##s that they struggled to repay so soon after taking out the loan, the prevalence of " stated - income " lending was a clear culprit. substantial anecdotal evidence indicates that failing to verify income invited fraud. moreover, when we looked at the loan - level data we saw a clear correlation between " low - doc " or " no - doc " lending and performance problems, particularly early payment defaults. that is why we have proposed to complement a broad requirement to assess repayment ability with a specific requirement to verify the income or assets a lender relies on to make a credit decision. we recognize that stated - income lending may have a proper place when not layered on top of too many other risks. therefore, we would target the verification requirement to higher - priced loans, including the higher - priced end of the alt - a market, where the risks of stated - income lending could be layered on top of too many other risks. the proposal identifies standard documents that would be acceptable, such as w - 2 forms. it also allows, however, any third party documents that provide reasonably reliable evidence of income. some consumers may have access to only nonstandard documents and others, such as self - employed entrepreneurs, may have some difficulty documenting their income. this rule is meant to preserve consumer choice by allowing the market to identify credible nontraditional documentation of consumer income – for example, check - cashing receipts. to help ensure that the proposal preserves access to credit for the full range of consumers, we have sought public comment on this issue. escrows for taxes and insurance another part of our proposal for higher - priced loans – a requirement to escrow taxes and insurance – would also help ensure that borrowers can afford their payments. escrowing has become standard practice in the prime market, and the case for making it standard in the subprime market, too, appears compelling. consumers with shorter or weaker credit histories may be less likely to appreciate the sizable burden that taxes and insurance can add to the cost of homeownership, or more vulnerable to being misled by payment quotes that leave out these amounts. moreover, when we looked at the data, we saw in the unusually high level of early payment defaults possible evidence that the lack of escrows hurt consumers who did not have experience paying property tax and insurance bills. we have proposed to address the problem with a requirement to escrow taxes and insurance on higher - priced loans, accompanied by a limited allowance

accord. for a more detailed review of these attributes, see p. jenkins, " canada's financial sector : responses to the global crisis " ( presentation to the colombian banking association, cartagena, colombia, 10 july 2009 ). see " renewal of the inflation control target, background information " ( ottawa : bank of canada, november 2006 ). in the price - level - target approach to inflation control, bygones are not bygones, unlike the current policy. under price - level targeting, if inflation has been below trend, causing the price level to fall below target, monetary policy would need to generate above - trend inflation for a while to return the price level to target. or, if inflation has been above trend, lifting the price level above its target, the central bank would need to temporarily induce below - trend inflation to return the price level to its target path over time. see various articles, bank of canada review ( ottawa : bank of canada, spring 2009 ). in terms of financial stability, what we have witnessed over the past two years has been an increasingly complex set of interrelationships among credit, market, and funding risks. these interrelationships, involving key segments of the global financial system, have had significant consequences for economies worldwide – consequences that have brought to the fore the critical importance of effectively managing liquidity, credit, and market risks, as well as the importance of ensuring adequate levels of capital. in several of these areas, canada – as i noted earlier – has stood out for the sound management, regulation, and supervision of its financial institutions. however, the focus at this micro level is not enough. indeed, another key lesson of the global financial crisis has been a recognition of the need for oversight of the system as a whole, including both systemically important institutions and markets. such an approach is critical, because systemic risks can arise from the collective actions of institutions and market participants that, at the individual level, may appear to mitigate risk, but that collectively – because of interconnectness and common exposure – contribute to the instability of the system overall. the off - loading of assets in illiquid markets is just one example. a system - wide, or macroprudential, approach is the shared responsibility of the department of finance and all of the federal financial regulatory authorities, including of course the bank of canada, the office of the superintendent of financial institutions, and the canada deposit insurance corporation. ultimately, it