Bank Of Canada Research Articles

Money at risk: climate change and performance of Canadian banking sector

PurposeIn the last few decades, the frequency and intensity of extreme weather events have increased in most parts of the world including Canada because of global warming. The global warming in Canada is about double the magnitude of global warming; therefore, policymakers are concerned about the potential significant impact of the weather catastrophes on the economy and financial sector. The purpose of this study is to explore the impact of weather catastrophes on the Canadian banking sector.Design/methodology/approachUsing a sample of banking firms from Canada over the period 1988–2019, the present study estimates different econometric techniques to investigate the impact of weather catastrophes on the risk and performance of Canadian banks.FindingsAnalyses of the study do not find a significant impact of the weather catastrophes on the performance of the Canadian banks; however, it has helped banks to lower their risk level and improve stability due to proactive risk management. The findings of this study are not consistent with concerns of the policymakers about climate risk to the Canadian bank sector. More sector-specific research and policy initiatives are recommended to minimize the future financial risk of the increased frequency and intensity of natural disasters.Originality/valueThe study contributes to support the notion that the climate risk of banks is protected with insurance and reconstruction activities provide more banking opportunities.

Evolution of risk management from risk compliance to strategic risk management Part II: The changing paradigm for the risk executive and Boards of the Canadian banking and insurance sectors

Part I of this paper examined the risk function’s evolution in response to (i) financial disclosures becoming increasingly risk-based, (ii) an increasing need to optimise capital management and business mix to enhance Return on Equity (ROE). The optimisation frameworks to determine the optimal ‘risk strategies’ need to be established by the risk function, which is now at the core of financial disclosure, technology and strategy. Part II examines the necessary competencies for the risk executives, in particular Chief Risk Officers (CROs), to be effective and lead the evolution. These are analytical, digital and strategic competencies. For the leadership roles in well-established finance, accounting, actuarial functions, and in engineering, it is recognised that professional qualifications, advanced content knowledge and experience are required for the leaders to be effective. We observe that this is often not the case for bank risk executives. It is not uncommon to see a leader without specific risk expertise and experience holding senior risk executive, even CRO, roles. CRO roles also have limited upwards mobility and can be the last stop, bridging the executive to retirement. We examine the potential causes, including the historical reasons, insiders’ bias, cognitive biases, pigeon-holed career paths and misuse of power. We make suggestions for improvements and opening the path for the next generation of risk professionals to fill the executive and board roles and lead the necessary evolution.

Basel III FRTB: data pooling innovation to lower capital charges

BackgroundAnticipated to overhaul the structure of market risk teams, IT teams, and trading desks within banks by 2023, Basel III's Fundamental Review of the Trading Book requirements will also increase capital charges banks will incur globally. The case study focuses on describing what is needed with regards to the risk factor eligibility test (RFET) as well as for implementing a data pool to lower capital charges. By establishing a consortium of banks per region to implement a data pooling solution, participants can prove a wider breadth of modellable risk factors per asset class and use the Internal Models Approach (IMA) of valuing risk to lower capital charge requirements significantly.Case descriptionFirst, a description on the historical context surrounding the Fundamental Review of the Trading Book rules and the business requirements needed to comply with the risk factor eligibility test is made. Then an examination is conducted on the innovative data pooling initiative implemented by CanDeal, TickSmith Corp., and the 6 largest Canadian banks to lower capital charge requirements under the Fundamental Review of the Trading Book.Discussion and evaluationA description is made on what types of data, expertise, and technology is needed to calculate for risk factor modellability. It is up to each firm to decide if the benefits to using the Internal Models Approach to lower capital charges outweighs implementation and running costs of the underlying data platform. Implementing a data pool for each region comes with challenges that include anti-competition law that may block the initiative, varied benefits to each competitive participant, and data security concerns.ConclusionIt is evident that the data pool innovation provides benefits to lowering capital charges as the Canadian banks have seen an increase of modellability by several factors using the sample bond asset class. While each firm must still determine internally if the benefits outweighs the technological costs they will incur, it is clear that regulators are pushing for increased data retention and scrutiny.

