##ening of markets is generally very welcome because it makes the system more robust and increases competition, which disciplines banking activity. while markets expand the choices and lower the prices available to financial consumers, they function differently from banks. unlike banks, markets rely more completely on confidence for liquidity. we have seen during this crisis that confidence is not always present. liquidity waxes and wanes, and with it, so do the prices of securities. in recent months, as we have seen a fundamental repricing of virtually every financial asset across the world, liquidity in many securities has fallen dramatically. banks have relationships with their customers. they follow borrowers over time and monitor their payment history and reliability. when performing their role properly, banks tailor their products to the borrower, imposing higher or lower standards as appropriate. in contrast, markets are transaction oriented. they act as an intermediary between savers and borrowers but maintain relationships with neither. consequently, market instruments are more robust when the underlying product is more standardized. determining whether an activity is best financed through a bank or a market depends on the relative benefits to that activity of specialization versus standardization. in response to increased competitive pressure from markets, banks have become direct participants in markets. this move helped to sow the seeds of the crisis through three channels in particular : wholesale funding, securitization, and proprietary trading. first, banks have become increasingly heavy users of markets to fund their activities. in recent years, many international banks borrowed in short - term markets to finance asset growth and, in the process, to substantially increase their leverage. this made them increasingly dependent on continuous access to liquidity in money and capital markets. in the process, banks conflated a reliance on market liquidity with their access to central bank liquidity. this exacerbated the potential liquidity problems of banks to a magnitude that we now better appreciate. second, banks increasingly used securitization to straddle relationship banking and transactional market - based finance. under the originate - to - distribute business model, banks originated a set of loans, repackaged them as securities, and sold them to investors. in essence, banks took specialized loans and sold them in standardized packages. while securitization promised to diversify risks for banks, the transfer of risk was frequently incomplete. banks often sold securities to " arms - length " conduits that they were later forced to reintermediate or held onto aaa tranches of

to see markets functioning effectively in the absence of bank participation. these activities can be distinguished from principal positions or proprietary investments and are essential to well - functioning markets. efforts to improve market infrastructure described above will make markets less risky and the system as a whole more robust. second, banks are the major providers of cross - border financing products ranging from trade finance, to foreign exchange hedging, to foreign financing. in a world of global supply chains and corporations, it would be very costly to prohibit bank provision of these services that have become integral to global commerce. moreover, with global cross - border flows already under such pressure, further impediments would be extremely risky. third, the crisis has demonstrated that there are many firms that have been deemed systemic and worthy of rescue even though they were not deposit - taking banks. efforts to build more robust markets and to define clearer and more comprehensive resolution schemes may limit these cases in the future, but they are unlikely to eliminate them entirely. in my opinion, a better approach is the plan by the g - 20 to expand the perimeter of regulation. as a general principle, all financial activities that can pose a systemic risk to financial stability should be supervised and regulated. this will include pools of capital of material size, leverage, and maturity mismatches. in addition, to avoid regulatory arbitrage, markets should be regulated according to economic substance, placing similar activities into the same regulatory bucket, even if undertaken in different institutions. regulating by economic substance should limit the destabilizing impact of shadow banks on the banks themselves. in many respects, the relative success of canadian banks and their consolidated supervision by the office of the superintendent of financial institutions demonstrates that, with the proper regulatory regime and professional management, banks can be much more than utilities. in this spirit, canada is contributing to the international debate on financial sector reform. we are stressing the need for a macroprudential ( i. e., comprehensive and systemwide ) approach that takes into account the importance of banks, markets, and the interactions between them. conclusion our principal preoccupation is weathering the financial and economic storm, but as we respond to the current tempest, policy - makers must also focus on where we want to end up when calmer conditions arrive. our destination should be one where banks and financial markets play critical, and complementary, roles in a financial system to support long - term economic prosperity. the system as a whole will be more stable if market infrastructure