power to write regulations ; others are limited to monitoring and making recommendations. while their precise roles may differ, it ’ s crucial that central banks be involved, because we bring a unique, system - wide perspective that can help identify and assess systemic vulnerabilities and risks. further, our interests in financial stability cut across the bank of canada ’ s functions – not only do we need a well - functioning financial system to transmit our monetary policy, but we also have oversight of systemically important financial market infrastructures and, of course, we are the lender of last resort to the system. when more than one body is involved in macroprudential policy, there needs to be a mechanism to discuss and coordinate responses and to provide checks and balances within the regulatory system. in canada, the senior advisory committee fulfills this role. the committee is chaired by the deputy minister of finance and includes the bank of canada, the office of the superintendent of financial institutions, the canada deposit insurance corporation and the financial consumer agency of canada. it is an informal forum where members can share information and perspectives on their own policies as well as on the overall regulatory environment. the committee ’ s strength lies in the way it allows members to understand the views of other members and to coordinate macroprudential policies, which is essential, given the potential side effects that macroprudential and monetary policies can have on each other. the last line of defence is monetary policy, and this is the context in which we think of leaning against imbalances. to be clear, i ’ m defining leaning as choosing a different path for interest rates than would be optimal for the inflation target in order to mitigate risks to financial stability. this could mean, for example, accepting a significant delay in getting inflation back to target so as not to exacerbate financial vulnerabilities along the way. understanding the links at this point, let me remind you of a complicating factor for policy - makers that i mentioned earlier – the fact that macroeconomic and financial objectives aren ’ t always consistent. it ’ s clear that financial system policies – including global frameworks such as basel iii and country - specific macroprudential policies – can reduce the likelihood of financial imbalances and crises by reducing tail risks. however, it is also clear that these policies, and the state of the financial system in general, can also influence the effectiveness of monetary policy. so we need to deepen our understanding of the

to downplay the importance of research and the development of stylized models, which are crucial in helping us understand aspects of the relationship between the real economy and financial stability. but the reality is that central banks have to cope with tremendous uncertainty regarding financial stability issues, and this is layered on top of the regular uncertainties of monetary policy concerning unobservable variables such as potential output. given all of the uncertainty, it seems to me the proper response of the monetary authority is to acknowledge and accept all the things we don ’ t know, gauge the risks facing the economy as best we can, and manage those risks as we conduct monetary policy. i ’ ll describe our risk - management framework in detail later on. but we still have the question of how policymakers should respond to financial imbalances, particularly those that are concentrated in a specific sector or asset class. the bank of canada ’ s view is that monetary policy should be the last line of defence against threats to financial stability, behind the joint responsibility of borrowers and lenders, appropriate regulatory oversight within the financial sector, and sound macroprudential policies. let me say a little bit about each of these. financial stability threats – lines of defence borrowers and lenders are the first line of defence. they bear the ultimate responsibility for their own decisions at the individual and firm level. it is not the role of monetary policy to protect individuals from making bad choices. it is possible that the sum of those bad decisions could threaten financial stability or the economy as a whole, and so we monitor the situation as a matter of course. but there is no reason to assume that, in all circumstances, equilibrium will devolve into turmoil as borrowers and lenders inevitably sow the seeds of a financial crisis. indeed, market discipline enhanced by appropriate transparency can be very helpful in this regard. that ’ s not to say policy - makers have no role in enhancing this line of defence. financial education and efforts to improve financial literacy can help consumers better understand the important decisions they make. in canada, we have seen increasing levels of household debt that represent a key vulnerability for the financial system. the main driver behind this rise has been an increase in home - backed debt against a backdrop of rising house prices, particularly in two of canada ’ s bis central bankers ’ speeches largest cities – toronto and vancouver. among other factors, this was due to low interest rates that resulted in the ratio of debt service to income, including principal repayment, remaining