, thus making it clear that this was a shock of systemic importance. in response, central banks and governments around the world took unprecedented action to stabilize the financial system and reduce the severity of the ensuing global recession. the bank of canada intervened repeatedly to provide liquidity to financial market participants to mitigate the risks of serious financial disturbances. see appendix 1 : bank of canada liquidity facilities, p. 11. going into the crisis, banks, globally, were highly leveraged 2 and had overestimated the ability of markets to provide liquidity in times of stress. they relied heavily on sources of funding, such as securitization, that disappeared as the crisis gained momentum. at the same time, their funding requirements were growing, because they were forced to take more assets back onto their balance sheets and because they had to meet a surge in demand for credit from those with bank credit lines who had previously relied on market sources of funding. it is important to note that the decline in the liquidity of bank funding markets and the decline in the liquidity of asset markets in general are not unrelated. as was vividly demonstrated during the crisis, liquidity in asset markets is tightly intertwined with the ability of financial institutions to raise funds in money markets. impairment in one market increased the likelihood of impairment in others. indeed, market liquidity and funding liquidity of banks with trading operations are mutually reinforcing, creating the possibility of a “ liquidity spiral ” in a downward or upward direction. 3 central bank liquidity measures : pre - crisis prior to the crisis, the tools used by the bank to provide liquidity to the financial system as a whole were measures designed primarily to reinforce our target for the overnight interest rate. 4 these tools were – and still are – part of the bank of canada ’ s standard operating framework for the implementation of monetary policy. the main facility we use is the provision of settlement balances in the wholesale payments system – the large value transfer system ( lvts ) – which is supplemented, when required, by open market special purchase and resale agreements ( spras ) and sale and repurchase agreements ( sras ). 5 there are two facilities that can provide liquidity to individual financial institutions. 6 first – and also intimately linked to the implementation of monetary policy, the achievement of the overnight rate target, and the settlement of the payments system – is our standing liquidity facility at the bank rate. it provides liquidity, as required, to individual

appropriately, on the contribution monetary policy can make to sustained economic growth. but i want to emphasize that, while low inflation is essential in this context, it is not sufficient by itself. other policies, both macro - and micro - economic, must continue to focus on enhancing productivity and raising our production potential over the medium term. this focus is extraordinarily important if we want to achieve sustained, solid economic growth and rising standards of living over time. we should not lose sight of it as we go through the current short - term difficulties.