James Chapman is the Deputy Managing Director in the Banking and Payments Department (BAP) at the Bank of Canada. James received a Ph.D. in economics and a MSc in statistics from the University of Iowa in 2006. He joined the Bank of Canada as a senior analyst in that year. James’s primary research focus has been on interbank market and financial market infrastructure issues such as liquidity risk and credit risk in large-value payment systems as well as the efficiency of interbank markets. Recently James’s research focus has evolved to include research on fintech related topics. These topics include the use of distributed ledger technology in financial market infrastructure, specifically the Bank’s Project Jasper, as well as questions related to digital currencies such as Bitcoin, Ethereum and initial coin offerings. From March 2015 to October 2016 James was the research director at Payments Canada the operator of the core Canadian payments infrastructure.
We review the nascent but fast-growing literature on central bank digital currencies (CBDCs), focusing on their potential impacts on private banks. We evaluate these impacts in three areas of traditional banking: payments, lending and liquidity and maturity transformation. We also take a broader look at CBDCs and highlight two promising directions for future research.
The market for cryptoassets has exploded in size in the 10 years since bitcoin was launched. The technology underlying cryptoassets, blockchain, has also been held up as a technology that promises to transform entire industries.
The payments landscape in Canada is rapidly changing and will continue to evolve, fuelled by strong and persistent drivers. In Canada, the Canadian Payments Association (CPA) is on a path to modernize Canada’s core payment systems.
The authors consider the liquidity efficiency of Tranche 2 of the Large Value Transfer System (LVTS T2) by examining, through an empirical analysis, some plausible strategic reactions of individual participants to a systemwide shock to available liquidity in the system.
We use retail payment data in conjunction with machine learning techniques to predict the effects of COVID-19 on the Canadian economy in near-real time. Our model yields a significant increase in macroeconomic prediction accuracy over a linear benchmark model.
We present a simple model to study the risk sensitivity of capital regulation. A banker funds investment with uninsured deposits and costly capital, where capital resolves a moral hazard problem in the banker’s choice of risk.
Using 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.
We 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.
In 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.
We 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.
Given the increasing interdependence of both financial systems and attendant payment and settlement systems a vital question is what form should optimal policy take when there are two connected payment systems with separate regulators.
This paper develops a model of settlement system to study the endogenous structure of settlement networks, and the welfare consequences of clearing agent failure. The equilibrium degree of tiering is endogenously determined by the cost structure and the information structure.
In this paper, we investigate how liquidity conditions in Canada may affect domestic and/or foreign lending of globally active banks and whether this transmission is influenced by individual bank characteristics.
The Bank of Canada’s annual economic conference, held in October 2012, brought together experts from across Canada and around the world to discuss key issues concerning financial intermediation and vulnerabilities. The conference covered such topics as household finances and their relationship to financial stability, as well as bank regulation, securitization and shadow banking.
Central 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.
This report describes a joint endeavour between public and private sectors to explore a wholesale payment system based on distributed ledger technology (DLT). They find that a stand-alone DLT system is unlikely to be as beneficial as a centralized payment system in terms of core operating costs; however, it could increase financial system efficiency as a result of integration with the broader financial market infrastructure.
“Central Bank Haircut Policy” (with Jonathan Chiu and Miguel Molico) Annals of Finance, Vol. 7, No. 3, (August 2011), pages 319-348
“A Model of Tiered Settlement Networks” (with Jonathan Chiu and Miguel Molico) Journal of Money, Credit and Banking, Forthcoming
“Rediscounting Under Aggregate Risk with Moral Hazard” (with Antoine Martin) Journal of Money, Credit and Banking, Forthcoming
"Bounding Revenue Comparisons across Multi-Unit Auction Formats under ?-Best Response" (with David McAdams and Harry J. Paarsch) American Economic Review, Vol. 97, No. 2 (May 2007), pages 455-458.
"Which Bank is the 'Central' Bank? An Application of Markov Theory to the Canadian Large-Value Transfer System" (with Morten Bech and Rod Garratt), Journal of Monetary Economics, Vol. 57, No. 3 (April 2010), pages 352-363.