Financial institutions

• The Macroeconomic Implications of Changes in Bank Capital and Liquidity Requirements in Canada: Insights from the BoC-GEM-FIN

  Staff Discussion Paper 2010-16 Carlos De Resende, Ali Dib, Nikita Perevalov

  The authors use simulations within the BoC-GEM-FIN, the Bank of Canada's version of the Global Economy Model with financial frictions in both the demand and supply sides of the credit market, to investigate the macroeconomic implications of changing bank regulations on the Canadian economy.

  Content Type(s): Staff research, Staff discussion papers Research Topic(s): Economic models, Financial institutions, Financial stability, International topics JEL Code(s): E, E3, E32, E4, E44, E5, G, G1, G2

• Adverse Selection, Liquidity, and Market Breakdown

  Staff Working Paper 2010-32 Koralai Kirabaeva

  This paper studies the interaction between adverse selection, liquidity risk and beliefs about systemic risk in determining market liquidity, asset prices and welfare. Even a small amount of adverse selection in the asset market can lead to fire-sale pricing and possibly to a market breakdown if it is accompanied by a flight-to-liquidity, a misassessment of systemic risk, or uncertainty about asset values.

  Content Type(s): Staff research, Staff working papers Research Topic(s): Financial institutions, Financial markets, Financial stability JEL Code(s): D, D8, D82, G, G0, G01, G1, G11

• Losses from Simulated Defaults in Canada's Large Value Transfer System

  Staff Discussion Paper 2010-14 Nellie Zhang, Tom Hossfeld

  The Large Value Transfer System (LVTS) loss-sharing mechanism was designed to ensure that, in the event of a one-participant default, the collateral pledged by direct members of the system would be sufficient to cover the largest possible net debit position of a defaulting participant. However, the situation may not hold if the indirect effects of the defaults are taken into consideration, or if two participants default during the same payment cycle.

  Content Type(s): Staff research, Staff discussion papers Research Topic(s): Financial institutions, Financial stability, Payment clearing and settlement systems JEL Code(s): E, E4, E47, G, G2, G21

• Regulatory Constraints on Bank Leverage: Issues and Lessons from the Canadian Experience

  Staff Discussion Paper 2009-15 Étienne Bordeleau, Allan Crawford, Christopher Graham

  The Basel capital framework plays an important role in risk management by linking a bank's minimum capital requirements to the riskiness of its assets. Nevertheless, the risk estimates underlying these calculations may be imperfect, and it appears that a cyclical bias in measures of risk-adjusted capital contributed to procyclical increases in global leverage prior to the recent financial crisis.

  Content Type(s): Staff research, Staff discussion papers Research Topic(s): Financial institutions, Financial stability, Financial system regulation and policies JEL Code(s): G, G0, G01, G2, G21, G28
• September 11, 2009

  Bank of Canada Liquidity Actions in Response to the Financial Market Turmoil

  Bank of Canada Review - Autumn 2009 Lorie Zorn, Carolyn A. Wilkins, Walter Engert

  In response to the financial crisis of 2007-09, the Bank of Canada intervened repeatedly to stabilize the financial system and limit the repercussions of the crisis on the Canadian economy. This article reviews the extraordinary liquidity measures taken by the Bank during this period and the principles that guided the Bank's interventions. A preliminary assessment of the term liquidity facilities provided by the Bank suggests that they were an important source of liquidity support for some financial institutions and, on a broader basis, served to reduce uncertainty among market participants about the availability of liquidity, as well as helping to promote a return to well-functioning money markets.

  Content Type(s): Publications, Bank of Canada Review articles Research Topic(s): Financial institutions, Financial markets, Financial stability
• September 11, 2009

  Agency Conflicts in the Process of Securitization

  Bank of Canada Review - Autumn 2009 Teodora Paligorova

  Recent evidence finds a positive association between the prevalence of loans of inferior quality and the growth in securitized products. Some attribute this development to the lack of incentives for originators to screen and monitor the performance of securitized loans; others stress that certain factors, such as balance-sheet management, also contributed to the problem, making it difficult to pin down the reason for the proliferation of such loans during the period of high securitization growth. The author reviews the conflicts of interest between participants in the securitization process that contributed to the ongoing financial turmoil and highlights the most recent policy measures and potential solutions for ameliorating these agency issues.

  Content Type(s): Publications, Bank of Canada Review articles Research Topic(s): Financial institutions, Financial markets
• June 11, 2009

  Collateral Management in the LVTS by Canadian Financial Institutions

  Bank of Canada Review - Summer 2009 Chris D'Souza

  This article examines the incentives for banks to hold various assets on their balance sheets for use as collateral when the opportunity cost of doing so can be high. Focusing on the five-year period (2002-07) that preceded the financial crisis, it examines the choices made by financial institutions among the assets that are pledged as collateral in Canada's Large Value Transfer System. This serves as a baseline for collateral-management practices during relatively normal times. The results of this study are important for policy-makers, especially the Bank of Canada, which is concerned both about the efficient functioning of fixed-income markets and about the credit risk it ultimately bears in insuring LVTS settlement. The results suggest that relative market liquidity and market-making capacity are important factors in the choice of securities pledged as collateral in the LVTS.

  Content Type(s): Publications, Bank of Canada Review articles Research Topic(s): Financial institutions, Financial markets, Payment clearing and settlement systems
• June 11, 2009

  The Complexities of Financial Risk Management and Systemic Risks

  Bank of Canada Review - Summer 2009 Frank Milne

  Risk-management systems in financial institutions have come under increasing scrutiny in light of the current financial crisis, resulting in calls for improvements and an increased role for regulators. Yet such objectives miss the intricacy at the heart of the risk-management process. This article outlines the complexity inherent in any modern risk-management system, which arises because there are shortcuts in the theoretical models that risk managers need to be aware of, as well as the difficulties in sensible calibration of model parameters. The author suggests that prudential regulation of such systems should focus on failures within the financial firm and in the market interactions between firms and reviews possible strategies that can improve the performance of risk management and microprudential regulatory practice.

  Content Type(s): Publications, Bank of Canada Review articles Research Topic(s): Financial institutions, Financial stability, Financial system regulation and policies

• Price Movements in the Canadian Residential Mortgage Market

  Staff Working Paper 2009-13 Jason Allen, Darcey McVanel

  The authors empirically analyze the price-setting behaviour of the major Canadian banks in the residential mortgage market over the period 1991–2007. They use weekly posted prices of the major mortgage providers to study the degree of competition in mortgage price setting.

  Content Type(s): Staff research, Staff working papers Research Topic(s): Financial institutions, Financial services JEL Code(s): D, D4, G, G2

• Labour Shares and the Role of Capital and Labour Market Imperfections

  Staff Discussion Paper 2009-2 Lena Suchanek

  In continental Europe, labour shares in national income have exhibited considerable variation since 1970. Empirical and theoretical research suggests that the evolution of labour markets and labour market imperfections can, in part, explain this phenomenon.

  Content Type(s): Staff research, Staff discussion papers Research Topic(s): Economic models, Financial institutions, Labour markets JEL Code(s): C, C7, C78, E, E2, E25, J, J6, J64