After bailing out the financial system, the Bank of Canada and regulators are working to reduce the threat of moral hazard, deputy governor David Longworth said Wednesday.

In a speech to the C.D. Howe Institute, Longworth said “having gone through a financial crisis, we can be even more clear on how to [reduce moral hazard].”

The three basic things a central bank can do, he said, include:

• limiting crisis intervention to significant systemic events;

• encouraging reforms to make the financial system more resilient to systemic shocks; and

• maintaining a flexible intervention strategy.

“The goal is to reach a destination where financial institutions, markets, and infrastructure play critical — and complementary — roles to support long-term economic prosperity,” he said.

“As we move forward, it is important that financial system participants do not believe that our intervention in times of crisis implies a willingness to intervene in normal times. It is also important that we retain considerable flexibility about when and how to intervene in the next crisis to fulfill our mandate to be liquidity lender of last resort to the financial system in the event of a systemic shock,” Longworth added.

“For the Bank, the primary facilities used during the crisis, the term PRA and the term loan facility, should continue to be a part of the Bank’s toolkit, as is our Emergency Lending Assistance. In a crisis with a shortage of good quality collateral, the Bank would also consider a term securities lending facility to exchange good collateral for lower quality collateral — at the appropriate price — in order to support the functioning of core funding markets. Given potential changes to core market infrastructure (the implementation of central counterparties, for example), further study will also be important to determine the appropriate tools to address future liquidity issues,” he said.

IE