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OTTAWA - The liquidity crisis that continues to cause turmoil in money markets might have been avoided if there had been more transparency into the risks of new and complex investment instruments, Bank of Canada governor David Dodge says.

Dodge told business leaders in London, England, on Wednesday that the complexity of financial markets rendered some investments so opaque that many investors did not realize the risks involved, or that their assets might have included shaky American subprime mortgages.

As a result, Dodge said the global liquidity problem may take longer than in previous periods to understand and resolve.

"But one lesson, which I hope will be clear to everyone, is the absolute importance of transparency if markets are to function properly," he told the Canadian-U.K. Chamber of Commerce.

"Vendors of financial instruments need to structure these investments in such a way that market players can clearly see what they are buying," Dodge said.

"Credit-rating agencies need to clearly indicate that their ratings for highly structured products should not be used with the same degree of certainty as their ratings for conventional, single-name issuers."

Dodge added that it was appropriate for central banks around the world, including the Bank of Canada, to intervene in August to give commercial banks access to additional money.

He also stressed that "the actions that we took to provide liquidity to support the smooth operation of financial markets did not in any way signal a change in our monetary policy. In fact, it was a step in maintaining our monetary policy stance by keeping our target for the overnight rate at 4� per cent, which we judged appropriate for keeping inflation on target over the medium term."

And he said the need for more transparency is not limited to money markets and debt instruments, and investors need a clearer view into the workings of all financial markets. He specifically cited hedge funds, seeing "a clear case for increased transparency, at least with respect to their objectives, operating procedures, and governance."

Dodge said the current credit crunch originated in a desire for bigger returns in the face of low long-term interest rates. This, he said, led investors into increasingly risky assets.

As well, he said, a loosening of lending standards in some markets opened the way for complex structured products that included significant leverage.

"In this complex process, transparency about the underlying credit was often lost," he said.

"It was extremely difficult for investors to peel back the layers of these securities and derivatives to determine, with confidence, both the creditworthiness of the assets backing a particular security and the market value of the security itself."

It all came to grief in August, when delinquencies in U.S. subprime mortgages began piling up and it became clear the problems rippled beyond the subprime market.

The interventions by central banks, Dodge said, "were effective in improving the functioning of the overnight money markets."

But while the overnight market in Canada is on its way back to normal, he said this does not mean that all the problems have been resolved. Term funding remains expensive, he noted, and non-bank asset-backed commercial paper is still experiencing problems finding liquidity providers willing to step in when these short-term notes become due.

Dodge stressed that Canada's banks are well capitalized and well placed to deal with the current dislocations.

While he did not offer any specific recommendations on how to increase transparency, Dodge said Canada is working with the Bank of England to promote strengthening of the surveillance function of the International Monetary Fund.