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The Rise of Mortgage Finance Companies in Canada: Benefits and Vulnerabilities, by Don Coletti, Marc-André Gosselin and Cameron MacDonald, examines the increased importance of mortgage finance companies (MFCs) in the Canadian mortgage market. The authors discuss the MFC business model, highlighting MFCs’ relationship with mortgage brokers and banks, as well as the benefits they bring to Canadian borrowers. The authors conclude with a discussion of the impact of MFCs on financial system vulnerabilities.

In Monitoring Shadow Banking in Canada: A Hybrid Approach, Bo Young Chang, Michael Januska, Gitanjali Kumar and André Usche discuss how lending that occurs outside the traditional banking system provides benefits to the economy but must be monitored carefully for potential financial sector vulnerabilities. They describe how the Bank defines and measures shadow banking and how it assesses vulnerabilities in the sector, using an approach that examines both markets and entities.

Production efficiency and financial stability do not necessarily go hand in hand. With heterogeneity in banks’ abilities to screen borrowers, the market for loans becomes segmented and a self-competition mechanism arises. When heterogeneity increases, the intensive and extensive margins have opposite effects.

How much discretion should local financial regulators in a banking union have in accommodating local credit demand? I analyze this question in an economy where local regulators privately observe expected output from high lending. They do not fully internalize default costs from high lending since deposit insurance cannot be priced fairly.

Emergency Lending Assistance (ELA) is a discretionary last-resort collateralized loan or ad-vance by the Bank of Canada to eligible financial institutions (FIs) and financial market infrastructures (FMIs) facing serious liquidity problems. In December 2015, the Bank revised its ELA policy to (i) replace the requirement for an FI’s solvency with the requirement for a credible recovery and resolution framework; (ii) include mortgages as eligible collateral; and (iii) clarify both the eligibility requirements for FMIs and provincially regulated deposit-taking FIs.

The Bank of Canada’s framework for market operations and liquidity provision describes how and when central bank liquidity might be offered with regards to the implementation of monetary policy and for supporting the stability of the Canadian financial system. Market participants can therefore plan their transactions knowing that the Bank stands ready to help manage system liquidity to support its objectives for monetary policy and financial stability.

Central banks contribute importantly to the promotion of financial stability given their sys-tem-wide macro-financial perspective and existing roles as lender of last resort and overseer of systemic payment systems. Since the global financial crisis, the financial system role of central banks has expanded to place more emphasis on the prevention of financial stress and crises. Central banks work with other responsible authorities to enhance financial system resilience and to assess and mitigate financial vulnerabilities and systemic risk.

We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities, forcing them to sell assets at fire-sale prices.

Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators.

Senior Deputy Governor Carolyn Wilkins discusses the financial stability risks associated with slow growth and low interest rates, and explores strategies to mitigate them.