with a significant rise in uncertainty. this scenario captured many channels likely to affect the canadian economy, including foreign demand and commodity prices. it also attempted to capture some amplification from elevated household debt. it did not, however, include the effects of any financial turbulence coming from international markets. 6 see c. a. wilkins, “ the age of leverage ” ( remarks to ubc vancouver school of economics and cfa society vancouver, vancouver, british columbia, march 14, 2019 ). - 5is that in times of stress, redemptions of fixed - income etf shares could amplify volatility in the value of these shares and in prices in the underlying corporate bond market. other riskier forms of lending, such as leveraged loans, which are increasingly being packaged into collateralized loan obligations ( clos ), have been growing rapidly too. 7 globally there ’ s about us $ 700 billion of clos outstanding and issuance is strong. the financial engineering behind the structure has been improved since the crisis, but there is still room for concern. for one, the quality of the underlying loans has declined, and many of them lack the usual protections through covenants. the dynamics in an unwind of any of these more complex instruments could look a lot like a case of deja - vu. those in montreal during the financial crisis will remember that complexity of financial engineering and liquidity mismatch were at the heart of more than one problem. the first line of defence against these risks is clearly with people like you in this room — understanding and mitigating your own risks and building contingency plans in case something goes wrong. the bank is stepping up our own monitoring too, especially as it pertains to non - bank financial intermediation, and is leading an initiative to build greater information sharing among federal and provincial regulators. 8, 9 now, how could the trade war create a perfect storm? what i mean by a perfect storm is a combination of an economic downturn and financial stress. an increase in uncertainty or bad trade news could be the trigger. this, in turn, could spark a sharp reversal in risk premiums and lead to a drop in prices for assets, including for houses. creditors would see more defaults, especially from corporations with lower credit ratings. moreover, if enough investors rushed to adjust their portfolios at the same time, liquidity would dry up, amplifying the effects. 10 all of this would find its way to the

banking system, making it harder for business owners and families to borrow and intensifying the downturn. resilient to storm pressures let me now turn to my third point : the canadian financial system is highly resilient. 7 leveraged loans are high - yield loans to non - financial corporations with lower credit ratings. banks underwrite most leveraged loans and issue them in us and european markets. they are sold to a wide range of financial system participants, and a substantial share is securitized into clos. clo structures are subject to tighter regulations than they were before the global financial crisis, including more stringent subordination requirements and restrictions on asset holdings. 8 see g. bedard - page, “ non - bank financial intermediation in canada : an update, ” bank of canada financial system hub ( march 26, 2019 ). 9 the bank chairs the heads of regulatory agencies ( hoa ), a federal - provincial forum for discussing financial sector issues. the hoa also includes the department of finance canada, the office of the superintendent of financial institutions, the quebec autorite des marches financiers, the ontario securities commission, the alberta securities commission and the british columbia securities commission. 10 in our may 2019 fsr, bank staff looked at what would happen to open - ended fixed - income mutual funds in canada if many people pulled their investments out simultaneously. - 6canadian banks are part of a global banking system that is more solid than it was a decade ago. globally active banks are holding over us $ 2 trillion more capital than they were at the beginning of 2011, when the phase - in of the post - crisis reforms began. this translates to a 7 - percentage point increase in their tier 1 capital ratio. 11 the leverage limits and new liquidity regulations also make these banks more resilient. 12 canada has implemented new measures to further strengthen our banking system. for example, canada ’ s prudential regulator, the office of the superintendent of financial institutions ( osfi ), increased the required amount of capital that canada ’ s big banks have to hold to protect themselves against financial - system vulnerabilities. canada introduced a bail - in regime to ensure that investors — not taxpayers — would take the brunt of the financial burden in the unlikely event that a big bank were to fail. also, osfi asked many smaller, single - business - line banks to reduce their reliance on short - term brokered funding, which can be