Financial stability
-
-
November 17, 2011
Liquidity Provision and Collateral Haircuts in Payments Systems
Central banks play a pivotal role in well-functioning payments systems by providing liquidity via collateralized lending. This article discusses the role of collateral and haircut policy in central bank lending, as well as the distinguishing features of the central bank’s policy relative to private sector practices. It presents a model that explicitly incorporates the unique role of central banks in the payments system and argues that central banks must consider how their haircut policies affect the relative price and liquidity of assets, the market’s asset allocation, and the likelihood of participants to default. Furthermore, under extraordinary circumstances, there is a rationale for the central bank to temporarily reduce haircuts or broaden the list of eligible collateral to mitigate the shortage of liquidity in the market. -
Measuring Systemic Importance of Financial Institutions: An Extreme Value Theory Approach
In this paper, we define a financial institution’s contribution to financial systemic risk as the increase in financial systemic risk conditional on the crash of the financial institution. The higher the contribution is, the more systemically important is the institution for the system. -
Lessons from International Central Counterparties: Benchmarking and Analysis
Since the financial crisis, attention has focused on central counterparties (CCPs) as a solution to systemic risk for a variety of financial markets, ranging from repurchase agreements and options to swaps. -
May 19, 2011
Understanding and Measuring Liquidity Risk: A Selection of Recent Research
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. -
May 19, 2011
Lessons from the Use of Extraordinary Central Bank Liquidity Facilities
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. -
May 19, 2011
Central Bank Collateral Policy: Insights from Recent Experience
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. -
February 17, 2011
Adverse Selection and Financial Crises
The recent financial crisis has highlighted the importance of adverse selection as a contributing factor to financial market instability. -
February 17, 2011
Conference Summary: Financial Globalization and Financial Instability
The Bank of Canada’s annual conference, held in October 2010, brought together leading researchers from universities and central banks around the world. -
Financial Spillovers Across Countries: The Case of Canada and the United States
The authors investigate financial spillovers across countries with an emphasis on the effect of shocks to financial conditions in the United States on financial conditions and economic activity in Canada. These questions are addressed within a global vector autoregression model.