risk assets and leading to the relaxation of credit standards. to be clear, the problem was not the use of securitization per se ; rather, it was that originators of the securitized loans at times did not have the proper incentives to carefully assess the creditworthiness of borrowers. in many cases, once the loan had been securitized and sold, the originator no longer faced the consequences if the borrower defaulted. it seems to me that in recent years, we at the bank of canada and, i suspect, other monetary authorities as well, may not have fully appreciated just how much the increase in securitization represented an easing of credit conditions. loans were being sold and, to a greater or lesser extent, moved off balance sheets, allowing more loans to be made. if securitization led to the creation of loans that would not otherwise have been made, then this was a source of demand in the economy that we as central bankers may have only partially taken into account. any given policy rate would thus have been less restrictive than was earlier judged, implying that, in hindsight, interest rates globally might have been a little lower than would have been optimal. however, since both global and domestic inflation have been largely contained over this period, we should not exaggerate the magnitude of this effect. but following recent events, a reduction in securitization globally is now likely, along with a degree of re - intermediation by financial institutions. indeed, in the bank of canada's latest monetary policy report, published on thursday, we projected that the cost of credit for canadian firms and households relative to our policy interest rate will be about 25 basis points higher over the projection horizon than it was prior to the summer. the challenge for monetary authorities is to determine the persistence of this tightening and re - intermediation, because it could affect the conduct of monetary policy going forward. policy challenges ahead aside from this issue for monetary authorities, this summer's events have led to policy challenges in other areas that are of mutual interest to central banks, regulators, and private sector financial institutions. let me spend some time now discussing two of them : those related to transparency and those related to liquidity. transparency let me begin with transparency. following the events of this summer, it may take awhile to achieve an appropriate pricing of risk, because it will take time to unravel some of the complex, opaque structured products to get to the underlying assets

had implications that had not been anticipated. indeed, these events have highlighted the increased importance of liquidity in a market - based financial system and the risks to the system when there is a rapid erosion of market liquidity and banks are called upon to quickly provide liquidity and credit. this re - intermediation has taken place following a period that saw an expanding use of securitization, where assets such as loans, credit card receivables, and derivatives were bundled and sold as asset - backed securities, often with significant amounts of leverage embedded. as i mentioned earlier, this process allowed banks and, in particular, nondeposit - taking financial institutions, to originate more loans than they would have if it had been necessary for them to hold these assets on their balance sheets. and it is the greatly expanded use of this securitization process, where loans were being originated for the purpose of distribution, that led to the relaxation of credit standards that charles dallara referred to. again, this does not mean that the expanded use of securitization per se is a bad thing. indeed, there are many examples of well - structured products that have dealt with the principal - agent problem that was, in many ways, the root cause of the relaxation of standards in the u. s. subprime - mortgage market. but the question can be asked : " are there ways to encourage the more appropriate use of securitization? " it may be possible, for example, to have asset - backed securities carry some manner of " branding " or " certificate of origination " that would provide a clear incentive for the loan originator to exercise due diligence in extending the loan before it is securitized. or, we can look for ways to encourage more originators or conduits to keep a portion of the product they are selling on their books – in particular, a portion of the riskiest tranche. so, there are market - based ways that could help to resolve the problems in the market for asset - backed securities. given time and increased transparency, the market for assetbacked securities should normalize, since it serves an important function for market participants by helping to distribute and diversify risk. this entire market is not dead. but it seems clear that investors will, at the very least, seek greater returns for opaque, complex instruments than for well - branded, plain - vanilla asset - backed securities. the specific market for asset -