But to protect the link between actions and liability, risks that have arisen under national responsibility must be reduced before a common deposit insurance scheme is created. What’s more, the impact of national policy decisions on the quality of bank balance sheets must be limited.
From a policy perspective, the greatest concern was that persistent large deficits were pushing Canada’s debt-to-GDP ratio to unsustainable levels and driving up risk premiums in our interest rates. The economic costs of Canada’s rising indebtedness became very clear after 1991, when our inflation rate came down quickly, but medium- and longer-term interest rates were slow to respond.