their domestic banking system. policy - makers didn ’ t fully understand the risks associated with new forms of financial intermediation – complex instruments like collateralized debt obligations. and they didn ’ t comprehend how interconnected the global financial system had become, and how easily shocks can be amplified and transmitted. responses to some of these lessons are already being put into practice, and there is considerable supporting research, both at the bank and in academia. at the regulatory level, the g - 20 countries recognized the need to make the world ’ s financial system safer. the financial stability board was given the task of coordinating the development of minimum global standards around capital, liquidity and resolvability, as well as for market infrastructure, to reduce the risk and severity of any future financial crisis. by and large, the fsb has delivered and countries have begun to implement the new standards. on the monetary policy front, central banks must, at the very least, understand emerging financial stability risks when conducting monetary policy. all central banks have upgraded their capacity in this area. the bank of canada now takes a more structured approach to our analysis in our semi - annual financial system review. specifically, we use more and better data to assist our financial system monitoring, backed by deeper conversations and models where appropriate, to make more informed judgments about financial stability risks. we ’ ve added other potential sources of vulnerability, such as the balance sheets of households, companies and banks, to our macroeconomic models. bis central bankers ’ speeches we ’ re also making progress toward a better understanding of how monetary policy actions influence risk taking. for example, when a central bank cuts interest rates to cushion the economy from a shock, the hope is that people will borrow more at that lower interest rate and spend more money. what this means is that financial imbalances are a necessary byproduct of monetary policy action, especially if the action is prolonged, so these additional adjustment dynamics must be fully taken into account when conducting policy. clearly, though, incorporating financial stability into our monetary policy framework remains a work in progress. as a practitioner, it still feels to me like we are adding various rooms onto a house we love, rather than creating a new, elegant and coherent structure. we need to make sure there ’ s enough flexibility and clarity about the role of financial stability in our monetary policy framework. we need to better understand how macroprudential policies – such as mortgage insurance rules – that are aimed at promoting financial stability interact with monetary

##f until 2007, showing how global savings – investment imbalances have played a fundamental role that must not be neglected. 8 these imbalances were ultimately the symptom of the creation of excessive international liquidity by countries like the united states and of excessive savings by countries like china, and were associated with a reduction in the cost of capital and interest rates, in particular in the united states. this spurred an unsustainable boom in consumption as well as excessive risk - taking, both among consumers and financial institutions. these imbalances contributed to the large financial distortions and bubbles in global financial markets, which created the preconditions for today ’ s crisis. neglecting imbalances as a source of risk is not the best way to improve the crisis prevention arm of the imf. how can we expect the international monetary order to develop? and how can we strike a better balance between financing and adjustment? there is a risk that the forces favouring earlier and more effective adjustment of imbalances, and thus helping to avoid financing crises, have been weakened. in the current discussion on the reform of the international financial system, not many are suggesting that the imf should play a stronger role in preventing the accumulation of excessive external imbalances and in fostering more disciplined domestic policies. just to give an example, the decision on bilateral surveillance over members ’ policies, aimed at identifying fundamental exchange rate misalignments, has been modified to allow greater discretion in surveillance, especially exchange rates. this might look like a tactical choice, but i doubt that it will result in a tougher hand for the imf. while emerging and developing countries are requesting a stronger voice in the imf, they also seem to be suggesting that they would like this institution to be less intrusive, imposing less conditionality while at the same time providing more and cheaper financing. advanced economies seem to be supporting this view, having inundated the imf with funds, most of them available with very little conditionality or none at all. this might be appropriate in times of systemic crisis but cannot be sustainable in normal times. some thought should perhaps also be given to the need for a strategy to exit from cheap and unconditional imf financing. overall, most of the imf ’ s shareholders seem to favour making imf financing easier. the idea of enhancing the role of the sdr, or another world reserve currency, goes towards facilitating the financing needs of both deficit and surplus countries