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. 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.