John Kiff

Canadian Residential Mortgage Markets: Boring But Effective?

Klyuev (2008) concluded that the Canadian market for housing finance is highly advanced and sophisticated, but financing options were somewhat limited, particularly at terms longer than five years. This paper argues that the paucity of longer-term loans is caused by a five-year maturity cap on government-guaranteed deposit insurance, and a prepayment penalty limit on residential mortgage loans in the Interest Act. That said, the availability and cost of residential loans for prime borrowers are comparable to those in the United States.

A Shot at Regulating Securitization

In order to incentivize stronger issuer due diligence effort, European and U.S. authorities are amending securitization-related regulations to force issuers to retain an economic interest in the securitization products they issue. This paper contributes to the process by exploring the economics of equity and mezzanine tranche retention in the context of systemic risk, moral hazard, accounting frictions and funding distortions. It shows that loan screening activity is maximized when the loan originating bank retains the equity tranche. However, in case capital structure irrelevance does not hold a profit maximizing bank is likely to favor retention of the less risky mezzanine tranche. From a regulators perspective this is a problem because the implied loan screening activity is substantially lower in this case. Policy attention is even more warranted if performing due diligence is costly, the economic outlook is positive or loan profitability is high.

Asset Securitization and Optimal Retention

This paper builds on recent research by Fender and Mitchell (2009) who show that if financial institutions securitize loans, retaining an interest in the equity tranche does not always induce the securitizer to diligently screen borrowers ex ante. We first determine the conditions under which this scenario becomes binding and further illustrate the implications for capital requirements. We then propose an extension to the existing model and also solve for optimal retention size. This also allows us to capture feedback effects from capital requirements into the maximization problem. Preliminary results show that equity tranche retention continues to best incentivize loan screening.

How the Canadian Housing Finance System Performed through the Credit Crisis: Lessons for Other Markets

Canada’s housing finance system exhibited considerable resilience during the recent financial crisis with comparatively little reliance on extraordinary government support. Several distinctive features of Canadian public policy and regulations have had a direct impact on the performance of the housing finance system. This article has three principal sections: The first section provides an overview of Canadian residential mortgage markets, including key features of the Canadian compared to the U.S. housing finance system, a comparison of Canadian and U.S. residential house offerings, and policy implications. The second section provides an overview of Canada’s housing finance system, including relevant features of Canada’s public policy landscape, the role of the Canada Mortgage and Housing Corporation (CMHC), the role of the private sector, and current initiatives underway to improve the system. The third section shows how the Canadian financial system performed through the financial crisis, discussing the performance of the banking system, the impact of the recession on intermediation, and factors related to the banking, regulatory, and communication structures that contributed to favorable outcomes for the Canadian financial sector.

The Impact of Longevity Improvements on U.S. Corporate Defined Benefit Pension Plans

This paper provides the first empirical assessment of the impact of life expectancy assumptions on the liabilities of private U.S. defined benefit (DB) pension plans. Using detailed actuarial and financial information provided by the U.S. Department of Labor, we construct a longevity variable for each pension plan and then measure the impact of varying life expectancy assumptions across plans and over time on pension plan liabilities. The results indicate that each additional year of life expectancy increases pension liabilities by about 3 to 4 percent. This effect is not only statistically highly significant but also economically: each year of additional life expectancy would increase private U.S. DB pension plan liabilities by as much as

Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically

84 billion.

Do Pension Plans Exploit Regulatory Leeway to Manage Pension Liabilities

We use a historical experiment to test whether U.S. corporate defined benefit pension plans strategically use regulatory freedom to lower the reported value of pension liabilities, and hence required cash contributions. For some years, pension plans were required to estimate two liabilities - one with mandated discount rates and mortality assumptions, and another where these could be chosen freely. Using a sample of 11,963 plans, we find that the regulated liability exceeds the unregulated measure by 10 percent and the difference further increases for underfunded pension plans. Moreover, underfunded plans tend to assume lower life expectancy and substantially higher discount rates. The effect persists both in the cross-section of plans and over time and it serves to reduce cash contributions. Finally, we show that credit risk is unlikely to explain the finding. Instead, it seems that plans use regulatory leeway as a simple cash management tool.We employ the fundamental details of U.S. pension funding law to test whether corporate defined benefit (DB) pension plans manipulate reported pension liabilities. Using a large sample of 11,963 plans, we find that reported pension liabilities are understated by approximately 10 percent. Most of the bias is driven by higher assumed discount rates, whereas a small fraction relates to the use of outdated longevity assumptions. The bias is particularly strong for underfunded plans. These findings are relevant for current policy discussions, as U.S. lawmakers have recently given more freedom to DB pension plan sponsors to reduce their reported pension liabilities. JEL Classification: G23; G39; J32 ∗The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. We thank Stephen Boyce, Benedict Clements, Frank Eich, David Gustafson, Gregorio Impavido, Laura Kodres, Olivia Mitchell, S. Erik Oppers, Ian Tonks and Amy Viener for invaluable feedback. Please address all correspondence to michael.kisser@nhh.no. †Norwegian School of Economics ‡International Monetary Fund

Money for Nothing and Checks for Free: Recent Developments in U.S. Subprime Mortgage Markets

We use a historical experiment to test whether U.S. corporate defined benefit pension plans strategically use regulatory freedom to lower the reported value of pension liabilities, and hence required cash contributions. For some years, pension plans were required to estimate two liabilities - one with mandated discount rates and mortality assumptions, and another where these could be chosen freely. Using a sample of 11,963 plans, we find that the regulated liability exceeds the unregulated measure by 10 percent and the difference further increases for underfunded pension plans. Moreover, underfunded plans tend to assume lower life expectancy and substantially higher discount rates. The effect persists both in the cross-section of plans and over time and it serves to reduce cash contributions. Finally, we show that credit risk is unlikely to explain the finding. Instead, it seems that plans use regulatory leeway as a simple cash management tool.