institution basis is important, but it is not enough. the risk to the financial system is greater than the average risk to individual firms. managing this risk requires new system - wide tools, and here, too, there has been considerable progress. the counter - cyclical capital buffer included in basel iii is a giant step forward. the bank of canada played a leading role in the development of the buffer, which bis central bankers ’ speeches provides for additional capital to be built up during periods of excessive credit growth in anticipation of a future economic downturn. the reform agenda is now moving beyond the core. this means taking into account the considerable importance of shadow banking or market - based financing. the credit intermediation activities of banks are closely regulated and supervised, and are backstopped with deposit insurance and central bank liquidity. in contrast, market - based financing is less regulated and does not have access to public liquidity support. but it is big, and the crisis highlighted the systemic vulnerabilities market - based financing can pose. for both these reasons the international agenda is now turning to the perimeter of regulation and market - based financing. it will be essential that reforms strike an effective balance between the benefits of market - based financing in terms of competition, diversification and innovation, and the risks related to regulatory arbitrage and systemic vulnerabilities. the role of central banks this leads to the role of central banks in mitigating systemic risks. as i said at the outset, a key role for central banks is to use their panoramic view of the financial system to identify system - wide vulnerabilities. central banks are well placed to recognize risks and prioritize them within a framework that maps potential weaknesses and traces the chain of cause and effect throughout the system. but to do this effectively, we need to raise our game. we need a deeper understanding of the links between financial intermediation, money and credit flows, the balance sheets of households and businesses, and the range of available policy instruments. and this understanding needs to be combined with better detection of emerging financial imbalances. this requires engagement with the private sector and building multidisciplinary teams that bring together economists, financial experts, accountants and lawyers, among others. and it is not enough to simply draw up long lists of vulnerabilities. risks need to be assessed and ranked, providing a clear sense of priority. since the outset of the crisis, the bank of canada has intensified its

- makers to think about. the very fact that new macroprudential tools are being employed will have an impact on the transmission of monetary policy. using these tools will change the behaviour of both the economy and the financial sector. monetary policy - makers will have to understand these effects. moreover, new trade - offs may arise. consider a situation where excess credit growth requires the counter - cyclical capital buffer to be activated at a time when inflation is already well contained. since the tightening of such a broad - based macroprudential tool could be expected to put downward pressure on inflation, monetary policy can either accommodate this restraint and let inflation return to target over a longer horizon, or it could lower the policy interest rate and risk undermining the effectiveness of the counter - cyclical capital buffer. finally, even the best - designed regulatory and supervisory framework will have limitations. and there could be circumstances in which monetary policy should play a complementary role in support of financial stability. this is more likely to occur in situations where an imbalance is broad - based or is being fuelled by a low interest rate environment. we know that monetary policy has a far - reaching influence on financial markets and on the leverage of financial institutions. this wide - scale impact makes it inappropriate for dealing with sector - specific imbalances, but potentially valuable in addressing imbalances that have spread to multiple sectors of the economy. needless to say, clarifying the role that monetary policy should play in supporting financial stability is an important issue to be considered in the renewal of the inflation - targeting framework. thank you for your attention. i look forward to the discussion and your questions. bis central bankers ’ speeches