Bank Of Canada Research Articles

Applying contingent capital in Canada

This article discusses a financial instrument – non-viability contingent capital (NVCC) – that could help policymakers manage distress at systemically important banks, and facilitate their resolution with less risk to taxpayers. The article sets out the motivation for, and key features of, NVCC. It also considers mechanisms that could be used to mitigate the risk of death spirals, which could be associated with such a convertible instrument. As well, with reference to the major Canadian banks, the article simulates the effects of converting NVCC into equity for the dilution of common stock at non-viability, and provides rates of recovery for common shareholders and NVCC investors, based on illustrative conversion formulas.

Featuring: Liz Bayley

Tell us about your career before becoming Director of the Health Sciences Library. I have been at the Health Sciences Library since 1986, first as Head of Cataloguing, adding Head of Systems and Curriculum Integration Coordinator to my title in 1992, then becoming Head of Collections, Systems and Technical Services Nursing Liaison Librarian in 2005. I actually did my undergraduate degree in French and Russian at McMaster and taught English for a year in Bordeaux, France, before completing my MLS at Western. I worked for the Department of Finance Treasury Board Secretariat and for the Bank of Canada, and I returned to McMaster Libraries in 1982 as a cataloguer in the University Library. One of my projects was to catalogue Bertrand Russell’s personal library.

A First Approximation to the Cost of Contingent Capital for Canadian Banks

This paper develops and calibrates a structural model of contingent capital. The model can be calibrated to specific institutions and used to provide quantitative guidance on important practical issues. For instance this paper appears to be the first to consider the problem of empirically determining reasonable terms of conversion, specifically those that ensure that seniority is respected upon conversion and that equity investors are not rewarded for poor performance. The model assumes that conversion is triggered by the institution's capital ratio falling below a predefined lower threshold and allows for considerable flexibility in the terms of conversion. In contrast to the existing literature we avoid the implicit assumption that debt is serviced via the issue of new equity, by explicitly incorporating debt service in asset value dynamics. Using data from the Canadian banking sector we illustrate how the model can be calibrated to specific institutions. Assuming 1.85% of total liabilities are contingent and that conversion is triggered by a CET1 ratio below 5% we find that, for the representative Canadian institution, a reasonable range for a fixed conversion price is between 45% and 52% of the institution's stock price at issuance. For conversion prices in this range we find that when contingent capital is introduced (i) the cost of senior debt is halved and is insensitive to the conversion price, (ii) the cost of contingent debt increases rapidly with the conversion price and (iii) the overall cost of debt is always reduced. In addition we find that the cost of contingent debt is far less sensitive to the level of the conversion trigger when the terms of conversion impose a fixed loss at conversion than it is when they specify a fixed conversion price.

Financial crisis, liquidity infusion and risk-taking: The case of Canadian banks

We examine the effects of government liquidity infusion on the risk taking behavior of Canadian banks and find that banks that received government financial assistance subsequently experienced a decrease in risk. The reduction in risk is induced by a shift from non-interest income related activities to more traditional interest income generating activities. After controlling for bank specific risk factors, we find that whilst the liquidity infusion has made the banks more safer, higher amounts of funds received appears to induce higher investments in non-interest income related activities. Further analysis aimed at disentangling the effects of the financial crisis from those of the liquidity infusion using observations of a control sample of banks that did not receive government support, shows that risk-taking by the focal banks in the aftermath of the financial crisis is significantly lower than that of the control sample. We argue that the stringent regulatory regime (involving high capital standards, tight mortgage market regulations, lower leverage ratio requirements, and close supervision of banks) and the need to preserve rent seem to account for the risk taking behavior of the banks.

WHY IS CASH (STILL) SO ENTRENCHED? INSIGHTS FROM CANADIAN SHOPPING DIARIES

One similarity among many developed economies is the predominance of cash over electronic payments in terms of payment frequency, especially for the low‐value transactions that are the bulk of retail payments. We use the Bank of Canada's 2009 Methods‐of‐Payment Survey, which collected information on consumers' payment choices through shopping diaries, to estimate a simple model of choice between cash and other payment methods. Results suggest that the main reasons cash is still a popular payment instrument in Canada, especially for low‐value transactions, are its wide acceptance among merchants compared with other alternatives, speed and ease of use, and low marginal cost when on hand. (JEL E41, D12, L81)

Human donor milk for the vulnerable infant: a Canadian perspective.

