carolyn wilkins : panel remarks for round table discussion at the 21st conference of montreal panel remarks by ms carolyn wilkins, senior deputy governor of the bank of canada, for round table discussion at the 21st conference of montreal : international economic forum of the americas, montreal, quebec, 8 june 2015. * * * introduction thank you for the invitation to be here today. i ’ m honoured to be part of this panel. it ’ s been more than seven years since the global financial crisis began, and we ’ re still coping with its aftermath. one of the consequences of the crisis has been a disruption of financial globalization. global capital flows – to give just one measure – have fallen by more than half from their pre - crisis peak of over us $ 8 trillion. 1 i ’ ll spend a few minutes on why we ’ re seeing this fragmentation. i ’ ll then offer my views on what we should do to realize the full benefits of financial globalization and manage the risks associated with it. causes of fragmentation the retreat from financial globalization that we ’ ve seen reflects cyclical economic forces, such as the slowdown of global trade and investment. it also reflects structural adjustments, including the deleveraging undertaken by banks to repair their balance sheets and respond to regulatory changes. none of this should come as a surprise, given what we ’ ve been through. on the cyclical side, the crisis has cost the world economy as much as us $ 10 trillion in lost output, or almost 15 per cent of production. global trade slowed, as did the demand for the international financial services that support it. the share of trade in gdp fell after the crisis, reversing some of the 20 - percentage - point increase over the two decades that preceded it. 2 on the structural side, financial institutions that experienced losses during the crisis had to repair their balance sheets by scaling back their lending – not only at home but especially internationally. trade, commodities and infrastructure financing were particularly hard hit. since the crisis, banks have more than doubled the amount of common equity capital they hold. while doing this, banks have tended to focus on their home market and the best ways to allocate capital in the new environment. rules such as anti - money laundering and counter terrorism financing laws may also be altering the terrain. financial institutions have also had to respond to regulatory changes. for example, derivatives dealers appear to be doing more business with domestic counterparties in part because of more stringent, and sometimes inconsistent, rules. 3 while the

level of cross - the institute of international finance, “ financial globalization : maximizing benefits, containing risks ” december 2014. m. francis and l. morel, “ the slowdown in global trade ”, bank of canada review ( spring 2015 ) : 13 – 25. s. o ’ malia, “ no answer yet to cross - border concerns ”, international swaps and derivatives association, 11 may 2015. bis central bankers ’ speeches border activity in this area is still robust, one study finds that regulatory changes can explain roughly half of the drop in cross - border claims since before the crisis. 4 to put things in perspective, total foreign banking claims measured as a share of global gdp have fallen by one - third since 2008, to 39 per cent at the end of 2014. 5 this fragmentation is of concern to people like me, who believe that open global financial markets are generally a good thing for economies because they facilitate the most efficient allocation of capital and boost growth. at the same time, the crisis taught us that integrated markets also entail risks that need to be properly managed. we know that, unchecked, financial globalization could increase procyclicality and make financial cycles larger. 6 in other words, booms and busts could become more frequent and more destabilizing. and it ’ s possible that international financial flows were inflated by excessive growth in finance relative to global gdp. 7 so authorities have to find the right balance between encouraging globalization and guarding against its risks. getting the right balance progress is being made globally. we have put in place a framework to better manage the risks that come with financial globalization through reforms agreed to by g - 20 leaders. the basel committee on banking supervision has established new rules for banks, and the financial stability board ( fsb ) published its key attributes of effective resolution regimes for financial institutions. these are big steps in the right direction. some of these reforms have been substantially implemented. i ’ m talking about the basel iii rules, which impose more stringent standards on capital and liquidity and a surcharge for systemically important banks, and the principles for financial market infrastructures, which establish higher standards for central counterparties and other systemically important infrastructures. a level playing field on this is supported by peer reviews conducted by the fsb to ensure consistent implementation in different countries. at the national level, recovery and resolution regimes are being introduced to further protect taxpayers and minimize systemic disruption in the event that a domestic systemically