money supply. but none of these methods provided a suitable medium - term anchor for inflation expectations. this made it difficult for individuals and businesses to form long - range plans with any degree of certainty. on the fiscal side, the picture was pretty grim at the start of the 1990s and getting worse. public sector deficits would eventually peak at around 8 per cent of canada ’ s gdp, and public debt levels were continuing to mount. clearly, the situation was not sustainable. adjustments were urgently needed. the first of these adjustments came in 1991, when the bank and the government of canada agreed to adopt a series of explicit inflation - control targets. the agreement called for an inflation target - defined in terms of the annual rate of increase of the consumer price index - that descended gradually to 2 per cent, the midpoint of a 1 to 3 per cent range. that initial agreement has been extended three times, with the latest agreement covering the period to the end of 2006. in each case, the midpoint of the inflation - control target range has been kept at 2 per cent. this framework has worked well - better than might have been expected. by january 1992, inflation was already close to 2 per cent, and from the end of 1994 to today, inflation has averaged almost exactly 2 per cent. moreover, not only has inflation fallen, it has become more stable. indeed, the trend of inflation - as measured by what we call core inflation - has stayed within the target range almost continuously for the past 10 years. just as importantly, we found that, after a few years of inflation targeting, the inflation expectations of canadians fell into line with the 2 per cent target. and expectations have remained close to the target in recent years. the point of all this is that we have been successful in using monetary policy to create an economic environment of low, stable, and predictable inflation. with a credible monetary policy, the whole nature of the inflation process has changed. inflation itself has become more stable and, in turn, this has led to a more stable and better - functioning economy. the second big adjustment began in earnest around the middle of the 1990s. as i said before, at that time, canada was facing an unsustainable fiscal situation. compounding this immediate fiscal problem were the looming challenges posed by our aging population. spending had to be put on a viable long - term course, and the ratio of public debt to gdp on a steady downward track. by the middle of the decade, governments

##ness. my third principle is that effective regulation and supervision needs to be efficient. efficiency is key to effective regulation. in the design of a regulatory framework, there is flexibility in how to achieve a desired outcome, and there are often multiple approaches that would be effective in doing so. once a decision has been made to regulate an activity, the next objective should be to ensure that the regulation achieves its intended purpose and that there are not more efficient alternatives that can yield those benefits at a lower cost. my fourth and final principle is that regulation and supervision should serve a legitimate prudential purpose, like promoting safety and soundness, or reducing financial stability risk. after the last financial crisis, there was strong public support for enhancing regulation and supervision over the banking system, with a particular focus on the largest banks. and many of the steps taken after the last financial crisis have improved the resiliency of the u. s. financial system. while the need for robust regulation and supervision remains as true today as it was after the last financial crisis, regulation and supervision must also allow banks to continue providing credit and other financial products and services. collectively, these principles guide my thinking about the future of supervision and regulation. with that framework in mind, i would like to turn to some critical issues that are relevant to large banks. 2 / 8 bis - central bankers'speeches stress testing as i just discussed, a critical element of due process is that rules and supervision should be consistent among firms, and over time. this can be a challenge because of the variability in the business models of banks, especially among the largest banks. each bank is different in terms of its balance sheet, business lines, and risk profile, so regulators must be vigilant that both regulations and supervisory practices are being applied consistently. one area where this need for consistency is clear is in the board's stress testing framework. since 2013, stress testing has been used to assess banks'capital positions and determine whether they have sufficient capital to both absorb losses and continue lending during stressed conditions. this process has evolved considerably since its inception, and that evolution is important to ensure that stress testing continues to be relevant and effective. much of the stress testing framework is designed to encourage consistency - we have a common scenario design for firms, and similarly situated firms are subject to stress testing on the same frequency. however, the stress tests produce results that vary considerably from year to year due to how a specific scenario interacts with a specific firm's business