BoC Releases Autumn 2011 Review

The Bank of Canada has released the Bank of Canada Review: Autumn 2011 with major articles:

  • The International Monetary System: An Assessment and Avenue for Reform
  • Liquidity Provision and Collateral Haircuts in Payments Systems
  • Extracting Information from the Business Outlook Survey: A Principal-Component Approach
  • Modelling the Counterfeiting of Bank Notes: A Literature Review

The second article, on Liquidity provision, is by James Chapman, Jonathan Chiu and Miguel Molico, all of whom are bank employees. They explain:

The study presented in the following section argues that the central bank’s haircut policy can therefore directly affect liquidity in these markets and indirectly influence market participants’ choice of asset portfolios, as well as the pricing of credit and liquidity spreads. The central bank is concerned not only about its own exposure to credit risk, but also about the efficiency and stability of the financial system. Consequently, in setting its haircut policy, the central bank must consider the impact of the policy on the financial system and its participants.

A growing need for high quality collateral is forecast:

Policy-makers also face the challenge of a growing demand for high-quality collateral. Modern financial systems tend to utilize more collateral because of the increased private use of collateral, and because of the need to post additional collateral with payment and settlement systems. The G-20 countries committed to have all standardized over-the-counter derivatives contracts cleared by central counterparties (CCPs) by the end of 2012 to help strengthen the global financial system. Such an increase in CCP activity has the potential to increase the need for collateral. In addition, revisions to the core principles for financial market infrastructure, currently being considered by the Bank for International Settlements’ Committee on Payment and Settlement Systems and by the International Organization of Securities Commissions, will further increase the demand for collateral by financial market participants. The haircuts set by central banks are important parameters in determining the ability of financial systems to make the most efficient use of high-quality collateral.

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