This paper provides a framework to compare linked and unlinked CCP configurations in terms of total netting achieved by market participants and the total system default exposures that exist between participants and CCPs.
Topics: Payment clearing and settlement systemsThis paper studies the welfare effects of different credit arrangements and how these effects depend on the trading mechanism and inflation. In a competitive market, a deviation from the Friedman rule is always sub-optimal. Moreover, credit arrangements can be welfare-reducing, because increased consumption by credit users will drive up the price level so that money users have to reduce consumption when facing a binding liquidity restraint.
Topics: Credit and credit aggregates; Payment clearing and settlement systemsOver the past 20 years, there has been a major shift away from the use of paper-based retail payment instruments, such as cash and cheques, toward electronic means of payment, such as debit cards and credit cards. Recent Bank of Canada research on consumers’ choice of payment instruments indicates that cash is frequently used for transactions with low values because of its speed, ease of use and wide acceptance, while debit and credit cards are more commonly used for transactions with higher values because of perceived attributes such as safety and record keeping. While innovations in retail payments currently being introduced into the Canadian marketplace could lead to a further reduction in the use of cash over the longer term, the implications for the use of cash of some of the structural and regulatory developments under way are less clear.
Topics: Bank notes; Econometric and statistical methods; Financial system regulation and policies; Payment clearing and settlement systemsUsing detailed loan transactions-level data we examine the efficiency of an overnight interbank lending market, and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no-arbitrage conditions on trades in the market.
Topics: Financial Institutions; Payment clearing and settlement systemsThe authors present the methodology and main findings of the Bank of Canada’s 2009 Methods-of-Payment survey, a detailed investigation of consumer payment behaviour in Canada. The survey targeted the 18- to 75-year-old Canadian resident population.
Topics: Bank notes; Financial services; Payment clearing and settlement systemsThis paper presents a model of an over-the-counter bond market in which bond dealers and cash investors arrange repurchase agreements (repos) endogenously.
Topics: Financial markets; Financial stability; Payment clearing and settlement systemsThis paper applies a static model of an interest rate corridor to the Canadian data, and estimates the aggregate demand for central-bank settlement balances in the Large Value Transfer System (LVTS).
Topics: Interest rates; Monetary policy implementation; Payment clearing and settlement systemsThe Bank of Canada’s annual conference, held in November 2011, brought together leading researchers from universities, central banks and other institutions from around the world. Divided into four sessions plus two keynote addresses, the conference covered such topics as the use of cash and other means of payment in retail transactions, large-value payments systems, and over-the-counter markets and central counterparties.
Topics: Bank notes; Central bank research; Financial system regulation and policies; Monetary policy implementation; Payment clearing and settlement systemsMany predict that innovations in retail payment may render cash obsolete. We investigate this possibility in the context of recent payment innovations such as contactless-credit and stored-value cards.
Topics: Econometric and statistical methods; Financial services; Payment clearing and settlement systemsThe author introduces a central counterparty (CCP) into a model of a repo market. Without the CCP, there exist multiple equilibria in the model. In one of the equilibria, a repo market emerges as bond dealers and cash investors choose to arrange repos in an over-the-counter bond market.
Topics: Financial markets; Financial stability; Payment clearing and settlement systemsCentral banks play a pivotal role in well-functioning payments systems by providing liquidity via collateralized lending. This article discusses the role of collateral and haircut policy in central bank lending, as well as the distinguishing features of the central bank’s policy relative to private sector practices. It presents a model that explicitly incorporates the unique role of central banks in the payments system and argues that central banks must consider how their haircut policies affect the relative price and liquidity of assets, the market’s asset allocation, and the likelihood of participants to default. Furthermore, under extraordinary circumstances, there is a rationale for the central bank to temporarily reduce haircuts or broaden the list of eligible collateral to mitigate the shortage of liquidity in the market.
Topics: Central bank research; Financial stability; Payment clearing and settlement systemsThis paper explores the reliability of using prices of credit default swap contracts (CDS) as indicators of default probabilities during the 2007/2008 financial crisis.
