david dodge : financial system efficiency - getting the regulatory framework right speech by mr david dodge, governor of the bank of canada, to the toronto cfa society, toronto, 22 september 2005. * * * i am happy to have the opportunity today to follow up on a speech i gave here in toronto last december. in that speech, i talked about the need for canada to improve its financial system efficiency. today, i want to focus my remarks on how regulation can, and must, contribute to that important goal. when i talk about an efficient financial system, i mean a system that helps to allocate scarce economic resources to the most productive uses. by making our financial system more efficient, we can help generate sustained economic growth and prosperity. the bank of canada has been contributing to the goal of an efficient financial system in a number of ways. the bank's monetary policy aims to keep inflation low, stable, and predictable. by doing so, we enhance canadians'confidence in the value of their money, thus reducing the need for people to spend resources either anticipating or coping with inflation. we also contribute to efficiency through our role as overseer of major payments, securities, and foreign exchange clearing and settlement systems, and by providing liquidity in times of financial stress. by reducing risks to the safety and stability of the financial system, we increase certainty about the robustness of the system, thus supporting efficiency. our semi - annual financial system review promotes awareness of financial system issues, looks at developments and trends in the system, and addresses issues that affect its safety, soundness, and efficiency. as well, the bank works actively with market participants and regulators to develop and promote an efficient financial system. and we conduct research that helps inform the decisions of policy - makers in terms of promoting this goal. today, what i want to talk about is how policy - makers can support efficiency by getting the regulatory framework right. i will start with some brief remarks about regulation in general. i'll then discuss how our regulatory framework can support financial system efficiency, and how we can best make sure that our framework is an effective one. i'll conclude with a look at some current issues in financial system regulation and the various ways in which the bank is involved in them. how regulation can promote financial system efficiency let me start with a basic premise. for any market economy to operate efficiently and achieve an optimal allocation of resources, there needs to be a solid legal and regulatory framework. basic legal concepts, such as

to support a faster expansion in output and employment and to prevent inflation from falling below the bottom of the target range. the reverse would be the case if potential was growing more slowly than we realized and inflation was tending to rise. moreover, by responding to the trend of inflation relative to the target range, as i have described, monetary policy will also act as an important stabilizer for the economy over the medium term in the face of cyclical fluctuations. the targets effectively call for the bank to tighten monetary conditions when demand in the economy approaches unsustainable levels, pressing against capacity. but they also call for easier monetary conditions when demand is weak, leaving slack in the economy. monetary policy targets focused on inflation were initially developed to help reduce persistent high inflation in an orderly manner. but i believe that such targets continue to provide the best framework for the conduct of monetary policy, even at low rates of inflation. concluding comments in recent years, canada has made significant progress in restoring the credibility of its macroeconomic policies and making the adjustments necessary to lay the foundation for a more efficient, prosperous economy in the future. we are now beginning to see the payoffs from this economic transformation. the best contribution the bank of canada can make to sustaining these positive trends is to foster a monetary environment of confidence and stability. and that is what we intend to deliver with our commitment to targets for inflation control.