February 23, 2012 Household Insolvency in Canada Bank of Canada Review - Winter 2011-2012 Jason Allen, H. Evren Damar With increasing levels of household debt in recent years, the number of households that may be vulnerable to a negative economic shock is rising as well. Decisions made by both the debtor and the creditor can contribute to insolvency. This article presents some stylized facts about insolvency in Canada’s household sector and analyzes the role of creditors in insolvencies. The average debt of an individual filing for bankruptcy is more than 1.5 times that of an average Canadian household; bankruptcy filers tend to be unemployed or in low-wage jobs, and are typically renters. The article reports that banks that approve more loans per branch, which is interpreted as less-intensive use of soft information (such as the loan officer’s assessment of the applicant’s character), experience more client bankruptcies. This finding has important policy implications, because financial institutions that do not use soft information risk further deterioration in their lending portfolios. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial services JEL Code(s): D, D4, G, G2
An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks Staff Working Paper 2012-5 Gregory Bauer, Antonio Diez de los Rios We construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate. Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Exchange rates, Interest rates JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12, G15
Price Competition and Concentration in Search and Negotiation Markets: Evidence from Mortgage Lending Staff Working Paper 2012-4 Jason Allen, Robert Clark, Jean-François Houde This paper examines the impact of bank consolidation on mortgage rates in order to evaluate the extent to which mortgage markets are competitive. Mortgage markets are decentralized and so rates are determined through a search and negotiation process. Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Financial services, Interest rates JEL Code(s): G, G2, L, L1
A Model of the EFA Liabilities Staff Discussion Paper 2011-11 Francisco Rivadeneyra, Oumar Dissou The authors describe the liabilities model of the Exchange Fund Account (EFA). The EFA is managed using an asset-liability matching framework that requires currency and duration matching of both sides of the balance sheet. Content Type(s): Staff research, Staff discussion papers Topic(s): Debt management, Foreign reserves management JEL Code(s): G, G1, G12, G3, G32
Bank Leverage Regulation and Macroeconomic Dynamics Staff Working Paper 2011-32 Ian Christensen, Césaire Meh, Kevin Moran This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial institutions, Financial system regulation and policies, Monetary policy framework, Monetary policy transmission JEL Code(s): E, E4, E44, E5, E52, G, G2, G21
Do Low Interest Rates Sow the Seeds of Financial Crises? Staff Working Paper 2011-31 Simona Cociuba, Malik Shukayev, Alexander Ueberfeldt A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. Content Type(s): Staff research, Staff working papers Topic(s): Financial system regulation and policies, Monetary policy transmission JEL Code(s): D, D5, D53, E, E4, E44, E5, E52, G, G2, G28
Trading Dynamics with Adverse Selection and Search: Market Freeze, Intervention and Recovery Staff Working Paper 2011-30 Jonathan Chiu, Thorsten Koeppl We study the trading dynamics in an asset market where the quality of assets is private information of the owner and finding a counterparty takes time. When trading of a financial asset ceases in equilibrium as a response to an adverse shock to asset quality, a large player can resurrect the market by buying up lemons which involves assuming financial losses. Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability JEL Code(s): E, E6, G, G1
Effectiveness of Capital Controls in India: Evidence from the Offshore NDF Market Staff Working Paper 2011-29 Michael Hutchison, Gurnain Pasricha, Nirvikar Singh This paper examines the effectiveness of international capital controls in India over time by analyzing daily return differentials in the non-deliverable forward (NDF) markets using the self-exciting threshold autoregressive (SETAR) methodology. Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, International financial markets, International topics JEL Code(s): F, F3, F31, F32, G, G1, G15
Security Transaction Taxes and Market Quality Staff Working Paper 2011-26 Anna Pomeranets, Daniel G. Weaver We examine nine changes in the New York State Security Transaction Taxes (STT) between 1932 and 1981. We find that imposing or increasing an STT results in wider bidask spreads, lower volume, and increased price impact of trades. Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial markets, Market structure and pricing JEL Code(s): C, C4, C43, G, G1, G10, G12
What Matters in Determining Capital Surcharges for Systemically Important Financial Institutions? Staff Discussion Paper 2011-9 Céline Gauthier, Toni Gravelle, Xuezhi Liu, Moez Souissi One way of internalizing the externalities that each individual bank imposes on the rest of the financial system is to impose capital surcharges on them in line with their systemic importance. Content Type(s): Staff research, Staff discussion papers Topic(s): Financial system regulation and policies JEL Code(s): C, C1, C15, C8, C81, E, E4, E44, G, G0, G01, G2, G21