December 10, 2014 Exchange-Traded Funds: Evolution of Benefits, Vulnerabilities and Risks Financial System Review - December 2014 Ian Foucher, Kyle Gray Ian Foucher and Kyle Gray explain the different types of exchange-traded funds (ETFs), which present both benefits and risks for investors. They discuss ways in which the risk characteristics of certain ETF products could have broader implications for the financial system, and describe the evolution of ETF market structure and regulation in different jurisdictions as authorities try to mitigate risks related to ETFs. Content Type(s): Publications, Financial System Review articles Topic(s): Financial markets, Financial stability, Market structure and pricing JEL Code(s): G, G1, G14, G18, G2, G20
December 10, 2014 Cyber Security: Protecting the Resilience of Canada’s Financial System Financial System Review - December 2014 Harold Gallagher, Wade McMahon, Ron Morrow 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. Content Type(s): Publications, Financial System Review articles Topic(s): Financial stability, Financial system regulation and policies, Payment clearing and settlement systems JEL Code(s): G, G2, G20, G23, G28
Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective Staff Discussion Paper 2014-6 Stephen S. Poloz This paper discusses how central banking is evolving in light of recent experience, with particular emphasis on the incorporation of uncertainty into policy decision-making. Content Type(s): Staff research, Staff discussion papers Topic(s): Economic models, Financial stability, Monetary policy and uncertainty, Monetary policy communications, Monetary policy framework JEL Code(s): C, C5, C50, E, E3, E37, E5, E6, E61
Predicting Financial Stress Events: A Signal Extraction Approach Staff Working Paper 2014-37 Ian Christensen, Fuchun Li The objective of this paper is to propose an early warning system that can predict the likelihood of the occurrence of financial stress events within a given period of time. To achieve this goal, the signal extraction approach proposed by Kaminsky, Lizondo and Reinhart (1998) is used to monitor the evolution of a number of economic indicators that tend to exhibit an unusual behaviour in the periods preceding a financial stress event. Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial stability JEL Code(s): C, C1, C14, C4, E, E3, E37, E4, E47, F, F3, F36, F37, G, G0, G01, G1, G17
Removal of the Unwinding Provisions in the Automated Clearing Settlement System: A Risk Assessment Staff Discussion Paper 2014-4 Nicholas Labelle, Varya Taylor A default in the Automated Clearing Settlement System (ACSS) occurs when a Direct Clearer is unable to settle its final obligation. Content Type(s): Staff research, Staff discussion papers Topic(s): Financial stability, Payment clearing and settlement systems JEL Code(s): C, C1, C15, G, G0, G01, G2, G3
Information, Amplification and Financial Crisis Staff Working Paper 2014-30 Ali Kakhbod, Toni Ahnert We propose a parsimonious model of information choice in a global coordination game of regime change that is used to analyze debt crises, bank runs or currency attacks. A change in the publicly available information alters the uncertainty about the behavior of other investors. Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial stability JEL Code(s): D, D8, D83, G, G0, G01
Filling in the Blanks: Network Structure and Interbank Contagion Staff Working Paper 2014-26 Kartik Anand, Ben Craig, Goetz von Peter The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial institutions, Financial stability JEL Code(s): C, C6, C63, D, D8, D85, G, G2, G21, L, L1, L14
June 12, 2014 Stress Testing the Canadian Banking System: A System-Wide Approach Financial System Review - June 2014 Kartik Anand, Guillaume Bédard-Pagé, Virginie Traclet Stress testing is an important tool used by financial authorities and entities around the world to evaluate potential risks to the financial system. Kartik Anand, Guillaume Bédard-Pagé and Virginie Traclet discuss different stress-testing approaches, with emphasis on the innovative and analytically rigorous model developed by the Bank of Canada: the MacroFinancial Risk Assessment Framework (MFRAF). They also present the stress-test results obtained in the context of the 2013 Canada Financial Sector Assessment Program led by the International Monetary Fund, including the important contributions made by the use of MFRAF in the exercise. Content Type(s): Publications, Financial System Review articles Topic(s): Financial institutions, Financial stability JEL Code(s): C, C6, C63, G, G0, G01, G2, G21
Interest on Cash, Fundamental Value Process and Bubble Formation on Experimental Asset Markets Staff Working Paper 2014-18 Giovanni Giusti, Janet Hua Jiang, Yiping Xu We study the formation of price bubbles on experimental asset markets where cash earns interest. There are two main conclusions. Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, Financial stability JEL Code(s): C, C9, C90, G, G1, G10
Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs Staff Working Paper 2014-12 Jasmina Arifovic, Janet Hua Jiang A "sunspot" is a variable that has no direct impact on the economy’s fundamental condition, such as preferences, endowments or technologies, but may nonetheless affect economic outcomes through the expectations channel as a coordination device. This paper investigates how people react to sunspots in the context of a bank-run game in a controlled laboratory environment. Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability JEL Code(s): C, C9, C91, C92, D, D8, D80, E, E5, E58, G, G2, G20