The “search for yield” could cause risk to be underpriced or lead investors to take on exposures that they may not be able to manage if conditions become less benign. Since December, there has been mounting evidence of this search-for-yield dynamic in the global financial system, although the risk that it could lead to financial instability in Canada remains moderate.
Key features of market-based financing The market behaviours I have just outlined – excessive risk-taking and the potential underpricing of risks – can, and often do, manifest themselves in the market-based financing or shadow banking sector. Let me describe the principal characteristics of the sector.