the business sector are found in bernanke, gertler, and gilchrist ( 1999 ) ; kiyotaki and moore ( 1997 ) ; christiano, motto, and rostagno ( 2010 ) ; and christensen and dib ( 2008 ). models demonstrating how the balance sheets of households affect their borrowing capacity are described in iacoviello ( 2005 ), christensen and meh ( 2010 ), and christensen et al. ( 2009 ). there is a long history of macroeconometric models that incorporate financial variables, for example, the bank of canada muse model used in the context of international analysis. first, we need better tools to understand the highly non - linear dynamics through which financial imbalances build up and affect the real economy. this involves improving our models, but also developing indicators that can help us to better track the risk of potential financial disruptions to the overall economy. second, we need to improve our understanding of how the real economy and system - wide forces can contribute to the development of financial imbalances, particularly through risk - taking behaviour. developing better tools regarding better tools, we are developing a new generation of models that, unlike those that came before, consider the financial sector, including banks, not just as a transmitter of shocks, but as a potential shock in its own right. we are developing macroeconomic frameworks that take into account the balance sheets of financial intermediaries, multiple interest rates and credit spreads so that we can understand better how developments in the financial sector affect economic performance. this work is being done by academics and central bank researchers, including those at the bank of canada. 3 research at the bank of canada has made important strides in modelling balance sheets of banks into standard macroeconomic frameworks with financial frictions. 4 bank staff have also introduced multiple financial assets into the bank of canada ’ s main policy model ( totem ), as well as credit and banking into the global economic model ( bocgem - fin ). the bank of canada has used this research to make important contributions to international reports by the financial stability board ( fsb ) and the basel committee on banking supervision ( bcbs ), assessing the impact of stronger capital and liquidity requirements on economic activity. bank staff ran simulations to provide a comprehensive assessment of the potential impact on the canadian economy of the new basel iii global capital and liquidity standards. a report was published summarizing the bank ’ s core results for canada, including a comparison

of canada estimated that for canada, the net economic benefits to be gained from improving the safety and robustness of the canadian and international financial system could amount to about $ 200 billion – or about 13 per cent of gdp. 10 while it is neither possible, nor desirable, to eliminate risk - taking, by understanding it, identifying it, tracking it, and spotting dangerous trends, we can do much to prevent the buildup of imbalances that can lead to a crisis erupting. there is no magic bullet to safeguard the financial system. we work in an exceedingly complex and dynamic environment, one that presents new – and very difficult – challenges. the task we have set for ourselves is far from easy, but when the best and the brightest in the fields of economics and finance combine their efforts and work together, we can make important progress. complacency is the enemy. conclusion as we move away from the crisis, we all have an obligation to remember that imbalances build during periods of calm. our vigilance is required at all times, not just during a crisis. better tools will help us to identify risks and better understand the human behaviour behind risk - taking. and certainly, system - wide supervision and regulation will do much to improve the global financial system. however, as i conclude tonight, i would like to reinforce the fact that all of us here are part of the “ system. ” economists, finance professionals, business school professors and students are part of this “ system. ” we have a role, and a responsibility, to improve our understanding of, and account for, the system - wide consequences of our individual actions. we have a chance to ensure that the painful lessons of the last few years lead to a better financial system, and by extension, to a more prosperous and stable world. thank you very much. bibliography adrian, t. and h. s. shin. 2009. “ money, liquidity, and monetary policy. ” federal reserve bank of new york staff report no. 360. akerlof, g. a. 1970. “ the market for “ lemons ” : quality uncertainty and the market mechanism. ” the quarterly journal of economics 84 ( 3 ) : 488 – 500. bank of canada. 2010. “ strengthening international capital and liquidity standards : a macroeconomic impact assessment for canada. ” august. basel committee on banking supervision ( bcbs ). 2010. “ an assessment of the long - term economic impact of