Adjusting imbalances entirely through exchange rate realignments is neither practical nor desirable. Meanwhile, policy choices can influence absorption. If dissavings by the government are resulting in current account deficits, consolidation of fiscal expenditure would be necessary. Governments of deficit-running economies might also review any policies that are discouraging private savings or adopt policies that encourage private savings.
To illustrate the difference between a vulnerability and a risk, imagine a bridge with fractures in its concrete supports. That’s the vulnerability. The risk is that the bridge could collapse if a trigger event, such as an earthquake, shook its foundations. Focusing explicitly on vulnerabilities in the Canadian financial system allows us to highlight where the fragilities lie and how they are evolving.