Monetary Policy Responses to Covid-19: A Comparison with the 2008 Crisis and Implications for the Future of Central Banking

ABSTRACT The policy responses of major central banks to the Covid-19 financial and economic crisis were faster, larger, and broader in scope than those in response to the 2008 global financial crisis. This article explains in detail the conventional and unconventional measures adopted by the U.S. Federal Reserve and reviews similar measures adopted by the Bank of England, the Bank of Canada, the European Central Bank and the Bank of Japan. Apart from lowering interest rates and acting as lenders of last resort to financial institutions, these central banks embraced large scale asset purchases as a core crisis fighting tool, with the corresponding expansion in balance sheet that they entail. The article connects this change in emphasis in central bank intervention to the normalization of shadow banking, or market-based financial intermediation, that happened between the two crises. Other extensions of the role of central banks made possible by the scope of the policy responses to Covid-19, including direct support to sectors beyond the financial industry, are also explored.

Data-Sharing Frameworks In Financial Services: Discussing Open Banking Regulation for Canada

Data-sharing frameworks in financial services are becoming increasingly prevalent with the potential to shape drastically the future of banking and finance. As data assets are of strategic importance to financial institutions and central to their ‘datafication’ and digital transformation processes, sharing and accessing new data can alter the dynamics of competition and lead to the emergence of new players as well as nascent markets. Innovative technologies such as application programming interfaces (APIs) can help simplify data communication between systems and thus standardize the exchange of information between organizations allowing them to experiment with new, more open, business models. APIs also give the ability to effectively control openness and orchestrate ecosystems of third-parties that can add value to organizations’ supply chain and end users. Having said that, the deployment of open APIs in financial services raises numerous questions regarding the appropriate regulatory (or not) framework and infrastructure for opening up data in the banking sector. The current paper examines the potential for an open banking framework in the Canadian market and makes an effort to identify the regulatory, economic, technological, sociological, and political debates in the industry concerning data openness. During the course of the study there was consensus from participants that discussing the “merits of open banking” or opportunities that it will bring is an outdated topic and instead the discussions should focus on the real issues and ‘pain-points’ around open banking implementation in Canada. Following a good number of interviews with FinTechs, challenger and incumbent banks, regulators, legal experts, consultants, and financial services professionals (in various part of the business as well as IT) in the Canadian market, the paper outlines a number of themes and frictions that the industry as well as policy-makers in Canada should consider when implementing an open banking framework. We believe that the findings can be generalized and be useful for practitioners and regulators around the world when exploring similar frameworks. The paper starts with an introduction to data-sharing and open finance providing some workable definitions and comparing the relevant technologies in place. In this section we also clear various misunderstandings around ‘open banking’. The following section provides a brief description of the most popular open banking paradigms around the world: UK, EU, and Australia before we move to the Canadian context. The main findings section is organized in four parts discussing a) the objectives of open banking in Canada and whether a potential scheme should be policy-mandated or market-driven, b) the relevant regulatory issues such as liability and related data-privacy laws, c) the key debates and tensions when designing the data-sharing infrastructure (such as data openness, digital identity, security, API and data standards), and finally d) the relevant concerns and participant goals around identification of third-parties and access to the national payments infrastructure. The paper concludes with some insights from previous research on the impact of open banking on the market structure and business models in banking.

Investigating the Impact of COVID-19 Outbreak On Canada’S Government Treasury Bills

