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Data needs and cross-border exposures

Data needs and cross-border exposures. Presentation to the IMF July 8 th , 2009 Christopher Reid Bank of Canada. Mandates and cross-border exposures. Micro prudential regulators are mandated with the viability of individual institutions .. And they typically have access to the data.

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Data needs and cross-border exposures

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  1. Data needs and cross-border exposures Presentation to the IMF July 8th, 2009 Christopher Reid Bank of Canada

  2. Mandates and cross-border exposures • Micro prudential regulators are mandated with the viability of individual institutions .. And they typically have access to the data. • Macro prudential oversight is now a key consideration – Canada has helped form the thinking on this issue through G-20 working group 1. • From a macro prudential level we need better understanding of interconnections and common exposures– domestically and internationally • This will require new data

  3. What is the purpose of understand cross-border exposures? • In the end, we care about shocks and vulnerabilities that originate in other countries impacting our respective domestic FIs and markets. • What we need is a complete, and integrated model of all “systemically” important financial institutions with all the linkages and common exposures identified and quantified. • To do so we need to understand the risks in: • The trading book, • the loan book; and • funding risks.

  4. The First Best Solution not realistic • We need to know everything about everybody at all times ….

  5. State of play • BIS consolidated banking statistics best current source of cross border exposures • But data is highly aggregated and focused on loan book • In Canada, we can supplement this information with: • Bank of Canada’s Business and Financial Statistics - Aggregated Balance sheet data available … • Private information from the Office of the Superintendent of Financial Institutions (OSFI) - Limited data on assets and liabilities of specific Canadian banks

  6. Recent crisis as an example • Initial shock propagated via the trading book rather than the banking book • Lack of transparency led to elevated counterparty concerns • Which in turn fed into funding markets • Canadian banks’ funding costs (CDOR-OIS) increased markedly, despite little direct exposure to shock • Contagion is a key concern for the Canadian financial system

  7. Data shortcomings • Aggregate data is less useful in understanding contagion amongst financial institutions. • Institution specific data is a sensitive issue • Banking book exposures are relatively accessible in existing data • Exposures in the trading book are less transparent and likely more important and timeliness is an issue • OTC markets and securitization markets represent significant exposure for FIs – but relatively little data is available • Funding and liquidity information • Reporting of “non-banks” must be improved

  8. Data consistency and access issues • Different definitions and accounting standards are a problem • Being dealt with by BCBS, IASB, and FASB • Significant undertaking - Comparing data across countries requires detailed knowledge of the construction of each data series. • Access to data is limited to a sub-set of countries • Cross border bank net exposures are hard to establish • where the trade is booked is less helpful.

  9. Theory also lagging behind • Contagion literature still has far to go • Identifying and evaluating the importance of all the linkages is in the early stages • Process is also dynamic – regulatory changes will change the financial landscape and data needs will change as a result • Need to capture second-round effects

  10. Even if we had all the data … • Many unresolved issues: • Example: Bank A is exposed to Company B in the following way: • Long $5 Million in loan exposure • Long $2 million in equity holdings • Long $3 million in unused credit commitments • Short $10 million as part of a CDO mezzanine tranche • What is the net exposure of Bank A to Company B? • How does this net exposure vary with market movements?

  11. Work to be done • Steps towards the standardization and centralization of the OTC market are encouraging • Need data on counterparty exposures • Trading book data - establish typical exposures and cyclical patterns

  12. International cooperation between regulators is key • Data requirements are similar for deciphering domestic and foreign exposures • Challenge lies in accessing information • Sharing information across jurisdictions is essential but may be difficult to put in place in practice • Regulatory colleges will improve regulatory cooperation – but how does this extend to macro-prudential?

  13. Key points What we need: • More disaggregated data • Information about trading book, including OTC markets exposures • Better theory • Better cooperation between regulators and central banks both domestically and across borders.

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