Breast milk is the normal way to feed infants and is accepted worldwide as the optimal first source of nutrition. Though the majority intend to breastfeed, many mothers of sick, hospitalized newborns, particularly those of very low birth weight, are unable to provide a full volume of milk due to numerous physical and emotional barriers to breastfeeding. This vulnerable population of infants may benefit most from receiving breast milk nutrition and thus pasteurized donor milk should be the first consideration for supplementation when there is an inadequate supply of mother’s own milk. This commentary will briefly review the history of milk banking in Canada, as well as the best available evidence for donor milk use in the very low birth weight population, including available economic analyses, with a view to advocate for its use in these vulnerable infants.

The Ill Wind that Blows from Europe: Implications for Canada's Economy

Speculation about the consequences of a break-up of the eurozone, a worsening sovereign debt crisis or a prolonged recession in the European Union have all in recent years made the headlines. At first glance, the effect that such events might have on the Canadian macroeconomy might appear small. After all, Canada’s trade in goods and services and financial flows to and from the euro area are dwarfed by our economic relationship with the United States. Significant spillover effects, however, likely would arise out of any major economic or financial shock originating from the globe’s largest economic block (as measured by gross domestic product, GDP). The sovereign debt crisis in the eurozone exposed major fault lines in the economic stability of the common currency area. The indirect exposure of Canadian banks – and of the Canadian economy more generally – from a eurozone economic shock ought to represent a pressing source of concern for Canada’s policymakers. The continued uncertain outlook for the global and US economy also suggests that there is a real danger of another “perfect storm” such as the one that affected the world economy in 2008 and 2009. Canada might not escape next time around with only a short-lived recession, nor is it a given that its financial sector would emerge largely unscathed, notwithstanding Canada’s reputation for the quality of its financial regulation and supervision. This Commentary estimates a small macroeconomic model for Canada that explicitly incorporates financial sector influences. Then, foreign shocks with real and financial elements from the eurozone and the United States are added to the model to investigate the potential for spillover effects. The study also considers some counterfactuals, by imagining a large, negative and permanent economic shock from the eurozone, and compares the results with estimates based on observed data. The Commentary concludes that negative shocks from the real and financial sectors of the US and eurozone economies do spillover into the Canadian economy. Clearly, US shocks dominate, but eurozone shocks cannot be ignored. Counterfactual experiments suggest that, under eurozone worst-case scenarios, Canada’s economy would suffer a substantial drop of almost 8 percent in real GDP after two and a half years.

Database of Sovereign Defaults, 2017

Until recently, there have been few efforts to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. To help fill this gap, the Bank of Canada’s Credit Rating Assessment Group (CRAG) has developed a comprehensive database of sovereign defaults posted on the Bank of Canada’s website.

Boosting customer orientation through coaching: a Canadian study

Purpose – The purpose of this paper is to investigate to what extent bank manager's coaching, a managerial relationship behavior based on mutual trust, openness and quality of exchanges, affects front-line employee's performance through the mediating effect of salesperson's customer orientation. Design/methodology/approach – The paper conducted a non-experimental, cross-sectional study; a Canadian bank agreed to participate in the study and 122 financial advisors with sales responsibilities answered a web-based survey; data were analyzed using structural equation modelling. Findings – The paper found support for the hypotheses that managerial coaching behavior can help bank employees develop their customer orientation and increase their performance, as well as reduce opportunistic behavior (sales orientation). The paper found that the direct link between coaching and performance, plus the mediating effect of sales orientation and customer orientation (SOCO) can potentially explain a significant variation in employee's performance (r2=0.23). The paper also found that the hypothesized model provided better explanations of the phenomenon when compared with two rival models, one considering SOCO as a full mediator between coaching and performance, and the other one considering only the effect of coaching on performance. Originality/value – In the banking sector, practitioners and scholars are paying increased attention to the role of trust and relationship behaviors in the development of market orientation and customer relationships. The paper identified a key relationship behavior (customer orientation) and tests its impact as a mediator between a relationship managerial behavior (coaching) and business outcomes (performance) in an international banking setting (Canada).