SARS-Cov-2 was first recorded in Wuhan, a town in the Hubei Province of China with a population of 11 million in December 2019, following a clear-cut outbreak of non-pneumonia. More than 200 countries and territories have now spread the virus around the globe, and the World Health Organization (WHO) identified it as a pandemic on 11 March 2020. On the economic front, COVID-19 contributed to a partial or absolute lockout in more than 200 nations.This has undermined the global supply chain and has contributed to a major decline in both economic growth and the values of financial assets. Canada is one of the countries afflicted by the outbreak with 731 000 cases and 18 622 deaths as of 21 January 2020. Vaccines have recently been created, but the surge of infection continues to escalate every day. On the socio-economic front, COVID-19 led more than 200 countries to a partial or absolute lockdown, interrupted global supply chains and led to a collapse in both economic growth and financial asset prices.The impact of COVID-19 is unclear because the public health crisis is still unfolding. There is limited amount of studies concerning this topic, because the crisis is still unfolding. The objective of this study is to investigate the impact of COVID-19 on Canada’s Treasury Bills. The author uses extreme bound analysis for market interpretation and sourced data from Bank of Canada and Our World in Data COVID-19, from January 1 to December 31 2020. The result of the study show that, Stringency Index have an impact on Canada’s 6-month Treasury bill auction average yield (V80691304) because of the robust relationship between them. Furthermore, 3 months Treasury bill auction average yields (V80691303) has positive correlation with 6months Treasury bill auction average yields (V80691304), 1-year Treasury bills auction average yields (V80691305), 3 months Treasury bills (V80691344), 6 months Treasury bills (V80691345), 1 year Treasury bills (V80691346) and a negative correlation with Government Stringency index (SI). Furthermore, 6months Treasury bill auction average yields (V80691304) has positive correlation with 3 months Treasury bill auction average yields (V80691303), 1-year Treasury bills auction average yields (V80691305), 1 month Treasury bills (V80691342), 3 months Treasury bills (V80691344), 6 months Treasury bills (V80691345), 1 year Treasury bills (V80691346) and a negative correlation with Government Stringency index (SI). Again, 1-year Treasury bills auction average yields (V80691305) has positive correlation with 3 months Treasury bill auction average yields (V80691303), 6months Treasury bill auction average yields (V80691304), 1 month Treasury bills (V80691342), 3 months Treasury bills (V80691344), 6 months Treasury bills (V80691345), 1 year Treasury bills (V80691346) and a negative correlation with Government Stringency index (SI).

Technological progress and monetary policy: Managing the fourth industrial revolution

This paper looks at the implications for monetary policy of the widespread adoption of artificial intelligence and machine learning, which is sometimes called the “fourth industrial revolution.” The paper reviews experiences from the previous three industrial revolutions, developing a template of shared characteristics: new technology displaces workers; investor hype linked to the new technology leads to financial excesses; new types of jobs are created; productivity and potential output rise; prices and inflation fall; and real debt burdens increase, which can provoke crises when asset prices crash.The experience of the Federal Reserve during 1995–2006 is particularly instructive. The paper uses the Bank of Canada’s main structural model, ToTEM (Terms-of-Trade Economic Model), to replicate that experience and consider options for monetary policy. Under a Taylor rule, monetary policy may allow growth to run as long as inflation remains subdued, easing the burden of adjustment on those workers directly affected by the new technology, while macroprudential policies help check financial excesses. This argues for a family of Taylor rules enhanced by the addition of financial stability considerations.

Central Bank Digital Loonie: Canadian Cash for a New Global Economy

Global economic digitization continues to advance at exponential speed. This development is in sharp contrast to the financial sector and payment systems that still operate on legacy infrastructure that lacks the flexibility to serve those technology needs. Further, the emergence of Decentralized Finance demonstrates the capacity to disrupt the financial sector, impact national sovereignty, and affect established monetary transmission channels. Hence, it is no surprise that nation-states and tech-firms alike are now building new digital infrastructures that circumvent the legacy practices. Central banks, in particular, are racing to explore the issuance of Central Bank-issued Digital Currencies (CBDCs) in an attempt to rediscover the very essence and use of fiat cash. In the past decade, the Bank of Canada (BoC) has emerged as an international thought leader on CBDCs. In early 2020, the BoC issued a contingency plan for the potential introduction of a CBDC and later that spring ran a global competition among universities to sample arm length’s designs. Being a finalist in this competition, this manuscript presents a design proposal for a Central Bank Digital Loonie (CBDL) based on careful academic research of the possible technological, legal, and economic components of such an unprecedented and historic expedition. We propose a two-phased approach. In the first phase, the BoC introduces a centralized platform as a public-good infrastructure that establishes digital cash and ensures global/domestic interoperability. In this phase, e-KYC-based authentication leverages existing private/public sector solutions but also safeguards users' privacy/data against third-party commercial interests while complying with AML/CFT. In the second phase, the BoC will expand the platform to an enterprise-level permissioned blockchain. This shared resource will transform CBDLs into programmable e-money within a “social operating system” that will enable Canadians to operate, innovate, compete, and thrive in this new global digital economy.

