the insurance company has no choice but to take on greater risk, either directly or through investments in alternative assets. 9 we also see how incentives encourage risk - taking at financial institutions where compensation depends on short - run returns. although, the financial crisis is seen as having many significant causes, the compensation structure of some institutions is viewed as an important contributing factor. through these channels, a tranquil macroeconomic environment can lead to the buildup of risks and financial imbalances on the balance sheets of banks. these imbalances can increasingly expose the wider economy to the risk of financial crisis. if confidence disappears, banks call back credit, balance sheets shrink and a difficult readjustment is needed, with negative effects on financial and economic stability. in particular, the buildup of big leverage within the financial system can unwind swiftly, causing more stringent general financing conditions. so what needs to be done? first, we need to be collectively aware of these connections and better understand their importance. firms are run by people. risk is taken by people. the more complete the understanding, the better the chance of properly assessing risk and designing appropriate contracts. but there is also a need to adopt measures to make the financial system as a whole more resilient. this includes enhanced system - wide supervision and regulation. the recent basel iii agreement will go far to enhance supervision and regulatory practices in the financial sector. g - 20 leaders have agreed to strengthen their banking systems by raising the amount and quality of capital and liquidity that financial institutions must carry. these higher standards will lower the incidence of financial crises, reduce their severity and provide for smoother economic cycles. they will also reduce the risk that resources are misallocated. the agreement also includes a countercyclical capital buffer that provides for additional capital to be built up during the periods of excessive credit growth that are associated with an increase in system - wide risk. this will provide additional loss - bearing capacity in a downswing see misina and tkacz ( 2009 ) and gauthier, he, and souissi ( 2010 ). see adrian and shin ( 2009 ), borio and zhu ( 2008 ), brunnermeier and sannikov ( 2010 ), diamond and rajan ( 2009 ), and farhi and tirole ( 2009 ). see rajan ( 2005 ). in a credit cycle. the countercyclical buffer itself should also help dampen excess credit growth. recent research at the bank

stephen s poloz : release of the monetary policy report opening statement by mr stephen s poloz, governor of the bank of canada, at the press conference following the release of the monetary policy report, ottawa, ontario, 30 october 2019. * * * good morning. senior deputy governor wilkins and i are pleased to be here to answer your questions about today ’ s interest rate announcement and our monetary policy report ( mpr ). before turning to your questions, let me first offer some insight into governing council ’ s deliberations. not surprisingly, the worsening global situation was the primary issue. economic forecasts have been marked down further in most countries, largely as a consequence of the escalation of trade actions and uncertainty around what may be next. heightened uncertainty about future trade policies is directly reducing business investment, and there is a risk that this will spread to households as well. these consequences can be buffered through easier monetary policy, and many central banks have recently eased in response. however, we need to remember that tariffs and trade restrictions will work over time to permanently reduce potential output everywhere, while raising the prices of consumer goods — a stagflationary scenario. monetary policy can only do so much about these elements of the shock. canada is not immune to these global developments. in fact, canada was one of the first countries to feel the effects of trade policy uncertainty, since nafta was the first target of the trump administration. indeed, this uncertainty has been weighing on investment in canada for the past three years. these were important headwinds preventing canadian interest rates from rising by as much as us rates did during 2017 – 18. nevertheless, as other economies feel a growing impact from the trade war, there are second - round impacts on canada through weaker exports and lower commodity prices. in today ’ s updated projections, we are forecasting both exports and business investment to contract in the second half of this year and to recover only moderately in the next two years. we can see a wide range of indicators pointing to these effects — in manufacturing, mining and rail transportation — in our business outlook survey and in the quarterly reports of bellwether global companies. while we have had these secondary effects in our forecast for some time, and increased them in our latest projection, these are mostly judgment - based, and the situation could worsen. accordingly, we present a deeper analysis of this downside risk in today ’ s mpr, in box 3. let me just note