Financial Structure Change and Banking Income: A Canada-U.S. Comparison

Data suggest that the Canadian financial structure, and particularly indirect finance (e.g., banking), have become more market-oriented. We associate this financial trend in part with the regulatory changes that have occurred in Canada since the 1980s. Financial intermediaries are increasingly involved with financial market activities -- e.g. off-balance sheet (OBS) activities such as underwriting securities. For this reason, we analyze the non-interest income attributable to financial market activities. We find that the variance of Canadian banks' aggregate operating-income growth is rising because of the increased contribution of non-interest income. This component is by nature quite volatile compared to interest income. Consequently, our analysis corroborates the U.S. finding of Stiroh (2004), and Stiroh and Rumble (2005): By contributing to banking income volatility, market-oriented activities do not necessarily yield straightforward diversification benefits to Canadian banks.

Bank Act revision in Canada: past and potential effects on market structure and competition

The work evaluates the Canadian Bank Act of 1967 and whether it had a sufficient market impact to achieve its intended goal of greater competition. The author first considers the nature of legally imposed barriers and the effects of their attenuation by the Act. The structure and conduct of the Canadian banking industry is then discussed and some insights into the efficacy of the Act in bringing to that industry more vigorous inter-firm competition are provided.

Canadian bank mergers, the public interest and public policy

The Canadian banking system is highly concentrated. This is partially due to normal market attrition, but more significantly is the result of a protracted series of mergers. Since all bank mergers have to be approved by the Federal government, the fundamental public policy question is why the government allowed the mergers and sos assisted the concentration process. This paper attempts to determine whether the mergers which have taken place since 1955 have been in the “public interest”. The conclusion is that, on the basis of the available evidence, they have not. To arrive at this conclusion the author first specifies the appropriate “public interest” criteria. These criteria are then applied to the mergers in question. The implications for policy are laid out in the conclusion.

The power of words: A content analytical approach examining whether central bank speeches become financial news

Few studies have examined the impact that central bank indirect intervention has on exchange rates. Efficient market theory predicts that new information within central bank communication will become a component of information used by currency traders. This study applies a novel methodology to examine whether information contained within Bank of Canada and the Reserve Bank of Australia communications does in fact get embedded within the information reported on the financial newswires. The primary data are speeches that are made public by the two central banks and from news as reported by Reuters from 1995 to 2009. Applying content analysis and an innovative use of information science theoretic measures, we demonstrate the flow-through of information contained within central bank communications to the information set used by traders.

How Regulating Risk and Eschewing Competition Can Ameliorate a Global Financial Crisis: Canada's Perspectives and Experiences

This article identifies several key aspects of the Canadian banking regulatory regime that contribute to its stability. At the same time, it calls into question the current consensus that Canadian banking governance has been uniformly more heavily regulated than that of the United States. It is not the quantity of regulation that matters, but rather the quality. After all, the agents at the heart of the crisis in the United States were themselves highly, if inappropriately, regulated. The banks disclosed the types of instruments they used and quantified their risks. The article proceeds in a context of the overarching question of the ostensible trade-off between financial sector entrepreneurship and innovation on the one hand and stability in banking policy on the other, calling into question the assertions of law-and-economics jurists who argue that the true cost of stability in the financial sector is a less competitive and less dynamic capital market.

Some Historical Remarks on American and Canadian Banking Reform

This article makes several historical remarks on the structural differences between the Canadian and American banking systems. It argues that consideration of the context, form, and substance of banking legislation can help determine the distinct regulatory culture of legislative reform; in comparison to the United States, Canada's response to financial crisis is noticeably conservative. Part II of the article characterizes the regulatory steps taken by both countries during the years 1933–35. Part III provides basic background to the current banking legal regime in Canada; a discussion of the dual banking system in the United States is beyond the scope of this article. Part IV concludes by discussing the global financial crisis in 2008 and contemplates whether several themes from 1933–35 resurface despite legislative development throughout the historical period. The historical approach highlights Canada's distinctive legacy of commercial banking regulation, which perhaps is still pertinent today when comparing banking laws, their enforcement, and their general impact on the respective economies.

