will raise a number of questions. what i want to do is to stimulate ideas, in the hope that some of you may be inspired to continue to probe into these issues. where research is needed financial institutions. over the past 15 years or so, regulators and policy - makers have been working hard to improve the soundness of financial institutions. clearly, this is important and necessary work. but in carrying it out, we must always strive for a balance. that balance is between maintaining and strengthening the key elements of regulation and supervision that promote appropriate risk management, and the necessity to promote efficiency by keeping compliance costs to a minimum. so the question that can be asked is, how do regulators best encourage good risk management without unduly discouraging risk taking and without stifling innovation? rather than putting the emphasis on compliance with a vast number of detailed rules, it seems to me that the goal of the regulator should be to encourage financial institutions to identify and measure the true nature of the risks being taken, and to see that methods are being developed to mitigate these risks. policy - makers and regulators do not want to discourage appropriate risk taking to the point where incentives are created for appropriate risk - taking activities to move outside the regulated financial system. given the development of a wide range of new financial instruments and the exponential growth in their use, the need to find this regulatory balance is becoming more and more acute. it is certainly true that through these instruments, banks have become better able to manage risk by shifting some risks to others. but as banks do this, the question arises, where do these risks ultimately reside? and are the bearers of these risks able to manage potential losses in times of economic stress, so that the financial system is ultimately more stable? the evolution in accounting standards also has many implications for financial institutions and markets. does compliance with some of our accounting rules lead to large swings in reported earnings that do not reflect the true economic state of a firm? if we are to use fair - value accounting, how do we ensure that both assets and liabilities are correctly and equally marked to market? and we need to understand how particular elements of accounting rules can affect the risk - taking behaviour of financial institutions and investors. the issue of the right regulatory balance can also be looked at in relation to questions about the most efficient structure of financial institutions. this relates to the powers of institutions to do business, the types of business lines that can be offered by a single institution, and the corporate

david dodge : research in financial services and public policy - filling the gaps remarks by mr david dodge, governor of the bank of canada, to the conference on financial services and public policy, schulich school of business at york university, toronto, ontario, 22 april 2004. * * * good evening, ladies and gentlemen. it gives me great pleasure to open this important conference on research in financial services and public policy. in his invitation to this event, my former colleague, fred gorbet, referred to the need for “ highly focused academic research in canada on the linkages between public policy and financial services. ” i certainly concur with this assessment, and so i am happy to be a participant here today. for five years, the research program here at schulich has helped to support and nurture a canadian academic community focused on financial services. in doing so, the program has encouraged researchers to fill the gaps in our knowledge and help policy - makers and regulators to do a better job. after five years, it's useful to think back and recall the motivations for establishing this program in the first place. it goes without saying that the economy works better when a country's financial services sector is as sound and as efficient as possible. and the importance of promoting soundness and efficiency was certainly highlighted by the events of the late 1990s. five years ago, the global economy was emerging from the asian and russian financial crises, and the near - collapse of long - term capital management. during these events, we saw that financial markets are a key channel through which crises can spread. and among the countries most affected, we saw that one common element was a weak banking system. so one clear lesson to be learned was that the strength of a country's financial system is crucial. this is particularly true in times of stress, because a strong financial system gives an economy a better chance of making necessary adjustments, before a stressful economic situation turns into a full - blown crisis. it may be tempting to look at today's relatively benign economic and financial environment and conclude that the urgent need to strengthen financial systems has passed - tempting, but wrong. now is precisely the time to get the work done, when there is considerable liquidity in the global system, and interest rates and spreads around the world are low. because, at some point down the road, there will be less liquidity, and interest rates and spreads will be higher. so if we wait, the task will