The Bank of Canada is taking advantage of the post-financial crisis calm to shore up its defences against future liquidity emergencies, including the power to bail out provincially regulated institutions, such as Quebec's Desjardins Group credit union network.
The central bank laid out its plan in two discussion papers, released Tuesday and open for industry comment until early July.
"Should another bout of liquidity turmoil arise, we will be ready," senior deputy governor Carolyn Wilkins vowed in remarks prepared for a speech to the Board of Trade of Metropolitan Montreal.
The various changes, slated for implementation later this year and in 2016, are an effort to ensure that the risks of financial transactions are "priced more appropriately" in the market, Ms. Wilkins said.
While the measures would make funding "marginally more expensive," she suggested it's a "small price to pay" to avert another crisis.
In her speech, Ms. Wilkins highlighted several emerging financial risks, including the vastly expanded shadow banking sector, diminished liquidity in corporate bond markets, and the ability of exchange-traded funds (ETFs) and some mutual funds to withstand major shocks.
"The worry is that fund managers may not have enough cash holdings and may be forced to incur large losses as they sell assets to cover redemptions," she explained. "It's far from clear that all investors and savers appreciate the liquidity and redemption risks involved in some funds. ... Everyone should be aware of all the risks involved in investing, including liquidity risk."
The banking industry is reserving judgment on the changes, some of which the Canadian Bankers Association characterized as tweaking.
"There are a lot of pieces being changed, some of which are just tweaks," said CBA Robin Walsh. "It's going to take us some time to get through it and talk to our members to get a sense of the significance of the proposals."
The changes unveiled Tuesday would also see the bank create a new "contingent term repo facility" available to primary dealers, such as Canada's big banks, and other institutions, in the event of a "market-wide" liquidity crunch.
As well, the bank is proposing to cut the amount of "benchmark" government bonds it buys and to set up a regular program of term repo, or repurchase, operations to better manage its balance sheet.
And the bank is adding mortgages to the list of acceptable collateral that financial institutions could put up to get emergency loans.
The Bank of Canada said it intends to put strict conditions on any emergency loans it would make to provincially regulated institutions. Among them, recipients would have to be members of the Canadian Payments Association, the host province would have to backstop any losses incurred by the central bank and the emergency loans would only be made if the stability of the Canadian financial system were at risk.