A retail central bank digital currency denominated in Canadian dollars could, in theory, create competition for bank deposit funding.
Staff analytical notes
Staff discussion papers
We offer relevant authorities a three-step assessment framework they can use to understand, identify and quantify the risks associated with stablecoin and other cryptocurrency arrangements.
Security prices contain valuable information that can be used to make a wide variety of economic decisions. To extract this information, a model is required that relates market prices to the desired information, and that ideally can be implemented using timely and low-cost methods.
Understanding the nature of credit risk has important implications for financial stability. Since authorities – notably, central banks – focus on risks that have systemic implications, it is crucial to develop ways to measure these risks.
Staff working papers
We propose a framework that allows a portfolio manager to quantify the probability of simultaneous losses in multiple assets of a collateral portfolio. Using this framework, we propose a methodology to conduct stress tests on the market value of the portfolio of collateral when undesirable extreme dependence occurs.
Risk-Cost Frontier and Collateral Valuation in Securities Settlement Systems for Extreme Market EventsThe authors examine how the use of extreme value theory yields collateral requirements that are robust to extreme fluctuations in the market price of the asset used as collateral.
Bank of Canada Review articles
May 19, 2011 The 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.
September 11, 2009 Corporate bond spreads worldwide have widened markedly since the beginning of the credit crisis in 2007. This article examines default and liquidity risk–the main components of the corporate bond spread–for Canadian firms that issue bonds in the U.S. market, focusing in particular on their evolution during the credit crisis. They find that, during this period, the liquidity component increased more for speculative-grade bonds than it did for investment-grade bonds, consistent with a "flight-to-quality" phenomenon. An important implication of their results for policy-makers seeking to address problems in credit markets is that the liquidity risk in corporate spreads for investment and speculative bonds behaves differently than the default risk, especially during crisis episodes.