lawrence schembri : born of necessity and built to succeed – why canada and the world need the financial stability board remarks by mr lawrence schembri, deputy governor of the bank of canada, to the cfa society ( ottawa ), ottawa, ontario, 24 september 2013. * * * introduction it has been just over five years since the worst days of the global financial crisis, which began with the dramatic collapse of lehman brothers in september 2008. while the subsequent great recession officially ended in june 2009, it hardly seems over, given the slow - motion recovery of the global economy. this is especially the case in europe and the united states, where employment has not yet returned to pre - crisis levels. looking back at canada ’ s experience of the past five years, a key lesson from the crisis is that keeping our own house in order is not enough to shelter us from global financial storms. yes, canada ’ s recovery has been stronger than virtually all other advanced economies, thanks in part to our resilient financial system. our sound monetary, fiscal and financial sector policies protected us from the worst of the financial crisis and recession. but make no mistake : canada was still hit hard. output fell by 3. 5 per cent. and from october 2008 to october 2009, the unemployment rate rose from 6. 1 per cent to 8. 3 per cent. harder lessons were learned at the international level. the breadth and depth of the crisis, and the speed with which it travelled around the globe, made world leaders sit up and take notice. in 2009, the g - 20 identified the important task of reducing the likelihood of future financial crises and limiting their spillovers across borders. the financial stability board ( fsb ) was set up to coordinate this work. 1 today, i am going to talk about the fsb, especially its coordinating role for canada and the global economy. i will focus on : • why the fsb is needed, • how it works, and • its accomplishments to date and plans for the future. i will also discuss implications of the fsb ’ s financial reform agenda for canada. why we need the fsb from my perspective, the fsb is a unique international organization that has certain qualities that many associate with canadians, qualities i believe will help ensure its success in making the global financial system more resilient. a resilient global financial system is not an end in itself, but a necessary foundation for strong, sustainable and balanced global economic growth, leading to higher

. zingales, 1998, financial dependence and growth, american economic review 88, 559 – 586 ; hartmann, p, heider, f., papaioannou, e., and m. lo duca, 2007, the role of financial markets and innovation in productivity and growth in europe, ecb occasional paper no 72. for a thorough review, see levine, r., 2005, finance and growth : theory, evidence, and mechanisms, in the handbook of economic growth, eds. p. aghion and s. durlauf, north holland : amsterdam. greenspan, a., 1998. “ is there a new economy? ” remarks at the haas annual business faculty research dialogue, university of california, berkeley, 4 september. kaminsky, g., and c. reinhart, 1999, the twin crises : the causes of banking and balance - of - payments problems, american economic review 89, 473 – 500. laeven, l., and f. valencia, 2013, the real effects of financial sector interventions during the crisis, journal of money, credit and banking 45, 147 – 177. bis central bankers ’ speeches excessive leverage can throw the financial system into a crisis resulting in deep and abrupt economic downturns. 5 the crisis has made us understand that the size of the financial sector can exacerbate the trade - off between economic efficiency and financial stability. while finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity. of course, the question of what constitutes an “ oversized ” financial sector is a complex one, and the collection of papers on the programme of this conference makes great progress towards providing an answer. recent changes to the global regulatory architecture, particularly regarding the banking union in europe, are in part aimed at mitigating the negative effects that a large and complex modern financial industry can have. these changes should be implemented in a way that avoids eliminating the positive impact of financial services on growth and tackling financial complexity with overly complicated and excessive regulatory interventions. in addition, policy - makers should be increasingly aware of the importance of overcoming fragmentation in european capital markets and of achieving a single market for capital. identifying the problem as regards the link between finance and growth, for a long time, it was common to say that finance affects growth in a positive, monotonic way, as if more is always better. recent empirical evidence, however, has qualified this conventional