Financial system regulation and policies
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Potential benefits and key risks of fiat-referenced cryptoassets
Cryptoassets that reference a national currency (commonly known as stablecoins) aim to peg their value to the reference currency and typically use a reserve of traditional financial assets to maintain the peg. The market value of these fiat-referenced cryptoassets has grown more than thirtyfold between early 2020 and mid-2022. We explore some of their potential benefits and key risks. -
Regulatory Requirements of Banks and Arbitrage in the Post-Crisis Federal Funds Market
This paper explains the nature of interest rates in the U.S. federal funds market after the 2007-09 financial crisis. We build a model of the over-the-counter lending market that incorporates new aspects of the financial system: abundance of liquidity, different regulatory standards for banks, and arbitrage opportunities created by limited access to the facility granting interest on excess reserves. -
Stablecoins and Their Risks to Financial Stability
What risks could stablecoins pose to the financial system? We argue that the stabilization mechanisms of stablecoins give rise to the risk of confidence runs, which can propagate to broader cryptoasset markets and the traditional financial sector. We also argue that stablecoins can contribute to financial stability risks by facilitating the buildup of leverage and liquidity mismatch in decentralized finance. Such risks cannot be addressed by ensuring the price stability of stablecoins alone. Finally, we explore the potential implications of stablecoins for the current system of bank-intermediated credit and for monetary policy. -
Considerations for the allocation of non-default losses by financial market infrastructures
Non-default losses of financial market infrastructures (FMIs) have gained attention due to their potential impacts on FMIs and FMI participants, and the lack of a common approach to address them. A key question is, who should absorb these losses? -
Forecasting Banks’ Corporate Loan Losses Under Stress: A New Corporate Default Model
We present a new corporate default model, one of the building blocks of the Bank of Canada’s bank stress-testing infrastructure. The model is used to forecast corporate loan losses of the Canadian banking sector under stress. -
COVID-19 and Financial Stability: Practice Ahead of Theory
The COVID-19 pandemic uncovered policy challenges related to the economic measures that were taken to support the economy. Two years later, we attempt to identify the broader impact of these measures and research that needs to follow. -
Cyber Risk and Security Investment
We develop a principal-agent model of cyber-attacking with fee-paying clients who delegate security decisions to financial platforms. We derive testable implications about clients’ vulnerability to cyber attacks and about the fees charged. -
Unregulated Lending, Mortgage Regulations and Monetary Policy
This paper evaluates the effectiveness of macroprudential policies when regulations are uneven across mortgage lender types. We look at credit tightening that results from macroprudential regulations and examine how much of it is counteracted by credit shifting to unregulated lenders. We also study the impact of monetary policy tightening when some lenders are unregulated. -
Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification
We provide empirical evidence of effects to the aggregate economy from surprises about financial intermediaries’ net worth based on a high-frequency identification strategy. We estimate that news of a 1% decline in intermediaries’ net worth leads to a 0.2%–0.4% decrease in the market value of nonfinancial firms.