an orderly way, the contagion effects on global financial conditions could be significant. while less urgent than the situation in europe, the risks surrounding sovereign debt are also affecting other regions. in particular, in the united states the spectre of a “ fiscal cliff ” looms over that country ’ s prospects for growth. more generally, weakness in global demand that is partly due to international current account imbalances continues to represent a major source of risk. moreover, in several advanced economies, keeping policy rates low over an extended period of time may stimulate excessive risk - taking. bis central bankers ’ speeches here in canada, the high level of indebtedness and the potential for a correction in the housing sector are the principal domestic risks facing the financial system. as well, the fragile situation abroad increases the probability of a negative shock to the incomes and wealth of canadian households. to date, the crisis in europe has had a limited impact on our financial system. canadian markets have remained relatively stable, and our banks continue to have good access to wholesale funding markets. nonetheless, a deterioration in the situation could have a considerable effect on canada through trade, confidence and financial channels. even though our financial system is solid, it is important to take further steps to bolster its ability to absorb shocks. the creation of a central counterparty for the repo market is a step in that direction. with your permission, i will now turn to the crucial role played by the repo market in canada. the repo market repos – transactions that involve selling a security while concurrently committing to repurchasing it at a later date for the sale price plus interest – are the economic equivalent of secured loans. investment dealers and banks use the repo market as a source of low - cost secured financing to fund long positions and hedge short positions on securities. these activities allow market - makers to generate liquidity for the broader financial system and maintain liquid secondary markets. other institutions, such as insurance companies and pension funds, also use the repo market as a tool to manage cash balances. since a very large proportion of repo transactions are short term, the turnover rate in this market is high. these transactions provide the immediate margin of adjustment for financial institutions ’ funding structures. to give you a sense of magnitude, on 30 march 2012, the repo positions on the securities of canadian banks were valued at a total of can $ 90 billion ( approximately 5 per cent of their canadian - dollar - denominated assets

##os : market overview and financial stability issues, ” workstream on securities lending and repos, interim report of the shadow banking workstream 5, 15 march 2012. bis central bankers ’ speeches one of the specific measures under consideration is the increased use of central counterparties. another promising avenue addresses the regulation of margins to mitigate the problems associated with procyclicality. adopting minimal, or countercyclical, margins could help to curb excessive leveraging during periods of exuberance and lessen the extent of a disruptive curtailment of leveraging during difficult periods. moreover, increased use of central counterparties for repos could facilitate the implementation of this type of regulation. conclusion it was my intention today to talk about risks, but even more to shed some light on the significant strides taken in canada to improve the resilience of our financial system. one tangible, and local, example of this progress has been the creation, right here in montreal, of a central counterparty for repo transactions. transactions executed by this counterparty are completely transparent and well capitalized, and there are rules and procedures in place in the event of default. today, canada ’ s experience is benefiting other countries and authorities. however, it ’ s worth emphasizing that it was the willingness of the private and public sectors to work together that led to the creation of this counterparty. it is essential that this spirit of co - operation be maintained, because much remains to be done. the success of this counterparty depends on the subsequent phases of implementation, which will broaden its sphere of influence. we will never have a risk - free financial system. that ’ s why we need to take measures to render it more resilient to shocks that may occur, either from abroad or domestically. let us make the financial system stronger to build a more stable future. thank you for your attention. bis central bankers ’ speeches