will be required over time. this outlook is subject to both upside and downside risks and to uncertainties. the risks include the pace of expansion in asia and the prices of oil and non - energy commodities. a further risk relates to the resolution of global current account imbalances. should these imbalances persist, the risk of a disorderly correction would grow over time. most of the uncertainties with respect to the canadian outlook relate to how the economy is adjusting to the relative price changes associated with major global developments. monetary policy continues to facilitate the adjustment process by aiming to keep inflation at the 2 per cent target and the economy operating near its production capacity. mr. chairman, paul and i now will be happy to answer the committee ’ s questions.

system. if the banking sector engages primarily in straightforward credit - extending and deposit - taking activities, a system geared toward intensive credit review and transaction testing may be more appropriate. certainly the years of regulatory report verification and large scale transaction testing allowed our supervisory system to develop skills in assessing borrowers ’ ability to repay, verifying the adequacy of internal controls, and recognizing signals that reported information may not reflect the true condition of the financial institution. it is difficult to gauge whether, without this experience, we could have shifted effectively to our current risk management intensive system of supervision. another issue that receives a great deal of debate in this country and in supervisory systems around the world is whether a single regulatory body is most efficient for supervising financial institutions. as you are aware, the u. s. banking supervisory system is composed of a large number of regulatory agencies. the federal reserve has argued against the creation of a single regulatory body outside the central bank, given the valuable information that the supervisory process provides to us in maintaining financial - market stability. however, compelling arguments have been made regarding efficiencies created by housing the entire financial supervisory apparatus under one roof. in the case of developing countries, a central consideration is the structure and character of the government itself. in countries with strong traditions of bureaucratic control over economic decisionmaking, consolidating the regulatory function may prove counterproductive because that agency would have tremendous power and few checks and balances. further, such consolidation is likely to be a larger problem if the supervisory agency is not independent of other government functions. current issues facing global supervisors finally, i would like to discuss a key issue related to the supervision of foreign banking organizations that arises in a dramatic fashion every few years. this issue is the importance of ensuring that banking organizations maintain controls for their foreign affiliates that are sound and independent local management ’ s influence. history has shown that foreign affiliates are particularly vulnerable to internal control problems. the failure of barings bank and the losses incurred by institutions such as daiwa bank and, most recently, allied irish bank were directly related to a failure in proper control of foreign affiliates. in most cases these losses could have been avoided by ensuring that the bank ’ s control procedures - - for example, segregation of duties and the conduct of thorough and independent internal audits - - were functioning properly. even under a risk - focused approach, supervisors must ensure that bank management is providing adequate controls for all aspects of the business, even those that appear relatively