Canada’s Côté talks shadow-banking regulation

Agathe Côté, a deputy governor at the Bank of Canada, on Tuesday examined the potential risks associated with shadow banking, or market-based financing, and discussed policy options being considered by regulators to address risks emerging from the sector.

At the Financial Markets Association of Canada in Toronto, Canada, Côté said: "Throughout the global financial crisis, Canada's financial system showed its strength and resilience. Nonetheless, an important lesson from the non-bank asset-backed commercial paper episode in particular and the global crisis more generally is that our financial system is not immune to vulnerabilities in market-based financing."

Côté said market-based financing raised concerns over regulatory arbitrage and the possibility of systemic risk, as such borrowers typically do not have direct access to central bank liquidity. Côté said there were various responses that policymakers could consider to indirectly regulate market-based financing activities, including regulating the banks' involvement in them, and directly regulating entities that are active in market-based financing and that pose systemic risk concerns or create opportunities for regulatory arbitrage.

Click here to read the speech