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The Governing Council judges that the risks to the Canadian financial system have decreased somewhat relative to the December FSR, but that the overall level of risk remains high. The key risks are similar to those highlighted in December, and emanate primarily from the external environment.

In the interbank market, banks will sometimes trade below the central bank's deposit rate. We explain this anomaly using a theory based on market frictions and relationship lending.

Because commodity prices help determine Canada’s terms of trade, employment, income and, ultimately, inflation, it is important to understand what causes them to fluctuate. Since the early 1900s, there have been four commodity price supercycles—which we define as extended periods of boom and bust that can take decades to complete. Now in its downswing phase, the current supercycle started after growth in China and other emerging-market economies in the mid-1990s resulted in an unexpected demand shock. The extent of this downswing depends on numerous factors that are presently uncertain.

Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.

Since 2009, the G-20 Framework for Strong, Sustainable and Balanced Growth has provided a mechanism for international macroeconomic policy coordination. The Framework has had some successes, including agreement on objectives for fiscal consolidation. However, post-crisis global growth has been neither strong nor balanced. Progress has also been slow in developing credible fiscal consolidation plans in some advanced countries and in increasing exchange rate flexibility in certain emerging economies. A stronger peer review process and enhanced analysis of international spillovers would increase the Framework’s influence on member policies.

Understanding the size of sectoral links is crucial to predicting the impact of a crisis on the whole economy. We show that statistical learning techniques substantially outperform traditional estimation techniques when measuring large networks of these links.

Chief Operating Office Filipe Dinis outlines how the Bank is strengthening its cyber defenses and helping improve the financial system’s cyber resilience and its ability to recover quickly from attacks.

We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions.

Deputy Governor Toni Gravelle discusses the Bank’s latest interest rate announcement and explains how efforts to keep financial markets functioning through the COVID-19 crisis will lay a solid foundation for economic recovery