156 Comprehensive tissue banking: An Edmonton perspective

Tissue transplantation is a life function restoring procedure and can also save lives in certain situations. The Comprehensive Tissue Centre (CTC) is a full-service tissue bank operated by Alberta Health Services in Edmonton, Alberta. Accredited by the American Association of Tissue Banks (AATB), licensed by Health Canada and the International Standards Organization, the CTC is one of only three full-service tissue banks in Canada, providing tissues both regionally and nationally. The CTC is responsible for the donor screening, procurement, processing, storage, quality assurance, and distribution of tissues. The current tissue allografts supplied by the CTC for transplantation are ocular, musculoskeletal, cardiovascular, skin, surgical bone, and amniotic membrane. For example, in 2012, the CTC recovered 1736 tissues from 85 local cadaveric donors and 151 local living donors, including skin (169), musculoskeletal (708), cardiovascular (81), amniotic membrane (429) and ocular (349) allografts. These allografts are stored for various durations, from days to years, depending on their method of preservation. Tissues are cryopreserved or refrigerated as required by allograft type, and used for a variety of treatments and for research and educational purposes. Ongoing research and development program ensures continuous improvement the quality of tissue allografts and banking processes, enabling the medical community to better serve transplant recipients. Some of the challenges facing the CTC are increasing tissue donation rates through public education and promotion programs and linking basic research to clinical applications. The CTC takes great pride in providing safe, effective and high quality allograft tissue for transplantation through excellence in practice and leadership in research. Source of funding: None declared. Conflict of interest: None declared. tumelo.mokoena@albertahealthservices.ca , jelena.holovati@ualberta.ca

Changes in Financial Market Regulation from Pre-Crisis to Post-Crisis Period in Canada

The paper starts by summarizing the factors that seem most likely to have contributed to the success of Canadian banks. It then considers the local and transnational contexts in turn. The concluding section draws out the lessons these offer for other countries, especially in the developing world.

La Stratégie CRM (Customer Relationship Management) dans les Banques de Détail : Les Facteurs-Clés de Succès

The article presents the best practices for the implementation of CRM ("Customer Relationship Management") systems in retail banking sector and discusses the theoretical and managerial implications. We conducted three case studies in three Canadian banks and identified twenty one best practices. These practices have been further enhanced using a Delphi survey that has been conducted with the participation of eighteen experts in various fields such as information technology, finance, project management, and strategic management. Moreover, some key factors have been given a priority rating. DOI: 10.5901/mjss.2013.v4n9p674

Influencias reciprocas: Una Historia de dos Bancos Centrales en el continente norteamericano

<p><strong>Resumen </strong></p><p>La historia del Banco de Canadá y el Sistema de la Reserva Federal (Fed) de Estados Unidos (US) está entrelazada no sólo por la proximidad geográfica, sino por la influencia recíproca en la forma en que han evolucionado sus estructuras para llevar a cabo la política monetaria. Mientras que ambos encuentran su origen en las crisis financieras, el entorno en el que fueron creados a principios del siglo XX fue diferente. Antes de la banca central, la estructura bancaria de US era descentralizada y susceptible a colapsos recurrentes, de manera que se necesitaba un prestamista de última instancia; mientras que el sistema bancario canadiense era oligopólico y altamente centralizado desde su creación. Durante la mayor parte del período de posguerra, el Banco de Canadá tendía a seguir políticas que generalmente se originaban al sur de la frontera con Canadá, pero en el último cuarto de siglo, el Banco de Canadá ha estado a la vanguardia de las innovaciones de las políticas monetarias, sobre todo en la búsqueda de reestructurar su sistema de política monetaria acorde con las líneas Wickselianas. Una historia detallada de estos cambios institucionales se aborda en este trabajo, incluyendo los recientes cambios que se han producido a raíz de la crisis financiera.<strong> </strong></p><p> </p>

Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada

The objective of this study is to identify monetary policy reactions in a nonlinear, structural vector autoregression (VAR) framework, with regime-switching contemporaneous policy responses in a small open economy. The key finding is that monetary policy in Canada responds contemporaneously to disturbances in the real exchange rate, as well as the output gap and inflation. The Bank of Canada is found to have much larger responses to exchange rate fluctuations during volatile periods than more stable periods. However, the Bank is found statistically to have a relatively linear reaction function with symmetric responses to output and inflation shocks across interest rate regimes. The estimates for the contemporaneous responses to the output gap in both regimes are found to be virtually identical to the 0.5 weights in the original Taylor rule for the United States, while the responses to inflation surprises are slightly smaller. Overall, the Bank of Canada is found to have operated within the range of optimal responses suggested by small-scale structural models in the normative literature on monetary policy rules.