Financial Institutions
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Prudential Liquidity Regulation in Banking—A Literature Review
Prudential liquidity requirements are a relatively recent regulatory tool on the international front, introduced as part of the Basel III accord in the form of a liquidity coverage ratio (LCR) and a net stable funding ratio (NSFR). I first discuss the rationale for regulating bank liquidity by highlighting the market failures that it addresses while reviewing key theoretical contributions to the literature on the motivation for prudential liquidity regulation. -
The Characteristics of Uninsured Mortgages and their Securitization Potential
Following changes to housing finance policies that target insured mortgages, uninsured mortgage credit has been growing. This robust growth creates a larger pool of mortgages that may be suitable for private-label residential mortgage-backed securities (RMBS). -
Redemption Runs in Canadian Corporate Bond Funds?
Mutual funds employ a host of tools to manage redemption run risk. However, our results suggest that Canadian corporate bond funds may be vulnerable to redemption runs, especially when they are less liquid and when market volatility is high. -
June 18, 2018 Rebooting Reference Rates
Deputy Governor Lynn Patterson discusses the efforts in multiple jurisdictions to strengthen LIBOR and similar benchmarks and work underway in Canada to consider a new risk-free benchmark for the Canadian dollar market. -
A Primer on the Canadian Bankers’ Acceptance Market
This paper discusses how the bankers’ acceptance (BA) market in Canada is organized and its essential link to the Canadian Dollar Offered Rate (CDOR). Globally, BAs are a niche product used only in a limited number of jurisdictions. -
June 7, 2018 The Bank of Canada’s Financial System Survey
This report presents the details of a new semi-annual survey that will improve the Bank of Canada’s surveillance across the financial system and deepen efforts to engage with financial system participants. The survey collects expert opinions on the risks to and resilience of the Canadian financial system as well as on emerging trends and financial innovations. The report presents an overview of the survey and provides high-level results from the spring 2018 survey. -
June 7, 2018 Covered Bonds as a Source of Funding for Banks’ Mortgage Portfolios
The author traces developments in the Canadian covered bond market. Covered bonds could be a valuable way to provide a stable and diverse source of funding, particularly for smaller banks. However, higher issuance could increase banks’ vulnerability to liquidity stress, with implications for the broader financial system. The author argues that these benefits and challenges can be balanced in a well-designed policy framework. -
June 7, 2018 Establishing a Resolution Regime for Canada’s Financial Market Infrastructures
This report highlights how an effective resolution regime promotes financial stability. It does this by ensuring that financial market infrastructures (FMIs) would be able to continue to provide their critical functions during a period of stress when an FMI’s own recovery measures were failing. The report explains the Bank of Canada’s new role as the resolution authority for FMIs, which will further bolster financial system resilience. -
Interest Rate and Renewal Risk for Mortgages
In this note, we explore two types of risk faced by holders of mortgages and home equity lines of credit (HELOCs) in the context of rising interest rates: interest rate risk and renewal risk. -
Customer Liquidity Provision in Canadian Bond Markets
This analytical note assesses the prevalence of liquidity provision by institutional investors in Canadian bonds. We find that the practice is not prevalent in Canada. Customer liquidity provision is more prevalent for less liquid bonds, on days when liquidity is already expensive or when there are larger trading volumes. In our interpretation, Canadian dealers draw on customer liquidity as a supplementary source of liquidity and only when necessary, given its cost.