Stablecoins and Their Risks to Financial Stability Staff Discussion Paper 2022-20 Cameron MacDonald, Laura Zhao 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. Content Type(s): Staff research, Staff discussion papers Topic(s): Digital currencies and fintech, Financial institutions, Financial markets, Financial stability, Financial system regulation and policies JEL Code(s): E, E4, E42, E44, E5, E58, G, G2, G23
Considerations for the allocation of non-default losses by financial market infrastructures Staff Analytical Note 2022-16 Daniele Costanzo, Radoslav Raykov 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? Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial system regulation and policies JEL Code(s): G, G2, G23, G28, G3, G32, G33
How does the Bank of Canada’s balance sheet impact the banking system? Staff Analytical Note 2022-12 Daniel Bolduc-Zuluaga, Brad Howell, Grahame Johnson We examine how changes in the Bank of Canada’s balance sheet impact the banking system. Quantitative easing contributed to an increase in the size of the banking system’s balance sheet and an improvement in bank liquidity coverage ratios. Quantitative tightening is expected to partially reverse these impacts. The banking system will have to adjust its liquidity management strategy in response. Content Type(s): Staff research, Staff analytical notes Topic(s): Financial institutions, Financial stability, Monetary policy JEL Code(s): E, E5, E51, G, G2, G21, G23, G3, G32
Cyber Risk and Security Investment Staff Working Paper 2022-32 Toni Ahnert, Michael Brolley, David Cimon, Ryan Riordan 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. Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial services, Financial stability, Financial system regulation and policies, Payment clearing and settlement systems JEL Code(s): D, D7, D78, D8, D81, G, G1, G18, G2, G21, G23
Unregulated Lending, Mortgage Regulations and Monetary Policy Staff Working Paper 2022-28 Ugochi Emenogu, Brian Peterson 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. Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial system regulation and policies, Monetary policy transmission JEL Code(s): E, E4, E44, E5, E50, E52, E58, G, G2, G21, G23, G28
How well can large banks in Canada withstand a severe economic downturn? Staff Analytical Note 2022-6 Andisheh (Andy) Danaee, Harsimran Grewal, Brad Howell, Guillaume Ouellet Leblanc, Xuezhi Liu, Mayur Patel, Xiangjin Shen We examine the potential impacts of a severe economic shock on the resilience of major banks in Canada. We find these banks would suffer significant financial losses but nevertheless remain resilient. This underscores the role well-capitalized banks and sound underwriting practices play in supporting economic activity in a downturn. Content Type(s): Staff research, Staff analytical notes Topic(s): Financial institutions, Financial stability JEL Code(s): E, E2, E27, E3, E37, E4, E44, G, G1, G2, G21, G23
Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification Staff Working Paper 2022-24 Pablo Ottonello, Wenting Song 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. Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Business fluctuations and cycles, Credit and credit aggregates, Financial institutions, Financial markets, Financial system regulation and policies, Monetary and financial indicators JEL Code(s): E, E3, E32, E4, E44, E5, E51, G, G0, G01, G1, G12, G2, G21, G23, G24, G3, G32
COVID-19 crisis: Liquidity management at Canada’s largest public pension funds Staff Analytical Note 2021-11 Guillaume Bédard-Pagé, Daniel Bolduc-Zuluaga, Annick Demers, Jean-Philippe Dion, Manu Pandey, Léanne Berger-Soucy, Adrian Walton We examine how the eight largest Canadian public pension funds managed liquidity during the market turmoil in March 2020. The funds were generally resilient to large demands for liquidity and relied heavily on Canada's core funding markets. Content Type(s): Staff research, Staff analytical notes Topic(s): Coronavirus disease (COVID-19), Financial institutions, Financial markets JEL Code(s): E, E5, E58, G, G0, G01, G2, G23
Non-bank financial intermediation in Canada: a pulse check Staff Analytical Note 2021-2 Rohan Arora, Guillaume Bédard-Pagé, Philippe Besnier, Hayden Ford, Alan Walsh The Canadian non-bank financial intermediation (NBFI) sector saw strong growth in 2018 and 2019. In 2020, COVID‑19 caused a financial shock. We provide a preliminary analysis on the impact of COVID‑19 on the sector as well as an update on its growth. Content Type(s): Staff research, Staff analytical notes Topic(s): Coronavirus disease (COVID-19), Financial institutions, Financial markets, Financial stability JEL Code(s): G, G0, G01, G2, G20, G23
COVID-19 Crisis: Lessons Learned for Future Policy Research Staff Discussion Paper 2021-2 Jean-Sébastien Fontaine, Corey Garriott, Jesse Johal, Jessica Lee, Andreas Uthemann One year later, we review the events that took place in Canadian fixed-income markets at the beginning of the COVID-19 crisis and propose potential policy research questions for future work. Content Type(s): Staff research, Staff discussion papers Topic(s): Coronavirus disease (COVID-19), Financial markets, Monetary policy JEL Code(s): D, D4, D47, E, E4, E41, E5, G, G0, G01, G1, G14, G2, G20, G21, G23