Bank of Canada Review - Spring 2011

May 19, 2011
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This special issue of the Review, “Lessons from the Financial Crisis,” examines the recent research on the role of liquidity in the financial system and on the public policy responses that aimed to restore stability to the financial system during the crisis and to foster economic recovery.

Supplementary article: Paying with Polymer: Developing Canada’s New Bank Notes
Content Type(s): Publications, Bank of Canada Review
May 19, 2011

Understanding and Measuring Liquidity Risk: A Selection of Recent Research

Bank of Canada Review - Spring 2011 Céline Gauthier, Hajime Tomura
During the recent financial crisis, one of the forces set in motion by the initial losses on subprime-mortgage loans was a significant decline in the market liquidity of assets and in the ability of financial institutions to obtain funding in wholesale markets. In this article, the authors summarize recent research that clarifies the role of liquidity in destabilizing the financial system and examine the implications of this research for the recently announced financial system reforms, including Basel III.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Financial system regulation and policies
May 19, 2011

Unconventional Monetary Policy: The International Experience with Central Bank Asset Purchases

Bank of Canada Review - Spring 2011 Sharon Kozicki, Lena Suchanek, Eric Santor
As part of their policy response to the financial crisis of 2007–09, central banks introduced numerous unprecedented monetary policy measures to provide monetary easing. This article defines and documents these measures, focusing on central bank asset purchases and their impact on central bank balance sheets. It then discusses the challenges of identifying the effects of these measures and explores possible exit strategies. The potential costs of these policies are also analyzed, as well as the broader implications for monetary policy frameworks.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Financial markets, International topics, Monetary policy framework
May 19, 2011

Lessons from the Use of Extraordinary Central Bank Liquidity Facilities

Bank of Canada Review - Spring 2011 Stéphane Lavoie, Alex Sebastian, Virginie Traclet
The recent crisis was characterized by widespread deterioration in funding conditions, as well as impairment of the mechanism through which liquidity is normally redistributed within the financial system. Central banks responded with extraordinary measures. This article examines the provision of liquidity by central banks during the crisis as they adapted their existing facilities and introduced new ones, while encouraging a return to private markets and mitigating moral hazard. A review of this experience illustrates the importance of clear principles for intervention, a flexible operating framework, and clear communication and co-operation by central banks. By exposing the degree of interdependence of financial institutions and markets, the crisis highlighted the need for reforms aimed at improving the infrastructure supporting core funding markets and the liquidity of individual institutions.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Lender of last resort
May 19, 2011

Central Bank Collateral Policy: Insights from Recent Experience

Bank of Canada Review - Spring 2011 Lorie Zorn, Alejandro García
The collateral policy of central banks played a critical role during the recent financial crisis, as they worked to bolster liquidity and alleviate the funding pressures facing financial institutions. This article examines central bank collateral policy and discusses three areas in which central banks can use their collateral policy to influence financial market practices: promoting greater transparency for securitized products, improving practices related to credit risk, and reducing procyclicality in the management of market risk.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Payment clearing and settlement systems
May 19, 2011

Supplementary article: Paying with Polymer: Developing Canada’s New Bank Notes

Bank of Canada Review - Spring 2011 Charles Spencer
In this article, author Charles Spencer reviews the complex process of developing the new series, which represents a dramatic change for Canada. The leading-edge security features made possible by the new substrate, the cost savings of the move to a polymer base and the environmental advantages of the new notes are also examined.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Bank notes, Credibility, Payment clearing and settlement systems