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Liquidity Provision, Liquidity Demand and Default Risk in Canada during the Subprime Crisis

Author

Listed:
  • Jakub Kastl

    (Stanford University)

  • Ali Hortacsu

    (University of Chicago)

  • Jason Allen

    (Bank of Canada)

Abstract

We analyze the Canadian banking system and focus on the monetary policy implementation and bank behavior during the subprime market crisis. Using a dataset on bilateral credit lines in the Large Value Transfer System (LVTS) through which transactions between banks are cleared together with data from auctions of liquidity, we analyze and quantify the perceived default risk of individual banks. We compare our results with the time series of the prices of credit default swaps and we argue that the private information about default gets revealed much faster in actions on the interbank market and in the central bank's liquidity auctions than on the CDS market. We further use our model to quantify the benefit to participating banks of being allowed to post the whole non-mortgage portfolio as collateral in the banking system in the post November 2008.

Suggested Citation

  • Jakub Kastl & Ali Hortacsu & Jason Allen, 2010. "Liquidity Provision, Liquidity Demand and Default Risk in Canada during the Subprime Crisis," 2010 Meeting Papers 1335, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:1335
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