G - Financial Economics

• November 15, 2012

  Financial Transaction Taxes: International Experiences, Issues and Feasibility

  Bank of Canada Review - Autumn 2012 Anna Pomeranets

  The financial transaction tax (FTT) is a policy idea with a long history that, in the wake of the global financial crisis, has attracted renewed interest in some quarters. This article examines the evidence of the impact of an FTT on market quality and explores a few of the practical issues surrounding the implementation of an FTT. Proponents argue that an FTT will generate substantial tax revenues and reduce market volatility. The majority of the empirical evidence, however, supports the arguments of opponents of the tax who assert that an FTT reduces volume and liquidity and increases volatility. In addition, there are numerous challenges in implementing an FTT, which may reduce the intended revenues. Whether an FTT is beneficial hinges on its effect on market quality and its ability to raise revenues. However, there are many unanswered questions regarding its design.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): G, G0, G01, G1, G10, G18
• November 15, 2012

  Access, Competition and Risk in Centrally Cleared Markets

  Bank of Canada Review - Autumn 2012 Jean-Sébastien Fontaine, Héctor Pérez Saiz, Joshua Slive

  Central counterparties can make over-the-counter markets more resilient and reduce systemic risk by mitigating and managing counterparty credit risk. These benefits are maximized when access to central counterparties is available to a wide range of market participants. In an over-the-counter market, there is an important trade-off between risk and competition. A model of an over-the-counter market shows how risk and competition could be influenced by the incentives of market participants as they move to central clearing. In a centrally cleared market, there may be less risk when participation is high. This helps to explain why regulators have put in place requirements for fair, open and risk-based access criteria.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): G, G1, G18, G2, G21, L, L1, L13
• November 15, 2012

  Monetary Policy and the Risk-Taking Channel: Insights from the Lending Behaviour of Banks

  Bank of Canada Review - Autumn 2012 Teodora Paligorova, Jesus Sierra

  The financial crisis of 2007-09 and the subsequent extended period of historically low real interest rates have revived the question of whether economic agents are willing to take on more risk when interest rates remain low for a prolonged time period. This increased appetite for risk, which causes economic agents to search for investment assets and strategies that generate higher investment returns, has been called the risk-taking channel of monetary policy. Recent academic research on banks suggests that lending policies in times of low interest rates can be consistent with the existence of a risk-taking channel of monetary policy in Europe, South America, the United States and Canada. Specifically, studies find that the terms of loans to risky borrowers become less stringent in periods of low interest rates. This risk-taking channel may amplify the effects of traditional transmission mechanisms, resulting in the creation of excessive credit.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E5, E58, G, G2, G21
• November 15, 2012

  The Changing Landscape for Retail Payments in Canada and the Implications for the Demand for Cash

  Bank of Canada Review - Autumn 2012 Carlos Arango, Kim Huynh, Ben Fung, Gerald Stuber

  Over 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.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): C, C8, C83, E, E4, E42, G, G2, G28
• August 16, 2012

  Global Risk Premiums and the Transmission of Monetary Policy

  Bank of Canada Review - Summer 2012 Gregory Bauer, Antonio Diez de los Rios

  An important channel in the transmission of monetary policy is the relationship between the short-term policy rate and long-term interest rates. Using a new term-structure model, the authors show that the variation in long-term interest rates over time consists of two components: one representing investor expectations of future policy rates, and another reflecting a term-structure risk premium that compensates investors for holding a risky asset. The time variation in the term-structure risk premium is countercyclical and largely determined by global macroeconomic conditions. As a result, long-term rates are pushed up during recessions and down during times of expansion. This is an important phenomenon that central banks need to take into account when using short-term rates as a policy tool.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12, G15
• August 16, 2012

  An Analysis of Indicators of Balance-Sheet Risks at Canadian Financial Institutions

  Bank of Canada Review - Summer 2012 David Xiao Chen, H. Evren Damar, Hani Soubra, Yaz Terajima

  This article examines four indicators of balance-sheet risks—leverage, capital, asset liquidity and funding—among different types of financial institutions in Canada over the past three decades. It also discusses relevant developments in the banking sector that could have contributed to the observed dynamics. The authors find that the various risk indicators decreased during the period for most of the non-Big Six financial institutions, but remained relatively unchanged for the Big Six banks. In addition, the balance-sheet risk indicators became more heterogeneous across financial institutions. The observed overall decline and increased heterogeneity follow certain regulatory changes, such as the introduction of the liquidity guidelines on funding in 1995 and the implementation of bank-specific leverage requirements in 2000. Given that these regulations required more balance-sheet risk management, they have likely contributed to the increased resilience of the banking sector.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): G, G2, G21, G28
• May 17, 2012

  Understanding Systemic Risk in the Banking Sector: A MacroFinancial Risk Assessment Framework

  Bank of Canada Review - Spring 2012 Céline Gauthier, Moez Souissi

  The MacroFinancial Risk Assessment Framework (MFRAF) models the interconnections between liquidity and solvency in a financial system, with multiple institutions linked through an interbank network. The MFRAF integrates funding liquidity risk as an endogenous outcome of the interactions between solvency risk and the liquidity profiles of banks, which is a complementary approach to the new […]

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E4, E44, G, G0, G01, G2, G21
• May 17, 2012

  Conference Summary: New Developments in Payments and Settlement

  Bank of Canada Review - Spring 2012 Ben Fung, Miguel Molico

  The 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 […]

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E4, E42, G, G2, G28, L, L8, L81
• February 23, 2012

  Household Insolvency in Canada

  Bank of Canada Review - Winter 2011-2012 Jason Allen, H. Evren Damar

  With increasing levels of household debt in recent years, the number of households that may be vulnerable to a negative economic shock is rising as well. Decisions made by both the debtor and the creditor can contribute to insolvency. This article presents some stylized facts about insolvency in Canada’s household sector and analyzes the role of creditors in insolvencies. The average debt of an individual filing for bankruptcy is more than 1.5 times that of an average Canadian household; bankruptcy filers tend to be unemployed or in low-wage jobs, and are typically renters. The article reports that banks that approve more loans per branch, which is interpreted as less-intensive use of soft information (such as the loan officer’s assessment of the applicant’s character), experience more client bankruptcies. This finding has important policy implications, because financial institutions that do not use soft information risk further deterioration in their lending portfolios.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): D, D4, G, G2