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What Explains Month-End Funding Pressure in Canada?

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  • Christopher S. Sutherland

Abstract

The Canadian overnight repo market persistently shows signs of latent funding pressure around month-end periods. Both the overnight repo rate and Bank of Canada liquidity provision tend to rise in these windows. This paper proposes three non-mutually exclusive hypotheses to explain this phenomenon. First, month-end funding pressure may be caused by search frictions. Market participants place a premium on liquidity around month-end periods because of the confluence of a generalized liquidity preference, heightened month-end forecast uncertainty, and resultant search frictions in the repo market. Second, this funding pressure could be attributed to spillovers from the US overnight repo market. Third, month-end funding pressure might be associated with large Canadian banks’ end-of-month repo adjustments. By combining market, central-bank and payments data, this paper provides evidence that the first hypothesis explains the latent funding pressure observed on the first day of the month. Using market and non-public regulatory data, this paper further argues that the second and third hypotheses are much less plausible.

Suggested Citation

  • Christopher S. Sutherland, 2017. "What Explains Month-End Funding Pressure in Canada?," Discussion Papers 17-9, Bank of Canada.
    • Handle: RePEc:bca:bocadp:17-9
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    Cited by:

    1. Christopher S Sutherland, 2022. "Forward guidance and expectation formation: A narrative approach," BIS Working Papers 1024, Bank for International Settlements.
    2. Christopher S. Sutherland, 2020. "Forward Guidance and Expectation Formation: A Narrative Approach," Staff Working Papers 20-40, Bank of Canada.

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    More about this item

    Keywords

    Financial markets; Interest rates; Monetary policy framework; Monetary policy implementation; Transmission of monetary policy;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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