elsewhere in canada, people in quebec are all too familiar with the stresses and strains of adjusting to changing economic realities. a large number of quebec businesses have undergone extensive restructuring in this decade, involving the acquisition of new high - tech equipment, the rationalization of activities, and the upgrading of labour skills. the public sector has also begun its own adjustment process recently. such restructuring is by no means easy. but the changes that have taken place have made a number of quebec ’ s industries ( telecommunications, office equipment, aircraft, construction ) highly competitive. and all of these changes should provide this province with the base for a better economic future. i believe that the emphasis of canadian monetary policy on low inflation, which has contributed to greater economic stability and low interest rates, is supporting the adjustment process in the quebec economy. why is the bank optimistic about canada ’ s economic prospects? the difficulties associated with the economic transformation in canada have no doubt acted as a drag on output and employment. but i believe we are now at the stage where the payoffs from these necessary adjustments have begun to outweigh the difficulties. one of the major benefits has been the marked decline in our interest rates since late 1995. many interest rates in canada are now at their lowest levels since the 1960s. and for maturities of up to 10 years, they are appreciably lower than comparable u. s. rates. this decline in interest rates represents a substantial stimulus to domestic spending. however, it takes considerable time - - one to two years - - for monetary policy actions to have an effect on the economy. so, it is only recently that we have seen unmistakable signs of the response to these lower interest rates. this explains some of the gloom during the past year regarding canada ’ s economic prospects. recent evidence, particularly from the interest - rate - sensitive sectors of the economy, is very encouraging. the economic results for the second half of 1996 and the first quarter of 1997 confirm that, much as expected, there have been significant increases in household spending on housing, motor vehicles, and consumer durables. and businesses continue to increase their capital spending. moreover, after a slow start to the year, growth in private sector employment has resumed. given the lags involved, the substantial past easing of interest rates should continue to support robust growth in domestic spending for some time. and with strong u. s. demand for our exports, the bank feels that there is good reason to expect a solid economic expansion in the period ahead

/ bust cycles : a role for global liquidity ”, ecb wp series no 1039, march ; borio and drehmann ( 2009 ), “ assessing the risk of banking crises – revisited “, bis quarterly review, march ; ecb financial stability review, june 2009, special feature d “ estimating probabilities of hedge fund liquidation ”. risk assessment risk assessment relates to the evaluation of the relevance and potential severity of each risk identified as material in the surveillance phase. it should therefore include a quantitative evaluation of the likelihood that the potential risk scenarios could actually materialise, as well as an evaluation of the ability of the financial system to absorb the shocks ( for example, through existing capital buffers or through the potential to increase buffers in the future through profit retention ). it should also include cost estimates in terms of the failure of institutions, costs deriving from the malfunctioning of financial markets or impairment of the real economy. the product of these factors forms the basis for the ranking of risks. quantitative methods and analytical tools ( for example, macro - stress testing models ) should support, together with expert judgement, the prioritising or ranking of these risks. the models will help in the conduct of quantitative impact assessments on the financial sector as well as in the assessment of the potential costs for the real economy, and thereby offer information about the relevance and severity of the risks detected in the surveillance phase. macro - stress testing models have become the workhorse of macro - prudential stability analysis in the last decade, notably including quantitative impact studies for specific scenarios. their main purpose is to assess the resilience of the banking and financial systems against extreme but still plausible events. one problem with these models in the past was that even for large shocks they generated hardly any bank failures. this can probably be improved by using appropriate data, more granular than previously available, and by capturing better and a larger number of adverse feedback loops that can play a role in amplifying the transmission of instability in the financial system. these feedback loops could include contagion effects across banks, market liquidity and funding liquidity problems. 14 another difficulty for these models is whether they should be extended to also capture feedbacks from real economy outcomes to financial stability variables. the assessment task is currently much less developed than the surveillance one. this is not only because it involves considerable analytical sophistication, but also and mainly because there are significant gaps in the information on the financial