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This issue features a summary of the Bank’s annual conference, which this year dealt with financial globalization, and three articles that present research by Bank staff on Canada’s mortgage market, the role of adverse selection in financial crises, and payment networks.
This article begins with a brief examination of the Canadian mortgage market, focusing on the market’s evolution following changes to the Bank Act in 1992, which allowed chartered banks to enter the trust business, and the subsequent entrance of virtual banks and mortgage brokers. It then summarizes key research currently being undertaken by the Bank of Canada. This research suggests that the mortgage rates paid by borrowers depend on their observable characteristics, their local market, and their bargaining ability. Results also imply that mortgage-rate discounting affects the speed and amount of pass-through of changes in the central bank’s policy rate to mortgage rates. Findings also suggest that bank mergers can lead to asymmetric effects on mortgage rates.
: Interest rates; Market structure and pricing; Transmission of monetary policyThe recent financial crisis has highlighted the importance of adverse selection as a contributing factor to financial market instability. In this article, the author examines the phenomenon of adverse selection and explains how its presence in a particular market can lead to market freezes and liquidity hoarding. She also describes several mechanisms that can propagate the initially small effect of adverse selection to the entire financial system. Possible policy responses and their effectiveness are also discussed.
: Financial stability; Financial system regulation and policies; Market structure and pricingIn 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. This approach allows researchers to study these systems as a whole, rather than at the participant level. Recent work on Canada’s Large Value Transfer System has revealed two communities of participants within the system. This work provides system overseers and financial-stability policy-makers with a new means of evaluating the systemic importance of individual participants and the connections between them.
: Central bank research; Payment, clearing, and settlement systemsThe Bank of Canada’s annual conference, held in October 2010, brought together leading researchers from universities and central banks around the world. Divided into six sessions plus a keynote address and a panel discussion, the conference covered such topics as the effects of financial globalization on risk, liquidity, and asset prices; the causes of crises and their effects; and appropriate regulatory responses.
: Central bank research; Financial markets; Financial stability; Financial system regulation and policies