for other countries. this is a most delicate issue, and while a perfectly level playing field may not be achievable, we have to be conscious of the consequences of a “ beggar - thy - neighbour ” approach to regulation. the transition to a uniform system of rules and oversight of the financial sector must be hastened. in the euro area, and in the european union at large, the project for banking union is ambitious, but it goes in the right direction. ● let me close on a different but related topic. some countries are now investing increasingly in efforts to improve the financial literacy of the public. this too is important. on the one hand, it helps to build the demand side of the “ inclusive finance ” that dr reddy mentioned, while on the other, financially literate citizens are better able to understand the efforts of regulators and policy makers to improve supervision and regulation, and less likely to subscribe to the simplistic view that “ finance is evil ”. but we should realise that – as the case of bernard madoff and others in the us and elsewhere clearly show – this is no panacea. ( madoff ’ s customers were surely much better educated than the average. ) therefore, for purposes of consumer protection in the financial services industry, financial regulation and good supervision are the necessary complements to financial education and inclusion. to conclude, following dr reddy ’ s final remarks, i would like to quote from a book by the brilliant bank of italy economist curzio giannini, who passed away prematurely nine years ago ( the age of central banks, edward elgar, 2011, translated from the italian l ’ eta delle banche centrali, il mulino, 2004 ). in that “ beautifully written and illuminating ” work, as charles goodhart describes it in his foreword, curzio applied “ a theory of history ” to describe how from pre - industrial payment technologies through the rise and fall of convertibility we ended up with the revolution in the payment system that has accompanied the globalisation of money and the challenge of building trust in an under - institutionalised environment. already at the turn of the century, curzio clearly saw the likely consequences of financial developments, and concluded, “ in the years to come, the most interesting developments will probably be precisely in the sphere of supervision and regulation ” and that “ [ w ] hatever its detractors may say, the central bank has no need to move into new lines of business.

institution basis is important, but it is not enough. the risk to the financial system is greater than the average risk to individual firms. managing this risk requires new system - wide tools, and here, too, there has been considerable progress. the counter - cyclical capital buffer included in basel iii is a giant step forward. the bank of canada played a leading role in the development of the buffer, which bis central bankers ’ speeches provides for additional capital to be built up during periods of excessive credit growth in anticipation of a future economic downturn. the reform agenda is now moving beyond the core. this means taking into account the considerable importance of shadow banking or market - based financing. the credit intermediation activities of banks are closely regulated and supervised, and are backstopped with deposit insurance and central bank liquidity. in contrast, market - based financing is less regulated and does not have access to public liquidity support. but it is big, and the crisis highlighted the systemic vulnerabilities market - based financing can pose. for both these reasons the international agenda is now turning to the perimeter of regulation and market - based financing. it will be essential that reforms strike an effective balance between the benefits of market - based financing in terms of competition, diversification and innovation, and the risks related to regulatory arbitrage and systemic vulnerabilities. the role of central banks this leads to the role of central banks in mitigating systemic risks. as i said at the outset, a key role for central banks is to use their panoramic view of the financial system to identify system - wide vulnerabilities. central banks are well placed to recognize risks and prioritize them within a framework that maps potential weaknesses and traces the chain of cause and effect throughout the system. but to do this effectively, we need to raise our game. we need a deeper understanding of the links between financial intermediation, money and credit flows, the balance sheets of households and businesses, and the range of available policy instruments. and this understanding needs to be combined with better detection of emerging financial imbalances. this requires engagement with the private sector and building multidisciplinary teams that bring together economists, financial experts, accountants and lawyers, among others. and it is not enough to simply draw up long lists of vulnerabilities. risks need to be assessed and ranked, providing a clear sense of priority. since the outset of the crisis, the bank of canada has intensified its