Mandatory Retention Rules and Bank Risk Staff Working Paper 2023-3 Yuteng Cheng This paper studies, theoretically and empirically, the unintended consequences of mandatory retention rules in securitization. It proposes a novel model showing that while retention strengthens monitoring, it may also encourage banks to shift risk. Content Type(s): Staff research, Staff working papers Topic(s): Credit risk management, Financial institutions, Financial system regulation and policies JEL Code(s): G, G2, G21, G28
Geographical and Cultural Proximity in Retail Banking Staff Working Paper 2023-2 Santiago Carbo-Valverde, Héctor Pérez Saiz, Hongyu Xiao This paper measures how both geographical and cultural proximity of bank branches affect household credit choice and pricing. For credit products that require high levels of ex-ante screening, we find that both proximities can complement each other in reducing the cost of providing soft information, thereby increasing credit access. Content Type(s): Staff research, Staff working papers Topic(s): Credit and credit aggregates, Financial institutions, Financial services JEL Code(s): D, D8, D82, D83, G, G2, G20, G21, R, R2, R22, Z, Z1, Z10, Z13
Financial Constraints and Corporate Investment in China Staff Discussion Paper 2022-22 Kun Mo, Michel Soudan Financial constraints deter firms from pursuing optimal investment plans. In China, we find privately owned firms face greater financial constraints than state-owned enterprises (SOEs). This can be explained by our finding that lenders appear less concerned about the credit risk of SOEs, which causes distortions in the allocation of credit. Content Type(s): Staff research, Staff discussion papers Topic(s): Financial markets, Firm dynamics JEL Code(s): E, E2, E22, G, G1, G3
Potential benefits and key risks of fiat-referenced cryptoassets Staff Analytical Note 2022-20 Hugh Ding, Natasha Khan, Bena Lands, Cameron MacDonald, Laura Zhao Cryptoassets that reference a national currency (commonly known as stablecoins) aim to peg their value to the reference currency and typically use a reserve of traditional financial assets to maintain the peg. The market value of these fiat-referenced cryptoassets has grown more than thirtyfold between early 2020 and mid-2022. We explore some of their potential benefits and key risks. Content Type(s): Staff research, Staff analytical notes Topic(s): Digital currencies and fintech, Financial institutions, Financial markets, Financial system regulation and policies, Payment clearing and settlement systems JEL Code(s): E, E4, G, G2, G28, L, O, O3
Monetary Policy, Credit Constraints and SME Employment Staff Working Paper 2022-49 Julien Champagne, Émilien Gouin-Bonenfant We revisit an old question: how do financial constraints affect the transmission of monetary policy to the real economy? To answer this question, we propose a simple empirical strategy that combines firm-level employment and balance sheet data, identified monetary policy shocks and survey data on financing activities. Content Type(s): Staff research, Staff working papers Topic(s): Credit and credit aggregates, Econometric and statistical methods, Firm dynamics, Labour markets, Monetary policy JEL Code(s): E, E2, E3, E4, E43, E5, E52, G, G3
Regulatory Requirements of Banks and Arbitrage in the Post-Crisis Federal Funds Market Staff Working Paper 2022-48 Rodney J. Garratt, Sofia Priazhkina This paper explains the nature of interest rates in the U.S. federal funds market after the 2007-09 financial crisis. We build a model of the over-the-counter lending market that incorporates new aspects of the financial system: abundance of liquidity, different regulatory standards for banks, and arbitrage opportunities created by limited access to the facility granting interest on excess reserves. Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Economic models, Financial institutions, Financial markets, Financial stability, Financial system regulation and policies, Wholesale funding JEL Code(s): E, E4, E42, E5, E58, G, G2, G28
Stablecoins and Their Risks to Financial Stability Staff Discussion Paper 2022-20 Cameron MacDonald, Laura Zhao What risks could stablecoins pose to the financial system? We argue that the stabilization mechanisms of stablecoins give rise to the risk of confidence runs, which can propagate to broader cryptoasset markets and the traditional financial sector. We also argue that stablecoins can contribute to financial stability risks by facilitating the buildup of leverage and liquidity mismatch in decentralized finance. Such risks cannot be addressed by ensuring the price stability of stablecoins alone. Finally, we explore the potential implications of stablecoins for the current system of bank-intermediated credit and for monetary policy. Content Type(s): Staff research, Staff discussion papers Topic(s): Digital currencies and fintech, Financial institutions, Financial markets, Financial stability, Financial system regulation and policies JEL Code(s): E, E4, E42, E44, E5, E58, G, G2, G23
November 22, 2022 Tracking the financial vulnerabilities of households and the housing market The Bank of Canada is publishing a new set of indicators of financial vulnerabilities. This will allow households, the private sector, financial authorities and governments to better understand and monitor the evolution of two key vulnerabilities in the financial system: the elevated level of household indebtedness and high house prices. Content Type(s): Publications, Financial System Hub articles Topic(s): Credit and credit aggregates, Financial stability, Housing, Monetary and financial indicators, Recent economic and financial developments, Sectoral balance sheet JEL Code(s): D, D1, D14, D8, D84, E, E5, G, G2, G21, R, R2, R21
Variable-rate mortgages with fixed payments: Examining trigger rates Staff Analytical Note 2022-19 Stephen Murchison, Maria teNyenhuis We estimate the share of variable-rate mortgages with fixed payments that reached the so-called trigger rate—the interest rate at which mortgage payments no longer cover the principal. Amid rising interest rates, this share was close to 50% at the end of October 2022 and could potentially reach 65% in 2023. Content Type(s): Staff research, Staff analytical notes Topic(s): Credit and credit aggregates, Financial institutions, Interest rates, Recent economic and financial developments JEL Code(s): D, D1, E, E4, E5, G, G2, G21
Considerations for the allocation of non-default losses by financial market infrastructures Staff Analytical Note 2022-16 Daniele Costanzo, Radoslav Raykov Non-default losses of financial market infrastructures (FMIs) have gained attention due to their potential impacts on FMIs and FMI participants, and the lack of a common approach to address them. A key question is, who should absorb these losses? Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial system regulation and policies JEL Code(s): G, G2, G23, G28, G3, G32, G33