Skip to main content

Economy Bank of Canada lays out plan for future bailouts

Bank of Canada Senior Deputy Governor Carolyn Wilkins takes part in an event in Ottawa February 10, 2015.

BLAIR GABLE/REUTERS

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.

Story continues below advertisement

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.

Story continues below advertisement

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.

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter