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Éric Chouinard and Graydon Paulin review the progress to date in implementing Basel III, the new framework of global regulatory standards for the banking sector developed by the Basel Committee on Banking Supervision. The report highlights the expected net benefits of implementing Basel III, as well as the challenges in ensuring international consistency in measuring the risk-weighted capital of banks. It includes a discussion on how implementing Basel III has affected the banking system in Canada and other important jurisdictions, and demonstrates the need for ongoing assessment of the effects on the financial system and the macroeconomy.

Harold Gallagher, Wade McMahon and Ron Morrow examine the various sources of cyber attacks and their potential for systemic risk. Against this background, the report highlights efforts being made to protect against cyber-security threats, including individual and collective actions by financial institutions and financial market infrastructures, as well as initiatives by international organizations, regulatory authorities and governments. The authors then describe the coordination, under the Joint Operational Resilience Management program, of private and public sector actions in Canada for managing and testing capabilities during severe operational events such as cyber attacks.

We enhance benchmarks for assessing strength in the Canadian labour market. We find the labour market remains tight despite recent strong increases in labour supply, including among prime-working-age women. We also assess the anticipated easing in labour conditions in a context of high population growth.

This paper shows that changes in market participants’ fear of rare events implied by crude oil options contribute to oil price volatility and oil return predictability. Using 25 years of historical data, we document economically large tail risk premia that vary substantially over time and significantly forecast crude oil futures and spot returns.

The LVTS is an electronic network for sending and receiving large-value payments. It is expected to become operational in the first half of 1999. Major chartered banks and other large deposit-taking institutions will provide access to the system for their clients in the financial, corporate and government sectors. Canada’s LVTS exceeds world standards for risk control in large-value systems. The author explains how this is achieved through the netting, bilateral and multilateral credit limits, collateral, and loss-sharing procedures used in the event of a default, and, as a last resort, a guarantee by the Bank of Canada. The LVTS gives participating institutions certainty of settlement for their LVTS positions every day, even if one or more participants default. This greatly reduces systemic risk in the financial system. Moreover, the LVTS supports finality of payment; that is, it makes funds unconditionally and irrevocably available to the receiver. Finality is highly desirable when the amount of the payment is substantial, or when exact timing is critical. Since the LVTS will carry the great majority of the value of all payments in Canada, it should be considered the core of the national payments system.

In this analytical note, we provide a comprehensive assessment of the complex structural adjustment facing the Canadian economy following the commodity price decline since mid-2014. We quantify separately the impacts coming from the commodity sector restructuring and the broader effect of significantly lower terms of trade.

Repurchase agreements (repos), reverse repos and securities lending markets permit a variety of institutions to conduct a broad range of financial transactions efficiently. In addition, they allow financial market participants to augment the returns on their cash holdings and securities portfolios. Canadian repo and securities lending markets have grown rapidly in recent years, following the expansion of such markets in major financial centres around the world; the volume of transactions in Canada now averages between $35 billion and $50 billion per day. The author notes that structural and regulatory changes in Canada have played important roles in promoting this growth. The vast majority of repo and securities lending transactions involve securities issued by the Government of Canada—principally Government of Canada bonds.

Credit derivatives are a useful tool for lenders who want to reduce their exposure to a particular borrower but are unwilling to sell their claims on that borrower. Without actually transferring ownership of the underlying assets, these contracts transfer risk from one counterparty to another. Commercial banks are the major participants in this growing market, using these transactions to diversify their portfolios of loans and other risky assets. The authors examine the size and workings of this relatively new market and discuss the potential of these transactions for distorting existing incentives for risk management and risk monitoring.

Thomas Thorn and Harri Vikstedt examine the efforts being taken internationally and in Canada to enhance the governance and integrity of financial benchmarks. The report provides an overview of how interbank interest rate benchmarks are set and describes the weaknesses in the process that were exposed by the financial crisis. It also explains recent policy developments designed to make global and Canadian interbank benchmarks more robust.