investors substituted the judgments of credit - rating agencies and others for their own due diligence. this opened the door to abuses in the creation of increasingly complex and opaque structured products with embedded leverage, and in the origination of loans intended for redistribution. these problems were compounded by a distinct disregard for economic fundamentals, which led many borrowers and lenders to discount the risk of a correction in house prices long after activity in the u. s. housing market had peaked. when the problems finally surfaced, the sudden realization that exposure to defaults was both widespread and difficult to locate led to extreme risk aversion and to a broad loss of confidence that impeded credit expansion and weighed heavily on economic activity. canada's financial system has fared relatively well throughout this global crisis, thanks to prudent practices and the important steps that we have already taken in canada to make our system more resilient to shocks. to be sure, our markets have been strained as a result of the global financial crisis but, for the most part, they have remained open. importantly, banks have continued to extend credit, albeit on tightened terms. still, the system has not performed as well as it should have. bank funding costs have come under pressure, and bond issuance has virtually ceased. further, our economy is now in recession as a result of the weakness in global economic activity engendered by the financial crisis. risk management : lessons from the current crisis the current global situation has clearly demonstrated the importance of sound risk management. so, let me turn to lessons that we can draw from the crisis to develop more robust risk - management processes in the future. as i noted earlier, a key contributing factor to the global financial crisis was the very high leverage embedded in structured products and actively pursued by some financial institutions – primarily those outside canada. in their search for higher returns, institutions took on more and more risk, while paying less and less attention to the consequences. risk - management models ( such as estimates of value at risk ) that were based on a short history of data and a presumption of continuous liquidity did not prepare them for crisis conditions. reliance on these models led to a myopic focus within institutions that ignored the risk of a significant disruption to the financial system if everyone reacted to a large shock in the same way. consequently, when significant problems emerged, and correlations between asset - price movements moved towards unity, institutions were often ill - prepared to cope, because they

but one way is through global financial stress. financial instability could amplify or even trigger a sharper slowdown of the global economy. recent international banking stresses have been a reminder that financial instability can strike quickly. 1 in march, the collapse of silicon valley bank and signature bank in the united states and the severe market pressure on credit suisse led to immediate spillovers to other financial institutions. financial market volatility rose sharply, and credit conditions tightened. fortunately, authorities took swift and forceful actions to protect depositors, maintain confidence and keep credit flowing. combined with the safeguards put in place after the 2008 – 09 global financial crisis that made financial institutions and the overall system more resilient, these actions have limited financial contagion. nonetheless - as the recent government - led sale of the first republic bank to jp morgan highlights - vulnerable institutions can still come under severe market stress. here in canada the spillover effects have been muted, reflecting the financial stability we are known for internationally. this stability reflects a combination of strengths, including the structure of our financial system, strong risk management within our financial institutions, and sound regulation and supervision. 3 / 5 bis - central bankers'speeches but financial stability risks remain, and we continue to see swings in market sentiment. if global financial stress were to re - emerge and prove more pervasive, the spillover effects into canada could be more significant. in addition, global stress could interact with domestic vulnerabilities related to high household indebtedness and the potential for a more pronounced contraction in the housing market. so even though, in our basecase projection, financial stresses remain contained, i'd like to say a few words about how price stability interacts with financial stability. the first point is that it's not one or the other. we need both price stability and financial stability. price stability - confidence in the value of money - is the foundation of a stable and well - functioning financial system. and financial stability is a pre - condition for price stability. to put it another way, the uncertainty that comes with high inflation, or a lack of price stability, is not going to improve financial stability. and severe financial stress will only make achieving price stability more complicated. the second point is that we have separate mandates and separate tools for price stability and financial stability. so we can work to achieve both at the same time. our primary tool for bringing demand and supply in the economy into balance and restoring price stability is our