This arbitrary, one-size-fits-all minimum capital ratio has spurred what can only be termed an avalanche of financial innovations aimed at either evading or taking advantage of the capital standard. Such regulatory capital arbitrage, as we call it, currently is carried out primarily via the securitization markets.
And, while global integration creates new opportunities, it also poses certain risks. In particular, if other countries fail to pursue sound policies, we could see abrupt changes in global financial conditions, with harmful spillover effects in Canada and elsewhere.