Rishi Vala is an Economist in the Financial Markets Department at the Bank of Canada. His research focuses on the financial stability implications of different non-bank financial institutions.
We examine how life insurers manage liquidity risks created by their business model. We find that Canadian life insurers did not face significant liquidity draws and continued their usual investment behaviour during the COVID-19 crisis and as interest rates increased in 2022.
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.
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.