Investigating the Impact of COVID-19 Outbreak on Canada's Commodity Market

SARS-Cov-2 was first reported in Wuhan, a town in Hubei Province of China with a population of 11 million in December 2019, following an outbreak of non-pneumonia of a clear cause. The virus has now spread across the globe considerably more than 200 countries and territories, and the world health organization (WHO) described it as a pandemic on 11 March 2020. On the economic front, COVID-19 has led more than 200 countries partially or totally lockdown. This situation disrupted global supply chain, and induced a significant fall in both economic activity and financial asset prices. Canada, being one of the country affected by the Virus with 731 000 Cases, and 18 622 Deaths as at the 21 of January 2020. Recently vaccines have been developed but the contamination wave keeps on increasing every day. On the socioeconomic front, COVID-19 has led more than 200 countries into partial or total lockdown, disrupted global supply chains, and induced a fall in both economic activity and financial asset prices. It’s of prime importance to study how COVID-19 impact’s on Canada’s commodity market. The commercial and financial effect of COVID-19. The impact of COVID-19 is unclear because the public health crisis is still unfolding. There is limited amount of studies concerning this topic, because the crisis is still unfolding. The objective of this study is to investigate the impact of Covid-19 on Canada’s Commodity markets. The author uses extreme bound analysis for market interpretation and sourced data from Bank of Canada and Our World in Data COVID-19, from January 1 to December 31 2020. The result of the study show that, Total deaths per million have an impact on the monthly Bank of Canada’s commodity price index of energy because of the robust relationship between them. Furthermore, the result also show that, commodity price index of energy and total deaths per million are determinants to total commodity price index. Furthermore, commodity price index excluding energy, commodity price index of energy, commodity price index of minerals and metals, commodity price index of forestry and total deaths per million are robust determinants of monthly Bank of Canada total commodity Prices. M.BCNE, M.ENER, M.MTLS, M.MTLS, M.FOPR, M.FOPR, M.AGRI, M.FISH, TC, TD have a positive relationship with MBCPI. M.BCPI, M.BCNE, M.MTLS, M.AGRI and M.FISH.

A Proposal for a Canadian CBDC

Undoubtedly inspired by recent advances in technology-driven payment systems such as mobile payment systems, cryptocurrencies, and blockchain technologies, recent years have seen central banks worldwide explore the possibility of issuing digital forms of fiat money called central bank digital currencies or CBDCs. A thoughtfully designed CBDC can help satisfy numerous policy objectives, improve economic efficiency and inclusivity, and serve as a platform for economic innovation. However, the vast CBDC design landscape, coupled with its potential to massively disrupt the financial system and broader economy, warrants caution, calling for a careful and methodical analysis of various designs' strengths, weaknesses, and risk profiles. At this time, the Bank of Canada (BoC) has not committed to issuing a CBDC; nevertheless, it does rank among the more than 80% of central banks globally who, according to a recent survey by the Bank for International Settlements (BIS), are at least contingency planning for the eventuality of doing so. This report details and analyzes the authors' vision for a hypothetical BoC-issued retail CBDC for use in the Canadian context, taking into account both, the `business case' for its adoption from the perspective of BoC, policymakers, the financial services industry, and the Canadian economy more generally and how its widespread adoption would impact ordinary Canadians. The design considered in this report leverages a mix of distributed ledger technologies (DLTs} and electronic cash (`e-cash') schemes with advanced cryptographic primitives. The confluence of these building blocks results in a scalable, resilient, privacy-centric, and universally accessible design that strives to bring added value (a Pareto improvement) for all stakeholders in Canada. In light of the abundance of CBDC designs in circulation, this report emphasizes aspects and implications of the design specifically tailored for Canada, such as ensuring universal access for remote communities and strong privacy protections consistent with Canada's role as a world leader in civil liberties and human rights. Likewise, some core aspects of the proposed architecture reflect characteristics of Canadian law and the Canadian financial system, which may differ substantially from other countries.

