sixfold. financial institutions, including many banks, came to rely on high levels of liquidity in markets. short - term money markets were the predominant source of financing for the one - third increase in the gross leverage of u. s. investment banks, u. k. banks, and european banks. the system ’ s exposure to market confidence was enormous. through all of this, a mirage formed of relentlessly expanding profitability in the financial sector. in the united states, between 2000 and 2006, corporate profits in the sector averaged over 36 per cent of total profits. it appeared briefly that finance was the ruler, rather than a servant of, the real economy. the large losses and costly bailouts required to repair balance sheets shattered this illusion. 5 the shortcomings of regulation were similarly exposed. the shadow banking system was not supported, regulated, or monitored in the same fashion as the conventional banking system, despite the fact they were of equal size on the eve of the crisis. 6 there were also major flaws in the regulation and supervision of banks themselves. basel ii fed procyclicalities, underestimated risks, and permitted excess leverage. gallingly, on the day before each went under, every bank that failed ( or was saved by the state ) reported capital that exceeded the basel ii standard by a wide margin. most fundamentally, the global financial crisis revealed the fallacy of composition that strong individual financial institutions collectively ensure the safety and soundness of the system as a whole. even the most vigilant, microprudential regulatory regime can be overwhelmed by systemic risks. as a consequence, policy - makers now recognise that systemic risk is the product of the resiliency of financial institutions, the robustness of systemically important markets, and the interconnectedness between institutions and markets. the g - 20 reform agenda the g - 20 has initiated an extensive program of reform designed to improve the safety and robustness of the global financial system. the measures are mutually reinforcing, and all are necessary. see a. haldane, “ the contribution of the financial sector – miracle or mirage? ” speech delivered at the future of finance conference, london, 14 july 2010. it was not just a question of misleading data on profitability. the basic shortcoming of financial growth accounting also plagued compensation structures. employees were paid in cash for positive net present value of long - tailed risks. z. pozsar, t. adrian, a. ashcraft, and

stephen s poloz : release of the monetary policy report opening statement by mr stephen s poloz, governor of the bank of canada, at the press conference following the release of the monetary policy report, ottawa, ontario, 25 october 2017. * * * good morning. senior deputy governor wilkins and i are pleased to be here to answer your questions about today ’ s interest rate announcement and our monetary policy report ( mpr ). as you know, governing council decided to raise interest rates at each of its july and september meetings, in the context of stronger - than - expected economic growth and a very strong labour market. furthermore, over the course of the summer, we saw a firming of inflation indicators and a rapidly closing output gap. as we predicted in july, the economy is showing signs of moderating in the second half of the year. nevertheless, we expect the economy to continue to grow at an above - potential pace. today, we left our policy rate unchanged at 1 per cent. we regard this level as appropriate in light of our updated projection for the economy and inflation — in particular, we expect inflation to reach our 2 per cent target in the second half of 2018. this is a little later than we projected in july, primarily because the canadian dollar has strengthened in 2017. before taking your questions, let me offer a few comments around governing council ’ s deliberations. governing council agreed that the economy is likely to require less monetary stimulus over time, but we will be cautious in making future adjustments to our policy rate. four key issues are adding uncertainty to the projection. these are the same four issues that i highlighted in my recent speech in st. john ’ s, and they played an important role in our deliberations for today ’ s decision. discussion of these issues features strongly in today ’ s mpr. the first issue on which governing council spent considerable time is around inflation itself. in this mpr, we investigate a number of conjectures around the apparent softness of inflation in several advanced economies. i refer you to box 1 of the mpr. these conjectures include a role for technology, specifically digitalization, which may be putting downward pressure on inflation ; a role for imported disinflation from lower - cost countries ; or more generally, a role for the forces of globalization. suffice to say that for the canadian data, this work has generally confirmed our faith in our model of inflation, in which inflation depends mainly on the degree of excess