Staff research, Staff discussion papers, Other, Research newsletters, , Technical reports, Staff working papers, Financial stability, Financial system regulation and policies
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Procyclicality in Central Counterparty Margin Models: A Conceptual Tool Kit and the Key Parameters
Regulators need to provide effective procyclicality guidance, and central counterparties must design and calibrate their margin systems and procyclicality frameworks appropriately. To serve these needs, we provide a novel conceptual tool kit. Further, we highlight that the focus should be on the key margin system parameters in determining procyclicality. -
Climate-Related Flood Risk to Residential Lending Portfolios in Canada
We assess the potential financial risks of current and projected flooding caused by extreme weather events in Canada. We focus on the residential real estate secured lending (RESL) portfolios of Canadian financial institutions (FIs) because RESL portfolios are an important component of FIs’ balance sheets and because the assets used to secure such loans are immobile and susceptible to climate-related extreme weather events. -
Understanding the Systemic Implications of Climate Transition Risk: Applying a Framework Using Canadian Financial System Data
Our study aims to gain insight on financial stability and climate transition risk. We develop a methodological framework that captures the direct effects of a stressful climate transition shock as well as the indirect—or systemic—implications of these direct effects. We apply this framework using data from the Canadian financial system. -
Central Bank Crisis Interventions: A Review of the Recent Literature on Potential Costs
Central banks’ actions to stabilize financial markets and implement monetary policy during crises may come with costs and side effects. We provide a literature review of these costs and discuss measures that may mitigate the negative impacts of crisis actions. -
Decentralized finance: Innovations and challenges
Decentralized finance surged in popularity around 2020. We explore its value and limitations and highlight some potential regulatory concerns. -
Estimating the Appropriate Quantity of Settlement Balances in a Floor System
This paper presents two complementary approaches to estimating the appropriate quantity of settlement balances needed to effectively operate monetary policy under a floor system in Canada. -
Three things we learned about the Lynx payment system
Canada transitioned to a new wholesale payment system, Lynx, in August 2021. Lynx is based on a real-time settlement model that eliminates credit risk in the system. This model can require more liquidity; however, Lynx’s design allows Canada’s wholesale payments to settle efficiently. -
Should Banks Be Worried About Dividend Restrictions?
A regulator would want to restrict dividends to force banks to rebuild capital during a crisis. But such a policy is not time-consistent. A time-consistent policy would let banks gradually rebuild capital and pay dividends even when their equity remains below pre-crisis levels. -
Do hedge funds support liquidity in the Government of Canada bond market?
While Government of Canada bond transactions of hedge funds are typically in the opposite direction to those of other market participants, during the peak period of market turmoil in March 2020, hedge funds sold these bonds, just as other market participants did. This shows that hedge funds can at times contribute to one-sided markets and amplify declines in market liquidity.