The informative value of central banks talks: a topic model application to sentiment analysis

Central banks communication has lately become an important tool to guide expectations and its impact on the economy has been acknowledged by the literature. Nowadays central banks speeches face an increasing variety of topics, which are not discriminated by text analysis. In this paper we develop a topic-weighted central bank sentiment index as a combination of machine learning and text analysis techniques to investigate large datasets. First, we grid search the best Latent Dirichlet Allocation (LDA) model to uncover the latent topics in central banks’ speeches and releases published between 2000 and 2021 and investigate their evolution over time. Then, we build a topic-specific sentiment index based on dictionary techniques. Next, we summarise the results in a topic-weighted Central Bank Sentiment Index (CBSIw) for the Bank of Canada (BoC), the Bank of England (BoE), the European Central Bank (ECB) and the Federal Reserve (Fed). We find that the main common driver of the CBSIw is the monetary policy topic, followed by macroprudential policy and payments and settlements. We also uncover bank-specific topics and topics related to new challenges, for example innovation and climate change. Moreover, we find that the CBSIw decreases after the Great Recession, signalling a worsening in sentiment, as well as during the COVID-19 crisis. Finally, we employ a probit regression to further assess the predictive power of our monetary policy topic-specific index. We find that the indicator helps predicting future changes in policy rate, corroborating the evidence that central banks communication signals future monetary policy decisions.

The informative value of central banks talks: a topic model application to sentiment analysis

Nowadays communication is acknowledged as a central bank tool to guide markets expectations. Speeches vary in topics, which are not discriminated ex-ante by text analysis. In this paper we develop a topic-weighted central bank sentiment index as a combination of machine learning and text analysis techniques to investigate large datasets. First, we grid search the best Latent Dirichlet Allocation (LDA) model to uncover the latent topics in central banks' speeches and releases of the last twenty years. Then, we build a topic-weighted Central Bank Sentiment Index (CBSIw) for the Bank of Canada (BoC), the Bank of England (BoE), the European Central Bank (ECB) and the Federal Reserve (Fed). We find that the CBSIw’s main common drivers are monetary policy, macroprudential policy and payments and settlements. We also detect topics related to new challenges, for example innovation and climate change. Moreover, we find that the CBSIw decreases after the Great Recession as well as during the COVID-19 crisis. Finally, we employ a probit regression to further assess the predictive power of our monetary policy topic-specific index. We find that the indicator helps predicting future changes in policy rate, corroborating the evidence that central banks communication signals future monetary policy decisions.

Islamic financial institutions: Performance comparison with Canadian banks

The Canadian financial market is considered to be very conservative and has been using the same practices for a long time. The economies of some countries such as England have adopted a strategy of including Islamic finance in their market and this has produced very satisfactory results. Considering that Islamic finance has been growing in recent years, this type of practice could be relevant to the Canadian market. The objective of this article is to analyze whether the performance of Islamic financial institutions is comparable to traditional banks. A comparison of the efficiency of conventional and Islamic banks will be important to determine because they do not operate in the same way and their primary source of income is different. The results revealed that Islamic banks tended to perform better than conventional banks. Performance ratios were in most cases higher for Islamic banks. This observation was confirmed with the use of the data envelopment analysis (DEA) model, which measures efficiency and effectiveness at the bank level. The results show that although some Islamic banks had significantly fewer assets than conventional banks, they were still able to use resources more efficiently. This confirmed that Islamic finance is an option for Canada and that with government support it will be possible to have a stronger economy overall.

Risk-Based Capital and Leverage Ratios Adjustments by Banks: Experience from Canada and the U.S.

The Basel III framework comes with the requirement of a minimum leverage ratio as a backstop to the existing Basel II risk-based capital ratio. Given that Canada and the US have adopted similar double capital rules prior to Basel III, we study the implications of these two rules on bank capital adjustments. We show that the mix of the two-capital rules can be viewed as a “hockey stick” shape single leverage ratio akin to a call option on the bank asset risk, measured by the risk-weighted assets (RWA) -to- total assets ratio, known as the RWA density. The exercise price of this call option is the quotient of the required minimum leverage ratio and the minimum risk-based capital ratio. Since a tighter limit was imposed in Canada than in the US on the combined leverage ratio, Canadian banks has exhibited asset risk-sensitive leverage ratios well before the 2007 global financial crisis (GFC). Meanwhile, the loosening regulatory limit on the US bank leverage ratio has rendered the leverage ratio in the US irresponsive or inversely related to US banks’ asset risk.

