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We estimate a panel error correction model for loan loss provisions, using unique supervisory data on flow of funds into and out of the allowance for loan losses of 25 Dutch banks in the post-2008 crisis period. We find that these banks aim for an allowance of 49% of impaired loans.

Monetary policy and financial stability are closely intertwined, and the resilience of the financial system carries weight in this relationship. This paper explores whether the financial system is more resilient as a result of the G20’s post-crisis agenda for financial regulatory reform.

This paper considers the problem of estimating a linear model between two heavy-tailed variables if the explanatory variable has an extremely low (or high) value. We propose an estimator for the model coefficient by exploiting the tail dependence between the two variables and prove its asymptotic properties.

We propose an early warning model for predicting the likelihood of a financial stress event for a given future time, and examine whether credit plays an important role in the model as a non-linear propagator of shocks.

Should monetary policy lean against housing market booms? We approach this question using a small-scale, regime-switching New Keynesian model, where housing market crashes arrive with a logit probability that depends on the level of household debt.

We model the asset-opacity choice of an intermediary subject to rollover risk in wholesale funding markets. Greater opacity means investors form more dispersed beliefs about an intermediary’s profitability.

In this piece we show that a limit on the level of asset encumbrance and minimum capital requirements are effective tools for minimizing the incentive for banks to take excessive risk.

This paper introduces a new methodology to date systemic financial stress events in a transparent, objective and reproducible way. The financial cycle is captured by a monthly country-specific financial stress index.

The authors present the four common cyclical vulnerabilities that appear in financial systems, providing examples of qualitative and quantitative indicators used to monitor these vulnerabilities across different sectors. They also discuss other inputs to the vulnerability assessment and to the internal process used at the Bank of Canada for identifying, evaluating and communicating vulnerabilities and risks, and highlight some of the key challenges in assessing financial system vulnerabilities and risks.

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.