Credit and credit aggregates
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Optimal Capital Regulation
We study constrained-efficient bank capital regulation in a model with market-imposed equity requirements. Banks hold equity buffers to insure against sudden loss of access to funding. However, in the model, banks choose to only partially self-insure because equity is privately costly. -
Monetary Policy, Private Debt and Financial Stability Risks
Can monetary policy be used to promote financial stability? We answer this question by estimating the impact of a monetary policy shock on private-sector leverage and the likelihood of a financial crisis. Impulse responses obtained from a panel VAR model of 18 advanced countries suggest that the debt-to-GDP ratio rises in the short run following an unexpected tightening in monetary policy. -
Supervising Financial Regulators
How much discretion should local financial regulators in a banking union have in accommodating local credit demand? I analyze this question in an economy where local regulators privately observe expected output from high lending. They do not fully internalize default costs from high lending since deposit insurance cannot be priced fairly. -
Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases
Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators. -
Assessment of the Effects of Macroprudential Tightening in Canada
During the period of 2008 to 2012, the rules for government-backed mortgage insurance were tightened on four occasions. In this note, we estimate the effects through a simple econometric exercise using a vector error-correction model (VECM). -
Financial Crisis Interventions
This paper develops a model of an economy where bank credit supports both productive investment and individual consumption smoothing in the face of idiosyncratic income risk. Bank credit is constrained by bank equity capital. -
The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit
We examine the impact of the 2009 amendments to the Canadian Bankruptcy and Insolvency Act on insolvency decisions. Rule changes steered debtors out of division I proposals and into the more cost-effective division II proposals. -
On the Nexus of Monetary Policy and Financial Stability: Effectiveness of Macroprudential Tools in Building Resilience and Mitigating Financial Imbalances
This paper reviews the Canadian and international evidence of the effectiveness of macroprudential policy measures in building resilience and mitigating financial imbalances. The analysis concludes that these measures have broadly achieved their goal of increasing the overall resilience of the financial system to the buildup of imbalances and increasing the financial system’s ability to withstand adverse shocks. -
Debt Overhang and Deleveraging in the US Household Sector: Gauging the Impact on Consumption
Using a novel dataset for the US states, this paper examines whether household debt and the protracted debt deleveraging help explain the dismal performance of US consumption since 2007, in the aftermath of the housing bubble. -
15 December 2015 Indebted Households and Potential Vulnerabilities for the Canadian Financial System: A Microdata Analysis
Over the past decade, an increasing proportion of households in Canada have become highly indebted relative to their income. These highly indebted households now hold one-fifth of total Canadian household debt.Simulations suggest that this greater degree of household indebtedness could exacerbate the impact of shocks to income and interest rates relative to the pre-crisis period. However, an assessment of the vulnerability of the Canadian financial system should, among other factors, account for the ability of Canadian financial institutions to withstand losses from the household sector.