Regulation of Cyber Risk in the Banking Sector: A Canadian Case Study

Cyber risk is one of the greatest threats facing any modern financial system, a result of increasing dependence on technology and the appeal of troves of personal data to well-equipped hackers. This article examines the governance of cyber risk in the Canadian banking system in the backdrop of the COVID-19 Crisis which has led to a surge in cyber attacks. It argues that the existing operational risk framework, developed by the Basel Accords, is unfit to handle the unique challenges posed by cyber risk. Cyber incidents are unlike traditional operational disruptions in both their dynamism and impact, and are not adequately captured by backward-looking proxies, such as historical losses. There is also a mismatch between the traditional risk-based supervision, which relies on annual risk rating of banks, and the quickly changing cyber profile of regulated entities. The article calls for a paradigm shift in banking regulation such that cyber resilience is set as an explicit regulatory objective for both individual firms and the system as a whole. It outlines a number of strategies which can help banks and regulators navigate and adapt to the ever-changing cyber landscape.

Central bank digital currencies: experience of pilot projects and conclusions for the NBU

An overview of the definitions of central bank digital currency (CBDC), formulated by researchers of the International Monetary Fund (IMF), the Bank for International Settlements (BIS), the Bank of England, is presented, and the essence of the CBDC is revealed. It is stated that the existing electronic money is a digital form of obligations of financial intermediaries, and CBDC is a form of emission and obligations of central banks. The types and forms of CBDC are generalized, namely: retail or wholesale, account-based or token-based ones. The structure and functionality of the register, payment authentication, access to infrastructure, and governance are defined as factors taken into account during CBDC designing. Similar models of launching national CBDC by the Bank of England (economy-wide access or financial institutions access, and financial institutions plus CBDC backed narrow bank access) and BIS (direct, indirect, hybrid) are under consideration. The synthetic CBDCs are marked as a theoretical concept of CBDC. The overview of projects of the People's Bank of China – "e-renminbi", the Central Bank of the Uruguay – "e-peso", the Central Bank of the Bahamas – "sand dollar" and the Eastern Caribbean Central Bank affirm the interest of developing countries in launching national retail CBDCs. It was found that apart from the Riksbank with the successful "e-krona" project, most of the monetary authorities of developed countries (BIS, Bank of Japan, Bank of Canada, Deutsche Bank, FRS) are just planning or starting to experiment with the issuance of digital securities, which demonstrates their concern about the restructuring of the banking system and the changes of global role of traditional currencies. Among the positive consequences of the introduction of CBDC for the domestic banking system are the emergence of an alternative payment instrument, the implementation of effective monetary policy through increased influence on interest rates, and regulation of the legal regime of crypto currencies. At the same time, the introduction of CBDC involves certain changes in financial intermediation (replacement of the deposits of commercial banks with the CBDC, the performance of functions inherent to commercial banks by the central bank or fintech companies), and will require powerful technical capabilities, including those related to protection from cyber risks. The results of the study point to the need for a cautious approach to the implementation of the Ukrainian CBDC only after the NBU assesses the public demand for new forms of money and the impact of the launch of CBDC models on price and financial stability, and compares available payment technologies that can achieve the same goals as the CBDC.

Цифрові валюти центральних банків: досвід пілотних проєктів та висновки для НБУ

An overview of the definitions of central bank digital currency (CBDC), formulated by researchers of the International Monetary Fund (IMF), the Bank for International Settlements (BIS), the Bank of England, is presented, and the essence of the CBDC is revealed. It is stated that the existing electronic money is a digital form of obligations of financial intermediaries, and CBDC is a form of emission and obligations of central banks. The types and forms of CBDC are generalized, namely: retail or wholesale, account-based or token-based ones. The structure and functionality of the register, payment authentication, access to infrastructure, and governance are defined as factors taken into account during CBDC designing. Similar models of launching national CBDC by the Bank of England (economy-wide access or financial institutions access, and financial institutions plus CBDC backed narrow bank access) and BIS (direct, indirect, hybrid) are under consideration. The synthetic CBDCs are marked as a theoretical concept of CBDC. The overview of projects of the People's Bank of China – "e-renminbi", the Central Bank of the Uruguay – "e-peso", the Central Bank of the Bahamas – "sand dollar" and the Eastern Caribbean Central Bank affirm the interest of developing countries in launching national retail CBDCs. It was found that apart from the Riksbank with the successful "e-krona" project, most of the monetary authorities of developed countries (BIS, Bank of Japan, Bank of Canada, Deutsche Bank, FRS) are just planning or starting to experiment with the issuance of digital securities, which demonstrates their concern about the restructuring of the banking system and the changes of global role of traditional currencies. Among the positive consequences of the introduction of CBDC for the domestic banking system are the emergence of an alternative payment instrument, the implementation of effective monetary policy through increased influence on interest rates, and regulation of the legal regime of crypto currencies. At the same time, the introduction of CBDC involves certain changes in financial intermediation (replacement of the deposits of commercial banks with the CBDC, the performance of functions inherent to commercial banks by the central bank or fintech companies), and will require powerful technical capabilities, including those related to protection from cyber risks. The results of the study point to the need for a cautious approach to the implementation of the Ukrainian CBDC only after the NBU assesses the public demand for new forms of money and the impact of the launch of CBDC models on price and financial stability, and compares available payment technologies that can achieve the same goals as the CBDC.

