Financial institutions

• June 11, 2009

  Collateral Management in the LVTS by Canadian Financial Institutions

  Bank of Canada Review - Summer 2009 Chris D'Souza

  This article examines the incentives for banks to hold various assets on their balance sheets for use as collateral when the opportunity cost of doing so can be high. Focusing on the five-year period (2002-07) that preceded the financial crisis, it examines the choices made by financial institutions among the assets that are pledged as collateral in Canada's Large Value Transfer System. This serves as a baseline for collateral-management practices during relatively normal times. The results of this study are important for policy-makers, especially the Bank of Canada, which is concerned both about the efficient functioning of fixed-income markets and about the credit risk it ultimately bears in insuring LVTS settlement. The results suggest that relative market liquidity and market-making capacity are important factors in the choice of securities pledged as collateral in the LVTS.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial markets, Payment clearing and settlement systems
• June 11, 2009

  The Complexities of Financial Risk Management and Systemic Risks

  Bank of Canada Review - Summer 2009 Frank Milne

  Risk-management systems in financial institutions have come under increasing scrutiny in light of the current financial crisis, resulting in calls for improvements and an increased role for regulators. Yet such objectives miss the intricacy at the heart of the risk-management process. This article outlines the complexity inherent in any modern risk-management system, which arises because there are shortcuts in the theoretical models that risk managers need to be aware of, as well as the difficulties in sensible calibration of model parameters. The author suggests that prudential regulation of such systems should focus on failures within the financial firm and in the market interactions between firms and reviews possible strategies that can improve the performance of risk management and microprudential regulatory practice.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial stability, Financial system regulation and policies