##nt, and therefore contributed to postponing an overdue repricing of risk. indeed, central banks, including the bank of canada, had for some time identified the possibility of " a significant price reversal in riskier assets. " 6 let me now describe how the late summer turbulence in financial markets affected various forms of liquidity. this phrase is taken from the bank of canada's december 2005 financial system review, p 4. how recent events in financial markets have affected liquidity throughout the year, delinquency rates and foreclosures associated with subprime mortgages in the united states have been rising. these mortgages have, over the years, been increasingly repackaged, or securitized, into asset - backed securities ( abss ) such as residential mortgage - backed securities ( rmbss ). more recently, these rmbss, along with other assets and abss, have been further repackaged into other structured products, such as collateralized debt obligations ( cdos ) and asset - backed commercial paper ( abcp ). because the magnitude of the delinquencies and foreclosures was unexpected, it is not surprising that we have seen a repricing of many assets with exposure to the u. s. subprimemortgage market. the subsequent downgrade by credit agencies of many cdo tranches – especially those that included u. s. subprime mortgages – made market participants aware of the risk inherent in these products, and also made them realize that credit risk more broadly may not have been priced appropriately. so, to the extent that the repricing of credit risk that we have seen in recent months has, in fact, been a renormalization of the value of risk, these events are to be welcomed. many of these structured products lack transparency – particularly those backed by other structured or securitized products, such as abcp backed by cdos. it is often difficult for investors to determine the underlying assets that ultimately provide the cash flow for these products – and, therefore, to determine their direct exposures. while securitization helps disperse risk to those more willing to bear it, it can also obscure to the investor in which instruments and with which actual and potential counterparties the ultimate risk resides. because of this lack of transparency, uncertainty among market participants began to build in early august, and perceptions of counterparty risk rose. bid / ask spreads widened, market depth

- e. html. when lvts participants are in deficit at the end of the day, and therefore need to access the standing liquidity facilities, aggregate participant deposits at the bank of canada will exceed the target for net settlement balances. as discussed at the end of this speech, these facilities also respond to temporary difficulties in funding liquidity experienced by lvts participants. because such a regime allows us to have a monetary policy that is independent of other countries. now i'll turn to liquidity in financial markets. liquidity in financial markets market liquidity refers to the extent to which one is able to quickly and easily buy and sell financial assets in the market, without moving the price. market liquidity captures the aspects of immediacy, breadth, depth, and resiliency in markets. immediacy refers to the speed with which a trade of a given size and cost can be completed. breadth, often measured by the bid / ask spread, refers to the costs of providing liquidity. depth refers to the maximum size of a trade for any given bid / ask spread. resiliency refers to how quickly prices revert to fundamental values after a large transaction. generally speaking, the more liquid the market, the better. but there is an important caveat – if market participants come to expect that market liquidity will always be ample, and they acquire assets with the assumption that they can liquidate their positions quickly and at fairly predictable prices, they may end up taking on more risk than has been factored into the purchase price. and this could sow the seeds of a nasty correction in the event of a shock and a rapid decline in market liquidity. that said, liquidity is the lifeblood of markets. over the past 50 years, and particularly in the past 10 to 15 years, we've seen a significant trend increase in liquidity in financial markets around the world, including the markets for bonds and other fixed - income products, and those for equities, derivatives, foreign exchange, and commodities. what gave rise to this increase in market liquidity? first, there have been structural factors in markets themselves. the appearance of new players, the introduction of new financial instruments, and advances in technology have all added to the liquidity of financial markets. new participants, such as hedge funds, have become active in many financial markets, thus introducing new capital into these markets, adding to their liquidity. financial innovation, typically enabled by technology,