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The recent financial crisis has highlighted the importance of adverse selection as a contributing factor to financial market instability.

In this article, the authors review work done at the Bank of Canada and at other central banks with the relatively new application of network analysis to the study of payments systems.

The Bank of Canada’s annual conference, held in October 2010, brought together leading researchers from universities and central banks around the world.

This is a report of the Governing Council of the Bank of Canada: Mark Carney, Tiff Macklem, John Murray, Timothy Lane, Jean Boivin and Agathe Côté. It presents the Bank’s outlook based on data received up to 14 January 2011.

Overall, businesses continue to be positive about the outlook for the next 12 months. While survey responses generally still indicate modest growth, with many firms citing headwinds from strong competition and moderate demand, the strength in commodity prices has led to increased optimism among those firms tied to commodity-related activity.

The survey results point to an overall easing in business-lending conditions. Both the price and non-price aspects of business lending eased during the quarter. Note that the balance of opinion indicates only the direction of the change in lending conditions; it does not provide information on the magnitude of the change.