of islamic finance in contributing to global financial stability this current global financial crisis has prompted a search for an enduring solution to ensure the stability of financial systems. the challenge before us is to build a new financial architecture that would allow for the more efficient functioning of not only financial intermediation within national economies but also across borders. islamic finance, with its emphasis on a strong linkage to productive economic activity, its inbuilt check and balances and its high level of disclosure and transparency offers this. indeed, inherent in islamic finance is the explicit elements that address several of the issues that have surfaced in the conventional financial system during the current crisis. at the centre of this recent global financial crisis was the breakdown in governance that led to indiscriminate lending, excessive risk - taking and overzealous financial innovation. this is avoided in islamic finance with the requirement that islamic financial transactions must have an underlying economic activity and that the process of innovation and formulation of islamic financial products and services must be done carefully and in accordance with shariah. the crisis has provided an important lesson that the development of new financial instruments embraces this process while being able to effectively compete in the global arena. strengthening the islamic financial system as islamic finance becomes an integral part of the global financial system, it has become increasingly exposed to the systemic implications of external developments. there is the risk of the contagion effects arising from financial and economic disruptions that emanated from the conventional markets. the correction of asset prices and the economic contraction following this international global financial crisis has been on an unprecedented scale. islamic finance is therefore confronted with the risks associated with these second round effects that need to be managed. this recent financial market turmoil in the advance economies also demonstrated the consequences of liquidity constraints. this has underscored the importance of a strong and well developed liquidity management infrastructure. an important aspect that needs to be urgently addressed in the islamic financial industry is the need to enhance the ability of islamic financial institutions to manage liquidity. this requires the development of shariah compliant financial instruments that facilitate this and a well internationally functioning market infrastructure to facilitate cross border management of liquidity, so that liquidity risks are effectively managed. malaysia has, for more than a decade now, an efficient functioning islamic money market which has accorded greater monetary flexibility in the islamic financial system. while the market is in domestic currency, it has drawn wider participation from the international financial community. as part of the global collaborative efforts to enhance

carolyn wilkins : panel remarks for round table discussion at the 21st conference of montreal panel remarks by ms carolyn wilkins, senior deputy governor of the bank of canada, for round table discussion at the 21st conference of montreal : international economic forum of the americas, montreal, quebec, 8 june 2015. * * * introduction thank you for the invitation to be here today. i ’ m honoured to be part of this panel. it ’ s been more than seven years since the global financial crisis began, and we ’ re still coping with its aftermath. one of the consequences of the crisis has been a disruption of financial globalization. global capital flows – to give just one measure – have fallen by more than half from their pre - crisis peak of over us $ 8 trillion. 1 i ’ ll spend a few minutes on why we ’ re seeing this fragmentation. i ’ ll then offer my views on what we should do to realize the full benefits of financial globalization and manage the risks associated with it. causes of fragmentation the retreat from financial globalization that we ’ ve seen reflects cyclical economic forces, such as the slowdown of global trade and investment. it also reflects structural adjustments, including the deleveraging undertaken by banks to repair their balance sheets and respond to regulatory changes. none of this should come as a surprise, given what we ’ ve been through. on the cyclical side, the crisis has cost the world economy as much as us $ 10 trillion in lost output, or almost 15 per cent of production. global trade slowed, as did the demand for the international financial services that support it. the share of trade in gdp fell after the crisis, reversing some of the 20 - percentage - point increase over the two decades that preceded it. 2 on the structural side, financial institutions that experienced losses during the crisis had to repair their balance sheets by scaling back their lending – not only at home but especially internationally. trade, commodities and infrastructure financing were particularly hard hit. since the crisis, banks have more than doubled the amount of common equity capital they hold. while doing this, banks have tended to focus on their home market and the best ways to allocate capital in the new environment. rules such as anti - money laundering and counter terrorism financing laws may also be altering the terrain. financial institutions have also had to respond to regulatory changes. for example, derivatives dealers appear to be doing more business with domestic counterparties in part because of more stringent, and sometimes inconsistent, rules. 3 while the