G3 - Corporate Finance and Governance
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June 7, 2018 The Bank of Canada’s Financial System Survey
This report presents the details of a new semi-annual survey that will improve the Bank of Canada’s surveillance across the financial system and deepen efforts to engage with financial system participants. The survey collects expert opinions on the risks to and resilience of the Canadian financial system as well as on emerging trends and financial innovations. The report presents an overview of the survey and provides high-level results from the spring 2018 survey. -
Measuring Vulnerabilities in the Non-Financial Corporate Sector Using Industry- and Firm-Level Data
Aggregate non-financial corporate debt-to-GDP has been growing rapidly in recent years and is at an all-time high. This growth began in 2011 and accelerated as the oil price shock affected the Canadian economy. -
Credit Risk Transfer and Bank Insolvency Risk
The present paper shows that, everything else equal, some transactions to transfer portfolio credit risk to third-party investors increase the insolvency risk of banks. This is particularly likely if a bank sells the senior tranche and retains a sufficiently large first-loss position. -
Recent Evolution of Canada’s Credit-to-GDP Gap: Measurement and Interpretation
Over the past several years, the Bank for International Settlements has noted that Canada’s credit-to-GDP gap has widened and is above thresholds indicating future banking stress. -
Do Liquidity Proxies Measure Liquidity in Canadian Bond Markets?
This analytical note evaluates the reliability of proxies for measuring liquidity in Canadian bond markets. We find that price-impact and bid-ask proxies paint a similar picture of evolving liquidity conditions to that obtained from richer measures of liquidity for benchmark Government of Canada bonds. -
Methodology for Assigning Credit Ratings to Sovereigns
The investment of foreign exchange reserves or other asset portfolios requires an assessment of the credit quality of investment counterparties. Traditionally, foreign exchange reserve and asset managers have relied on credit rating agencies (CRAs) as the main source for credit assessments. -
Multilateral Development Bank Credit Rating Methodology: Overcoming the Challenges in Assessing Relative Credit Risk in Highly Rated Institutions Based on Public Data
The investment of foreign exchange reserves or other asset portfolios requires an assessment of the credit quality of counterparties. Traditionally, foreign exchange reserve managers and other investors have relied on credit rating agencies (CRAs) as the main source for credit assessments. -
May 11, 2017 Why Is Global Business Investment So Weak? Some Insights from Advanced Economies
Various drivers of business investment can be used to explain the underwhelming performance of investment in advanced economies since the global financial crisis, particularly since 2014. The slow growth in aggregate demand cannot by itself explain the full extent of the recent weakness in investment, which appears to be linked primarily to the collapse of global commodity prices and a rise in economic uncertainty. Looking ahead, business investment growth is likely to remain slower than in the pre-crisis period, largely because of structural factors such as population aging. -
Equity Option-Implied Probability of Default and Equity Recovery Rate
There is a close link between prices of equity options and the default probability of a firm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability. -
Financial Constraint and Productivity: Evidence from Canadian SMEs
The degree to which financial constraint is binding is often not directly observable in commonly used business data sets (e.g., Compustat). In this paper, we measure and estimate the likelihood of a firm being constrained by external financing using a data set of small- and medium-sized Canadian firms.