Data Level Approach for Multiclass Imbalance Financial Data

In the real world, the class imbalance problem is a common issue in which classifier gives more importance to the majority class whereas less importance to the minority class. In class imbalance, imbalance metrics would not be suitable to evaluate the performance of classifiers with error rate or predictive accuracy. One type of imbalance data -handling method is resampling. In this paper, three resampling methods, oversampling, under-sampling and hybrid, methods are used with different approaches for in class imbalance of two different financial data to see the impact of class imbalance ratios on performance measures of nine different classification algorithms. Aiming to achieve better change classification performance, the performance of the classification algorithms, Bayes Net, Navie Bayes, J48, Random Forest Meta-Attribute Selected Classifier, MetaClassification via Regression, Meta-Logitboost, Logistic Regression, and Decision Tree, are measured on two Canadian Banks multiclass imbalance data with the performance measures, Precision, Recall, ROC Area and Kappa Statistic, by using WEKA software. The outcome of these performance measurements compared with three different resampling methods. The results provide us with a clear picture on the overall impact of class imbalance on the classification dataset and they indicate that proposed resampling methods can also be used for in class imbalance problems

A Keynesian analysis of Canadian government securities yields

Keynes argued that the short-term interest rate is the main driver of the long-term interest rate on government bonds. This paper empirically models the relationship between the short-term interest rate and long-term government securities yields in Canada, after controlling for other important financial variables. The statistical analysis uses high-frequency daily data from 1990 to 2018 to examine the behavioral dynamics of the long-term interest rate. The empirical results show that the actions of the Bank of Canada are key drivers of Canadian government securities yields in the long run, which supports the Keynesian perspective. There is a positive association between long-term bond yields and the Canadian federal government’s net debt to GDP ratio, but the effect is fairly modest. An important implication of these findings is that the Bank of Canada’s actions can have a decisive effect on the long-term interest rate over the long horizon. JEL codes : E43, E50, E60, G10, G12

Is an oligopolistic banking system more resilient and at what cost? A study of the competitiveness of the Canadian banking structure

The Canadian banking system, like its Australian counterpart, is often credited for weathering the 2007/8 financial crisis effectively. The oligopolistic rent is overlooked, as a necessary price for the resiliency of the system. In this paper, the authors discuss that the resilience was due to the banks’ ability to pass on the cost of the crisis and the following regulations to the end users of their products and services, and their ability to alter products and services to maximise profitability. In a competitive market, positive economic profit is supposed to erode over time, especially following major events such as the 2007/8 crisis. This did not happen for Canadian banks; therefore, arguably, there was an ‘implicit bailout’ in Canada whose cost was not borne by the taxpayers (as in the case of an explicit bailout) but by the end users of the banking services and products (the payers of the oligopolistic rent). This may reoccur in the aftermath of the COVID crisis, and the perceived resilience may win out over competition. The authors also theorise the diversification benefit vs the systemic risk trade-off with an increasing bank size. The diversification benefit can increase, but at a decreasing rate as a bank grows, whereas systemic risk increases at an increasing rate. Therefore, there exists a point where the systemic risk outweighs the diversification benefit as a bank continues to grow. The authors find that the standardised capital regime not only diminishes the banks’ competiveness against their internal ratings-based (IRB) counterparts but also forces them into the riskier segments of the market and diminishes their ability to diversify. The authors make a case that a banking environment that promotes competition is desirable to increase the utility of the system without sacrificing safety and soundness. As a matter of fact, increased competition can increase stability while reducing the undesired implicit public subsidy of private enterprise.