the mispricing of assets. in contrast, risks are events or outcomes that could threaten the ability of the financial system to perform its core functions. risks materialize when trigger events – which are adverse shocks such as the recent dramatic drop in oil prices – interact with vulnerabilities. to illustrate the difference between a vulnerability and a risk, imagine a bridge with fractures in its concrete supports. that ’ s the vulnerability. the risk is that the bridge could collapse if a trigger event, such as an earthquake, shook its foundations. focusing explicitly on vulnerabilities in the canadian financial system allows us to highlight where the fragilities lie and how they are evolving. we identify a range of vulnerabilities and consider them in relation to a wide variety of financial institutions, markets, end - users and payment systems ( table 1 ). 5 we share our assessments of systemic vulnerabilities and risks with our federal regulatory partners on the senior advisory committee ( sac ). the sac is chaired by the deputy minister of finance and includes the bank of canada, the office of the superintendent of financial institutions, the canada deposit insurance corporation and the financial consumer agency of canada. our work contributes to the committee ’ s discussions of systemic vulnerabilities and potential remedial policy actions. see “ enhanced risk - assessment framework, ” bank of canada financial system review ( june 2014 ) : 1 – 2 ; and i. christensen, g. kumar, c. meh and l. zorn, “ assessing vulnerabilities in the canadian financial system, ” bank of canada financial system review ( june 2015 ) : 37 – 46. the sectors we examine include the following : ( i ) financial institutions ( including large and small banks ), credit unions, trust companies, life insurance companies, and pension funds ; ( ii ) financial and property markets and non - bank financial intermediation ; ( iii ) the end - users of financial system services such as households, governments and non - financial corporations ; and ( iv ) payment clearing and settlement systems and financial bis central bankers ’ speeches the second step is developing a risk scenario for each of the most serious vulnerabilities, including a list of possible triggers. a risk scenario describes how a trigger event will interact with a vulnerability to affect the financial system. third, we assess the probability of each risk occurring and the impact if it did. the rating of risks summarizes our judgment on their importance to the financial system and their likely

cautious and gradual approach when entering uncharted territory — but as the pandemic has illustrated, there are times when policy - makers must act boldly. any policy involves risk, but inaction is often riskier. it ’ s important to take those risks, but it ’ s equally important to fully understand them and be transparent in communicating their nature. 4 when coming to a policy decision, the bank looks at several risks and assesses their relative importance. many risks are two - sided, but we may be more concerned about one side than the other. this has been particularly true during the pandemic. given the magnitude of the impact at the beginning of the crisis, our concern about of the downside risks to the economy led us to deliver an aggressive monetary policy stimulus. as the situation evolved, however, our policy action shifted along with the balance of risks. currently, with inflation well above our target, we are increasingly focused on countering the upside risks. at different stages in the pandemic we have changed our outlook and our policy stance to respond to the uncertain and fast - changing situation. what remained constant, see s. kozicki and j. vardy, “ communicating uncertainty in monetary policy, ” bank of canada staff discussion paper no. 2017 - 14 ( november 2017 ). however, was our commitment to explaining the basis for our projections and our decisions. we have been clear that we can ’ t be certain about many things. we have also been candid in describing the risks involved at any given moment. although we cannot eliminate uncertainty, we can provide as much clarity as possible about the bank ’ s actions and decision - making processes. this was clearly reflected in the conditions we included in our forward guidance throughout the pandemic. and it was in that spirit that we announced our decision in january, making it clear that with slack now absorbed, interest rates will need to be on a rising path to bring inflation sustainably back to the 2 % target. conclusion the pandemic has brought much that was unexpected. we have drawn on our analysis and experience to reach a clearer understanding of the forces at work, but we must anticipate the possibility of more surprises before this chapter is closed. while we now expect supply disruptions to ease and inflation to come down quickly in the second half of this year, we are alert to the risk that inflation may again prove more persistent. we will be nimble — and if necessary, forceful — in using