OTTAWA, June 18 (Reuters) - Following is the prepared text of a speech by Bank of Canada Governor Mark Carney to the Regina & District Chamber of Commerce in Saskatchewan.

It is a pleasure to be back in Saskatchewan. This great province has been one of the fastest-growing parts of the country in recent years, benefiting from increasing diversification into biotechnology and alternative energy, among other industries.

Today, I will refer to the traditional backbone of this economy: agriculture. I do so because lately there has been much talk of 'green shoots' in the global economy. From the initially careful references to data that suggested a slowing of the rate of decline in global activity, the use of the term 'green shoots' has quickly evolved. Some now refer to green shoots as if the global recovery is a foregone conclusion or even as if sustainable growth had already begun.

Would that it were so easy. Saskatchewanians know that it is a long, anxious time between the appearance of seedlings and the harvest. Much hard work remains, and external forces can profoundly influence the outcome: too little or too much rain, hail, pests, and disease can all frustrate even the most promising beginnings. And, in the end, global forces of supply and demand determine the prices received. Old adages usually contain great wisdom: Just as you don't count your chickens before they are hatched, we shouldn't presume that green shoots today guarantee a bumper crop tomorrow. Financial Stability and the Bank of Canada

I want to extend this analogy to provide some perspective on recent developments in Canadian financial stability. Financial stability is the resilience of the financial system to unanticipated adverse shocks. This resilience determines the extent to which Canadian households and businesses have access to the credit they need at appropriate terms and conditions.

While our financial system is one of the soundest in the world, the ferocity of the once-in-a-lifetime global financial tempest has affected all Canadians, regardless of their location or occupation. So, does our financial system still leave us well positioned for our green shoots to mature into a viable crop of summer wheat?

The Bank of Canada is well placed to make this judgment. As part of our commitment to promote the economic and financial welfare of Canada, the Bank actively fosters a stable and efficient financial system. The Bank constantly assesses the major risks to the soundness of our system, and helps to develop policies to mitigate them. In essence, we worry not only about prospects of external shocks (the equivalent of weather or crop prices), but also about the buffers that our banks, businesses, and households have (the equivalent of the financial reserves farmers need to carry in case the harvest disappoints).

Twice a year, the Bank publishes its Financial System Review, or FSR-the most recent edition appeared earlier this week. My talk today will draw on that analysis and assessment. I will concentrate on three risks, in particular: 1) the liquidity and funding positions of our banks, 2) the adequacy of their capital, and 3) the financial health of Canadian households. I will conclude with a few observations on the economic outlook. Assessment of Overall Financial Stability

Since the autumn, the global economy has been in a deep and synchronized recession that was triggered by the worst financial crisis since the Great Depression. In recent months, financial market conditions have improved noticeably and further, gradual progress is likely as numerous international policy initiatives gain traction. Equity markets have seen strong gains in recent months, and credit markets have also rallied. While there is still a long way to go before economic and financial conditions return to normal, markets seem to be turning their backs on worst-case scenarios. The panic that engulfed global financial markets last fall is over.

Developments in Canadian financial stability over the past six months reflect the competing influences of improved financial market conditions on the one hand and a deterioration in the economic outlook on the other. Overall, the level of risk to the Canadian financial system is judged to be broadly unchanged since last December.

I would sound a note of caution familiar to those who work the land. We are well prepared but will still be tested. While the strong position of our banks has improved further in recent months and the balance sheets of Canadian households remain relatively sound, the global recession will mean that these reserves will be drawn upon in the months ahead.

Let me now turn to the three risks that I cited a moment ago, starting with liquidity and funding for banks. Liquidity and Funding

At the heart of the financial crisis was the collapse of wholesale funding markets for banks. Since August 2007, the very short-term interbank and repo markets have been under great strain. During the most intense periods of the crisis around the collapse of Bear Stearns in March 2008 and Lehman Brothers and others in the fall of last year, these markets seized up entirely: Good collateral became unfinanceable overnight, firms failed, and risk aversion across all financial markets skyrocketed.

This crisis of confidence was less acute in Canada, but still produced severe strains in our wholesale funding markets. Heightened uncertainty made counterparties reluctant to extend financing beyond the shortest maturities, resulting in intense funding pressures for Canadian financial institutions. Banks cut back their market-making activities in order to conserve balance sheet capacity, which further aggravated market volatility. These dynamics raised the risk of an adverse feedback loop between the financial system and the real economy.

The Bank of Canada responded to these pressures by dramatically expanding our liquidity facilities, and the Government of Canada implemented a program to purchase insured mortgages with the help of the Canada Mortgage and Housing Corporation, thereby increasing the access of Canadian institutions to longer-term financing. Reflecting both the strength of our banks and the scale of our actions, conditions in Canada have been consistently better than elsewhere. Since December, these policies have gained considerable traction, helping to reinforce the improvement in domestic funding conditions as the global financial crisis subsided.

This improvement has been reflected in a decline in the spreads on bank financing in money markets, a moderate extension of maturities, and a substantial reduction in the cost of term funding for Canadian banks. In addition, policy initiatives have allowed banks to increase substantially their holdings of government securities, which has helped boost their liquidity situation in a capital-efficient way. These improvements have been further supported by strong growth in retail deposits and slowing credit growth. Market-making activity in Canadian financial markets has also been recovering, although it remains less than satisfactory.

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