Data needs and cross-border exposures

Presentation to the IMF July 8th, 2009

Christopher ReidBank 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.

• 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

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:1. The trading book,2. the loan book; and 3. funding risks.

The First Best Solution not realistic

• We need to know everything about everybody at all times ….

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

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

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

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.

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

Even if we had all the data …

• Many unresolved issues:• Example: Bank A is exposed to Company B in the

following way:1. Long $5 Million in loan exposure

2. Long $2 million in equity holdings

3. Long $3 million in unused credit commitments

4. 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?

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

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?

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.