##interrupted service of critical functions and for insured depositors ; preservation of franchise value of the firm ; credibility of regime among financial institution counterparties, ex ante ; and, effective coordination and cooperation among jurisdictions in the event of a crossborder failure of an institution. one promising avenue is to embed contingent capital features into debt and preferred shares issued by financial institutions. contingent capital is a security that converts to capital when a financial institution is in serious trouble, thereby replenishing the capital of the institution without the use of taxpayer funds. contingent conversions could be embedded in all future new issues of senior unsecured debt and subordinated securities to create a broader bail - in approach. its presence would also serve as a useful disciplinary device on management since common shareholders would be incented to act prudently and avoid having their stake in the institution diluted away by the prospect of conversion. building resilient markets the third strategy to mitigate systemic risk is to enhance the resiliency of financial markets through initiatives to improve infrastructure and enhance transparency. continuously open financial markets are essential to a system that is robust to failure. keeping markets continuously open requires policies and infrastructure that reinforce the private generation of liquidity in normal times and allow for central bank support in times of crisis. the cornerstone is clearing and settlement processes with risk - reducing elements, particularly central clearing counterparties or “ ccps. ” properly risk - proofed ccps act as firewalls against the propagation of default shocks across major market participants. moreover, in the case of a single - participant default, a ccp ’ s standardized procedures can contribute to an orderly close out of that participant ’ s positions, eliminating the chance of a “ fire sale ” and reducing spillovers to other markets. for these reasons, the bank of canada has supported the development of a domestic ccp for canadian - dollar repos, which should be launched later this year. the bank is working with its domestic partners to develop similar infrastructure for over - the - counter ( otc ) derivatives markets. current g - 20 efforts to transfer trading of standardized otc derivatives to clearing houses have similar benefits. securities regulators and central banks have a shared interest in ensuring that the new infrastructure is properly risk - proofed. iosco recently provided helpful guidance for riskmanagement practices of central counterparties that clear otc derivatives products. 6 central banks look forward to the results of your consultations on this issue, which should serve to set robust standards to

, tail risk has been removed from the economic outlook. the very low policy interest rates and greater - than - usual clarity on policy paths are encouraging investors to return to the markets and to take on greater risk. direct support to the industry has been breathtaking, with some industrialized countries committing a remarkable 25 per cent of gdp to support their financial sectors. in effect, there was wartime spending on peacetime calamity. the g - 7 commitments of last october temporarily eliminated counterparty risk for major institutions. when this support was combined with an intense flight to quality, large financial institutions benefited disproportionately. even in canada, public funding has been considerable. the $ 65 billion in insured mortgage purchase program ( impp ) funding for banks represents 4. 3 per cent of gdp. bank of canada extraordinary liquidity facilities have been smaller than elsewhere but they still peaked at 3 per cent of gdp. while government guarantees have not been used, it is noteworthy that canadian bank term funding is running at less than 30 per cent of normal levels, largely as a result of the use of impp and the bank ’ s facilities. initially, the crisis has also had a major impact on the competitive environment for financial institutions. competition globally has been substantially reduced through the combination of the failure of institutions, a decline in cross - border banking and, most importantly, the collapse of most of the shadow banking system. the reduced competitive dynamics could persist for some time, allowing the core of the financial sector to build sufficient capital for the future. banks around the world would be well advised to take this opportunity to do so. the g - 20 reform agenda the fundamental objective of the g - 20 reforms is to create a resilient, global financial system that efficiently supports worldwide economic growth. the system must be robust to shocks, dampening rather than amplifying their impact on the real economy. the bank of canada strongly believes that our destination should be one where financial institutions and markets play critical – and complementary – roles to support long - term economic prosperity. the financial system will be more stable if market infrastructure is substantially improved, products are more standardized and transparent, and banks are adequately capitalized to fulfill their market - making and credit intermediation roles. market forces should be left to determine the relative sizes and boundaries of the banking and market sectors. in doing so, markets can discipline banks by furnishing necessary competition. there are two main approaches to reform : • first, protect the banks