Macro and financial-sector policies to sustain the recovery

Canada benefited from many strengths such as a less-leveraged financial sector, few subprime mortgages and sound corporate balance sheets as it weathered the global economic crisis of 2007-09. Actions by the monetary and fiscal authorities have stabilised financial markets and provided substantial support to the economy. With upturns in global trade and in commodity prices, the recovery is now well under way, but the pace of expansion is projected to slow later in 2010 and in 2011 as policy stimulus is withdrawn, inventory rebuilding runs its course and households reduce their spending growth in reaction to high indebtedness. In the longer term, Canada faces the same reform challenges that other OECD countries face to allow credible exit paths for big banks and to increase competition, contestability and shareholder oversight in this sector. International efforts to strengthen financial-system resilience should take inspiration from Canada’s own model of risk-based prudential regulation, which successfully held banking risks in check. Reforms that imply large increases in bank capital should be accompanied by greater market discipline to contain moral hazard and spur efficiency. Securities markets should be better regulated in order to attract foreign capital, encourage competitive impulses and improve macro-prudential regulation.

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