In particular, Canadian institutional investors began to sell foreign securities, especially debt securities, and, their appetite for foreign investments has not returned. Nevertheless, international transactions in securities changed markedly beginning in mid-2007. First, Canadian asset-backed securities remained relatively sound investments 3 and, second, Canadian portfolio investment abroad was concentrated in marketable corporate shares, 4 with relatively little exposure to what has been referred to as foreign “toxic assets”, notably low quality mortgage-backed securities and the securities derived from them. In the case of the recent financial turmoil, risk was diffused to investors around the world through the securitization process, which eventually proved important to the speed and severity with which the contagion in credit markets spread after August 2007.Ĭredit risk was less of a problem for Canadian investors as global credit conditions deteriorated, for two main reasons. The pace of financial innovation and globalization also ushered in new types and uses of financial instruments - in particular, the growth of investment in financial institutions’ receivables 2 via asset-backed securities, where the risk associated with these instruments is passed on to investors. As a result of the ensuing outflow of investment in securities, Canada’s exposure to risk in foreign financial markets correspondingly increased, due to fluctuations in both the exchange rate and the price of securities. This development was facilitated by legislative changes, as the ceiling on foreign investment allowed in pension funds and other tax-deferred retirement plans was raised a number of times beginning in 1990 and eliminated in 2005. This development was underpinned by the substantial growth of institutional investors in Canada, largely pension funds seeking wider opportunities to invest. A significant portion of these outflows was in the form of portfolio investment abroad in marketable securities. However, over most of the past two decades Canada has invested substantial funds abroad, especially from 1998 to 2008, reflecting its expanding current account surplus and the trend to substantially increased access to international financial markets – specifically, securities markets. In addition, the established pattern from the post-war years until the mid-1990s was a net inflow of direct investment from abroad. For many years, Canada was a net borrower from abroad to finance both the current account and government deficits. Boulay 1 Background and contextĬross-border financial transactions have been an important element of Canada’s balance of payments statistics for a number of years, and a main factor in the evolution of Canada’s international investment position. Next | Previous The evolution of the global financial crisis and cross-border financial activity, 2007-2010 by E.
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