty credit quality. this uncertainty persisted because of the extreme asymmetric information among market participants, which impaired market makers'ability to transact with confidence and, therefore, to supply liquidity. at the same time as the supply of liquidity was shrinking, demand for liquidity by financial institutions was rising dramatically – for two reasons. first, the reintermediation of off - this occurs either by not replacing maturing treasury bills, or by selling them outright. the other way in which term pras can be financed is by having more government deposits on our balance sheet. this means that there would be fewer government deposits on private sector balance sheets, and thus fewer liquid assets as well. although the total size of the bank of canada's balance sheet increases in this scenario, the liabilities of the bank to the private sector ( currency plus private sector deposits ) do not, so there is no monetary stimulus involved in this type of operation. balance - sheet assets and contingent claims expanded, and continues