in publishing the fsr ; that is, to improve public understanding of financial system developments and trends, to point out potential vulnerabilities in the system, to highlight some of the bank's research, and to promote discussion of financial system issues in general. ultimately, the goal is to help provide the context that will lead to stronger financial system policies in canada. the latest issue of the fsr was published last week, and it deals extensively with the market turbulence that began during the summer. the bank actively works to promote a financial system that is both stable and efficient. i've already mentioned that financial instability can impair the bank's ability to conduct monetary policy. but most importantly, a stable financial system is crucial for an economy to function well. in canada, the responsibility for promoting financial stability is shared by a number of agencies. our partners include the department of finance, the office of the superintendent of financial institutions, the canada deposit insurance corporation, and provincial regulators and securities commissions. the bank is also the ultimate provider of liquidity to facilitate the settlement of financial transactions and is the lender of last resort for financial institutions. despite the importance of financial system efficiency, there is no single body responsible for promoting it. what do i mean when i say " efficiency "? an efficient system is one where scarce economic resources can be allocated to the most productive uses in a cost - effective way. in an efficient financial system, investors can get the highest risk - adjusted returns on their investments, and borrowers can minimize the costs of raising capital. inefficiencies can stunt investment and cut into economic growth. the bank of canada contributes to financial system efficiency through our monetary policy, which keeps inflation low, stable, and predictable. we also have a legislated role to oversee canada's most important clearing and settlement systems. these systems have been designed to provide certainty that large - value payments or securities transactions will settle in real time, while using relatively small amounts of liquidity. this frees up resources that can be put to better use elsewhere. over the past four years, i have tried to highlight some important efficiency issues for canada. in 2004, 1 i spoke of the need to promote efficiency in our financial institutions, arguing that our policy framework should provide greater incentives for innovation by encouraging competition while, at the same time, giving our financial institutions the scope to improve efficiency. there remains much work to do to encourage innovation, competition, and efficiency. i also spoke

needs to be institutionalized. i believe these challenges can be overcome if banks adopt a systematic approach like the one prescribed by the basel committee. let me briefly talk about the spectrum of approaches offered by basel accord to calculate operational risk capital charge. under the two simple approaches ( i. e. basic indicator and standardized approaches ), gross income is used as a proxy for the scale of business operations. this suggests that banks with higher gross incomes are relatively bigger in size and have more operational risk exposure. however, it is often argued that gross income is not always a perfect proxy for operational risk since it may fluctuate with the business / economic cycle. nevertheless, in the absence of any other proxy, income is being used due to its simplicity, comparability and reduced capital arbitrage opportunity. another approach offered under basel ii is the advanced measurement approach ( ama ), wherein banks can develop their own internal assessment techniques. unfortunately, the quantitative techniques for measuring operational risk are evolving and there is no broad consensus on the modeling methodologies of operational risk. thus, it can be said that the quantitative approaches offered under basel accord are still in the process of refinement. however, this is all the more reason for banks to focus on qualitative requirements depending on the regulatory approach they intend to follow. in the past one decade, the awareness of operational risk has improved and resultantly the principles for sound management of operational risk have emerged. banks need to incorporate these internationally agreed principles while implementing any operational risk management framework. these principles mainly focus on the governance, risk management environment, role of supervisors and business resilience. bis central bankers ’ speeches i will now outline sbp ’ s expectation on the integrated components of the overall framework for managing operational risk across the enterprise. sound internal governance forms the foundation of an effective operational risk management framework. it is necessary that those at the top of the organization should take the lead in establishing a strong risk management culture. the board of directors needs to regularly review the framework and ensure that senior management is actively monitoring the effectiveness of risk management and controls. for this purpose, the board should establish a management structure based on clear lines of responsibility, accountability and reporting. the board should set the bank ’ s risk appetite through the approval of operational risk management policy. sbp expects that boards should seek periodic reports from management to the monitor the operational risk profile of the bank in a proactive manner. the role of senior management is to implement the operational risk management framework