< http : / / www. bankofcanada. ca / 2010 / 08 / secondary - page / strengthening - international - capital - and - liquiditystandards - a - macroeconomic - impact - assessment - for - canada - 2 / >. see “ shadow banking : scoping the issues – a background note of the financial stability board, ” financial stability board, 12 april 2011 < http : / / www. financialstabilityboard. org / publications / r _ 110412a. pdf >. bis central bankers ’ speeches economies. this two - speed recovery, accompanied by a widening of global economic imbalances, is at the centre of a new configuration of risks to global financial stability. these risks comprise sovereign risks, financial fragility, the search for yield, and related stresses in emerging - market economies and foreign exchange markets. twice a year, the bank of canada publishes its financial system review ( fsr ), which examines developments in the financial system with a view to identifying potential risks to its overall soundness. this publication also highlights the efforts of the bank, and other domestic and international regulatory authorities, to mitigate those risks. the pattern of risks i am going to discuss was examined in our december 2010 issue. we are continuing to track them and will provide an updated assessment in june. sovereign risks have become increasingly prominent in a number of advanced economies. many countries entered the crisis with weak fiscal positions and then were further weakened by the effect of low growth on tax revenues and the costs of economic stimulus and the bailouts of financial institutions. these problems are most acute in the peripheral countries of europe – notably greece, ireland and portugal. but many advanced economies still have precarious public finances and will need to persevere to address these problems. canada ’ s fiscal position, in contrast, is stronger than that of most other advanced economies. moreover, the domestic financial sector has limited direct exposure to the sovereign debt of peripheral euro - area countries. nevertheless, there are a number of potential channels through which the canadian financial system could be adversely affected by sovereign debt problems elsewhere, such as higher funding costs and a decline in asset - price valuations. the low growth of many advanced economies has led to lingering financial fragility. the outlook for banks in europe – and, to a lesser extent, the united states – continues to be clouded. although many banks around the world made substantial progress in repairing their balance sheets, some remain unusually strained. they

well behind financial innovation. the global response the global financial reforms launched by g - 20 leaders are designed to address the three weaknesses i have just discussed. first, to reduce the incidence and severity of financial crises, financial institutions will be required to have more ample cushions of capital and liquidity. second, steps will be taken to reduce the risk that financial markets become channels of contagion. and third, mechanisms to deal with the too - big - to - fail problem will be made more robust. i will briefly discuss each of these elements. the centrepiece of the agenda for global financial reform is the new basel iii rules on capital and liquidity. these rules substantially increase the loss - bearing capital that financial institutions must hold, combined with required liquidity ratios and a limit on leverage. in addition, a countercyclical buffer will be established so that capital is built up in good times, which can subsequently be available to absorb losses. 1 on financial markets, a key step is to strengthen market infrastructure to reduce systemic risk. the g - 20 leaders agreed to require clearing and settlement of over - the - counter derivatives through central counterparties, and to increase transparency in those markets – which proved to be a channel of financial contagion during the crisis. a central counterparty is also being established in canada for clearing repurchase agreements ( repos ), a key form of short - term financing. a related issue is market - based financing, including securitized lending. work has begun under the auspices of the financial stability board to define the sector, to develop the data and methodology to systematically monitor it, and to develop policy options. 2 to address the too - big - to - fail problem of systemically important financial institutions, work is under way to ensure that they are appropriately supervised and adequately capitalized to absorb losses, and to establish a framework for resolution in the event that they do fail. so this, in a nutshell, is what is being done to address the weaknesses underlying the 2008 crisis, with a view to creating a more resilient global financial system. i will now go on to discuss a new pattern of risks that has emerged since the recession. risks in a two - speed global recovery as i have already mentioned, the current global recovery is operating at two speeds, with robust growth in emerging - market economies and anaemic growth in the advanced the bank of canada ’ s research report on the costs and benefits of the new rules can be found at