Be prepared for next financial crisis, warns C.D. Howe
Bank of Canada should establish new permanent liquidity pools to be instantly available.
TORONTO — The Bank of Canada (BoC) should start preparing for the next financial crisis by establishing permanent liquidity pools, according to a new C.D. Howe Institute report.
In “Looking for Liquidity: Banking and Emergency Liquidity Facilities,” author Jeremy Kronick urges the BoC to establish new permanent liquidity pools that would be instantly available in times of crisis.
The Toronto-based research firm warns financial institutions face a smaller liquidity market today than prior to the 2008-09 crisis. When the next financial crisis hits, they could face greater difficulty obtaining funding from private markets.
For example, in the US, daily trading volumes of agency mortgage-backed securities fell from US$321 billion in 2010 to US$178 billion in 2014.
The author argues permanent mechanisms would allow for on-going design improvements as market conditions evolve, adding transparency for market participants.
He recommends getting the design right by using the “Product-Mix” auction design, which involves an unlimited bid, single-round process in which bids are made on different forms of collateral simultaneously, and no minimum reference price above the benchmark overnight rate is established in advance.
Click here for the report.