Liquidity regulation for Canadian NBFIs
Mittelmann, Noah Kai (2024)
2024
All rights reserved. This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-202401312273
https://urn.fi/URN:NBN:fi:amk-202401312273
Tiivistelmä
As recent macroeconomic stress and a changed interest rate environment in Canada exposed vulnerabilities, and OSFI included transmission risk from the non-bank financial intermediary sector among its risk outlook for 2024, understanding what liquidity regulation is necessary to ensure financial stability in Canada has become an important discussion. This thesis investigates how money market mutual funds impact the financial stability of the Canadian banking sector to determine how these NBFIs should be regulated differently in the future. It provides a management summary of the current state of money market mutual fund regulation, its risks, and the next steps for the regulator.
A qualitative study based on an extensive literature review and three semi-structured interviews was conducted. The expert opinions were gathered between December 10, 2023 and January 7, 2024. Findings were analysed using a comprehensive seven-step process for conducting, analysing, and reporting semi-structured interview data.
The results show that liquidity concerns, such as the liquidity mismatch, in money market mutual funds impact the financial stability of the Canadian economy through its connection with the traditional banking sector. However, the small size of MMMFs in Canada (0,009 % of financial system assets in 2021) means that they do not pose a significant threat to financial stability currently.
The study has found that current liquidity regulation for Canadian banks, such as the Basel framework, still has gaps. The author recommends professionals expect changes to the Canadian liquidity regulation landscape in the next years. Moreover, liquidity regulation for MMMFs in the form of securities regulation is judged to be sufficient.
Consequently, the thesis has found that it is not necessary to place MMMFs under prudential liquidity regulation as of now. Instead, the author recommends that regulators increase transparency in the sector and for more researchers to focus on understanding the different types of Canadian NBFIs, as well as their uniqueness compared to the US and European markets.
Overall, the author found that while liquidity in MMMFs can influence the Canadian economy through its connection with the traditional banking sector, due to their insignificant size and sufficient existing regulation, no additional prudential liquidity regulation is necessary.
The thesis gives recommendations for the commissioning company to expect changes in prudential liquidity regulation in the coming years and to increase their efforts in understanding the NBFI sector more intimately, to defend their position as the market leader.
A qualitative study based on an extensive literature review and three semi-structured interviews was conducted. The expert opinions were gathered between December 10, 2023 and January 7, 2024. Findings were analysed using a comprehensive seven-step process for conducting, analysing, and reporting semi-structured interview data.
The results show that liquidity concerns, such as the liquidity mismatch, in money market mutual funds impact the financial stability of the Canadian economy through its connection with the traditional banking sector. However, the small size of MMMFs in Canada (0,009 % of financial system assets in 2021) means that they do not pose a significant threat to financial stability currently.
The study has found that current liquidity regulation for Canadian banks, such as the Basel framework, still has gaps. The author recommends professionals expect changes to the Canadian liquidity regulation landscape in the next years. Moreover, liquidity regulation for MMMFs in the form of securities regulation is judged to be sufficient.
Consequently, the thesis has found that it is not necessary to place MMMFs under prudential liquidity regulation as of now. Instead, the author recommends that regulators increase transparency in the sector and for more researchers to focus on understanding the different types of Canadian NBFIs, as well as their uniqueness compared to the US and European markets.
Overall, the author found that while liquidity in MMMFs can influence the Canadian economy through its connection with the traditional banking sector, due to their insignificant size and sufficient existing regulation, no additional prudential liquidity regulation is necessary.
The thesis gives recommendations for the commissioning company to expect changes in prudential liquidity regulation in the coming years and to increase their efforts in understanding the NBFI sector more intimately, to defend their position as the market leader.