the share of this sector in the canadian economy has expanded from 10 per cent of gdp after the second world war to nearly 20 per cent today. the financial industry is also one of the most productive in canada, if we consider its relatively modest share in total employment — barely 6 per cent. a recent study by the oecd 1 emphasizes the quality of regulation of the financial system as a factor of economic growth. its main conclusion is that "... regulatory settings that maintain excessively high barriers to competition in banking, or that provide too little protection for investors in securities markets, hamper the development of financial systems, resulting in weaker economic growth. " thus, a balance must be struck between competition and the protection of investors. this is of particular importance for firms that are growing rapidly and that depend on injections of outside capital, such as those specialized in information technology and biotechnology. this suggests that the quality of the financial sector is reflected in the industrial structure of an economy, and not only in its growth rate. oecd. 2006. " regulation of financial systems and economic growth. " in economic policy. the efficiency and stability of the financial system at the bank of canada, we have devoted considerable effort to promoting the efficiency and stability of the financial system. when speaking of the financial system, we are referring not exclusively to banks and markets, but rather to all financial institutions, their legal and regulatory framework, and their infrastructures, such as the payment, clearing, and settlement systems. we say that a financial system is functioning well when two conditions are met. first, agents have access to the information they need to allocate capital to the most productive investment projects. second, risk is managed in such a way that it is assumed by those who are most prepared to do so. this type of financial system also contributes to reducing volatility in consumption and investment. it buffers the real economy from harmful shocks, making growth less volatile. asymmetries in the information available to lenders and borrowers are an example of frictions that undercut efficiency. typically, the borrower has better information on the value and the risks associated with an investment project. other examples of frictions are operational inefficiencies resulting from relatively weak competition among suppliers of financial services or from market distortions caused by poorly designed regulation. if we want to bolster economic growth, we need to expose and correct these inefficiencies. however, before sketching out a

of financial system efficiency lies a very important factor for the competitiveness of the canadian economy. what can be done to improve things? i submit to you that our financial system does not need a comprehensive, dramatic reform. there is, however, a genuine need for tenacious efforts from all financial system participants to bring about a long series of ongoing improvements — especially in the area of enforcement, competition, and innovation. as good economists, we at the bank of canada will continue to advocate efficiency. and, as for monetary policy, rest assured that control of inflation will help markets function as efficiently as possible. all of these efforts will strengthen our economy and its ability to generate a high standard of living for our fellow citizens.