Deputy governor says we must be ready for when things go wrong
There is still work to be done to ensure the resilience of Canada’s financial system, especially in an uncertain world.
Carolyn Wilkins, senior deputy governor of the Bank of Canada, said Thursday that much has been achieved to bolster Canada’s financial system but she acknowledged continuing threats that must be prepared for.
“We have accomplished much over the past decade, and we are now reaping the benefits,” she told an audience at the University of Toronto’s Rotman School of Management.
But she warned that these accomplishments may not be durable without tackling some unfinished business.
“Refining our understanding of the role of monetary policy in supporting financial stability, keeping regulatory and supervisory policies current as risks evolve, and planning for recovery and resolution when things go wrong,” all need addressing she added.
Regulation must keep up with innovation
Ms. Wilkins said that regulatory and supervisory frameworks, both here and globally, must keep up with current conditions.
She noted two key risks - cyber security and the rapid innovation of the financial sector – as areas of concern.
“Risk is constantly shifting,” she said. “We learned from the crisis that, while trouble is a complex brew, financial innovation is usually a key ingredient.”
Although consensus on the best way for central banks to address stability when deciding on monetary policy, Ms. Wilkins said a key element is investing in policies that better capture links between the financial system and the economy.
And she said that macroprudential policies must focus on targeting financial system risks.
“A solid framework is essential to reduce the likelihood of undue pressure for monetary policy to lean against the build-up of financial vulnerabilities,” she said.
Tackling household debt
With high levels of household debt, the current policies to tackle inflation targets and support the financial system are complementary, the senior deputy governor highlighted.
“The Bank of Canada has underscored that there is nonetheless a fine balance to be struck here: while moving too slowly would allow more time for financial vulnerabilities to build, moving too quickly could have outsized effects, given the high level of household indebtedness,” she said.
“Rest assured, we will not be satisfied until all of these plans meet an appropriate standard,” she concluded.