Topics: Financial Institutions; Financial markets; Payment clearing and settlement systemsThe author uses a quantitative network analysis approach to assess how participants in the Large Value Transfer System (LVTS) respond to partial outages at other banks.
Topics: Payment clearing and settlement systemsSince the financial crisis, attention has focused on central counterparties (CCPs) as a solution to systemic risk for a variety of financial markets, ranging from repurchase agreements and options to swaps.
Topics: Financial markets; Financial stability; Financial system regulation and policies; Payment clearing and settlement systemsThe collateral policy of central banks played a critical role during the recent financial crisis, as they worked to bolster liquidity and alleviate the funding pressures facing financial institutions. This article examines central bank collateral policy and discusses three areas in which central banks can use their collateral policy to influence financial market practices: promoting greater transparency for securitized products, improving practices related to credit risk, and reducing procyclicality in the management of market risk.
Topics: Financial markets; Financial stability; Payment clearing and settlement systemsIn this article, author Charles Spencer reviews the complex process of developing the new series, which represents a dramatic change for Canada. The leading-edge security features made possible by the new substrate, the cost savings of the move to a polymer base and the environmental advantages of the new notes are also examined.
Topics: Bank notes; Credibility; Payment clearing and settlement systemsIn 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.
Topics: Central bank research; Payment clearing and settlement systemsThe Large Value Transfer System (LVTS) loss-sharing mechanism was designed to ensure that, in the event of a one-participant default, the collateral pledged by direct members of the system would be sufficient to cover the largest possible net debit position of a defaulting participant. However, the situation may not hold if the indirect effects of the defaults are taken into consideration, or if two participants default during the same payment cycle.
Topics: Financial Institutions; Financial stability; Payment clearing and settlement systemsWe present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral.
Topics: Central bank research; Financial services; Financial system regulation and policies; Monetary policy implementation; Payment clearing and settlement systemsIn the Canadian large value payment system an important goal is to understand how liquidity is transferred through the system and hence how efficient the system is in settling payments. Understanding the structure of the underlying network of relationships between participants in the payment system is a crucial step in achieving the goal.
Topics: Financial stability; Payment clearing and settlement systemsAnalysis of the characteristics and structure of a network of financial institutions can provide insight into the complex relationships and interdependencies that exist in a payment, clearing, and settlement system (PCSS), and allow an intuitive understanding of the PCSS's efficiency, stability, and resiliency.
Topics: Financial stability; Payment clearing and settlement systemsThis article examines the incentives for banks to hold various assets on their balance sheets for use as collateral when the opportunity cost of doing so can be high. Focusing on the five-year period (2002-07) that preceded the financial crisis, it examines the choices made by financial institutions among the assets that are pledged as collateral in Canada's Large Value Transfer System. This serves as a baseline for collateral-management practices during relatively normal times. The results of this study are important for policy-makers, especially the Bank of Canada, which is concerned both about the efficient functioning of fixed-income markets and about the credit risk it ultimately bears in insuring LVTS settlement. The results suggest that relative market liquidity and market-making capacity are important factors in the choice of securities pledged as collateral in the LVTS.
Topics: Financial Institutions; Financial markets; Payment clearing and settlement systemsPayment services offered by non-banks have flourished in recent years. The author provides an overview of the different kinds of non-bank retail payments schemes currently available in Canada, illustrating each by focusing on a specific example.
Topics: Financial services; Payment clearing and settlement systemsWe use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). Along the way we obtain estimates of the payment processing speeds for the individual banks.
Topics: Payment clearing and settlement systemsThe authors examine the effect of a trade-off between shared credit risk and liquidity efficiency, among participants in Tranche 2 of the Large Value Transfer System (LVTS T2), on their decisions to leave open, or close, their bilateral credit limits (BCLs) to a participant at risk of imminent closure.
Topics: Financial Institutions; Financial services; Payment clearing and settlement systems
