tiff macklem : managing risks in the new global economic landscape remarks by mr tiff macklem, senior deputy governor of the bank of canada, at the national insurance conference of canada, vancouver, british columbia, 27 september 2011. * * * it is a great pleasure to be speaking here in vancouver at the annual national insurance conference of canada. few industries know more about the personal, economic and financial impacts of disasters – or “ extreme events ” as insurance experts like to call them. and few know more about risk management. today i want to talk about both topics – an extreme event and private and public risk management in its wake. this morning you discussed earthquake insurance. earthquakes, like other natural disasters – tsunamis, hurricanes and ice storms come to mind – are entirely exogenous, extreme events – acts of god, if you will. they are not preventable, although their impact can be reduced by building resilience and by timely and effective disaster response. your industry, of course, plays a vital role in helping households and businesses to mitigate the consequences of natural disasters. other extreme events are endogenous – or manmade. the recent financial crisis falls into this category. the crisis that began in august 2007 and exploded in the autumn of 2008 was self - inflicted. the financial system was fragile and it failed. we are still paying. we will be paying for many years to come. the global recession that followed the financial crisis was the deepest since the great depression. and today, we are two years into what is shaping up to be the weakest recovery since the great depression. this is the new economic and financial landscape we find ourselves in. and while it may be less than we desire, it should not be terribly surprising. the lesson from history is that the recessions that follow financial crises are bigger than normal recessions. on average, the loss in output in a recession after a financial crisis is two to three times the loss in a normal recession. output falls further in a recession after a financial crisis. normally, the deeper the recession, the sharper the recovery. not so with the recoveries after financial crises. recoveries after a financial crisis are slower. typically, it takes output twice as long to return to its pre - recession level after a financial crisis than in a normal recovery, and output is permanently lower compared with its pre - crisis growth trajectory. the essential reason for this is that the legacy of a financial crisis is a lot of debt,

delivering on fiscal austerity in key countries and full implementation of announced measures to make the european financial stability facility more flexible. but more is required. the immediate priorities are to provide a funding backstop for vulnerable european sovereigns that is sized to the scale of the problem and a comprehensive capital plan for european banks. in our opinion, this can be done by using existing european resources more efficiently. these steps must be complemented by governance reforms and credible fiscal arrangements within the european monetary union. in other advanced countries, the priority must be to agree on credible, concrete and executable plans to restore fiscal sustainability consistent with the commitments made at last year ’ s g - 20 leaders summit in toronto. in many emerging - market economies, greater exchange rate flexibility is necessary to better manage demand pressures and inflationary risks, while facilitating a global rebalancing of demand. greater exchange rate flexibility between the united states and china is required to help the recovery in the former and control inflation in the latter. finally, advanced and emerging countries alike must implement agreed financial sector regulatory reforms to build a more resilient financial system that better serves the needs of households and businesses. in the face of a difficult external environment, the bank of canada will continue to support canada ’ s economic expansion by keeping inflation low, stable and predictable. bis central bankers ’ speeches since the crisis erupted four years ago, the bank has demonstrated its nimbleness in the conduct of monetary policy. we reacted quickly and forcefully during the downturn. as the canadian recovery has progressed, we have emphasized that we would be prudent with respect to the possible withdrawal of any degree of monetary stimulus. conclusion i must conclude. recoveries after financial crises feel more like a convalescence. for private sector investors, the fundamentals of sound portfolio management have not changed, but the economic landscape has. sovereign debt is no longer a risk - free asset, the shift in the economic centre of gravity to emerging - market economies has accelerated, and low - for - long interest rates are changing behaviours and straining some business models. the private sector bears much responsibility for the excesses at the heart of the 2008 – 09 financial crisis. risk management can and should be strengthened, and adapted to new realities. public policy has a critical role to play in mitigating systemic macroeconomic risks. more action is needed to contain sovereign risks, promote a rebalancing of global demand and implement financial regulatory reform. the distant horizon of the new