When the next financial crisis hits, the Bank of Canada (BoC) could potentially backstop financial market infrastructure firms and provincially-regulated financial institutions under a series of changes proposed by the bank today. The proposed changes would also permit the BoC to utilize a new tool to ensure market liquidity.
Canada’s central bank issued a pair of consultation papers today setting out proposed changes to both its emergency lending capabilities and its framework for market operations. The proposals aim to reflect lessons learned during the recent global financial crisis, and the evolution of the Canadian financial system since that crisis.
The paper proposing reforms to the BoC’s Emergency Lending Assistance (ELA) policies would, among other things, clarify the scope of its lending policies, including the possibility that it could provide emergency assistance to an infrastructure entity, such as a clearing and settlement firm. or a provincially-regulated credit union or caisse populaire.
“The scale of the financial crisis forced central banks to re-examine whether the scope of their lending policies was appropriate. In light of this, the bank will articulate its ELA policies for provincially regulated deposit-taking institutions and financial market infrastructures,” the BoC notes in the paper.
Other proposals are intended to strengthen the resilience of the Canadian financial system. The paper notes that policymakers are adopting reforms, such as recovery and resolution plans, designed to eliminate the need for taxpayer bailouts, and reduce the systemic impact of a firm failure. In response to these changes, the BoC is seeking to “improve the flexibility and capacity of ELA so that it can be used to effectively support financial institutions or FMIs in recovery or resolution.”
In a separate paper, the BoC is proposing changes to its financial market operations framework to, among other things, reflect changes in the ways financial institutions manage their liquidity needs; the changing dynamics in core funding and government debt markets; and the likely future growth in the size of the bank’s balance sheet. The BoC says that these changes follow a review of the experience both in Canada and in other jurisdictions, and at evolving operational practices at other major central banks.
Overall, the BoC says that it believes that its framework for financial market operations “has generally been effective in achieving its objectives, but that it would be prudent to make some enhancements in several areas.”
It notes that some changes are being proposed to routine operations, whereas others aim to introduce new tools to help manage any future episodes of exceptional liquidity stress. For instance, the BoC is proposing to create a new “Contingent Term Repo Facility”, in addition to its existing tools, “to enhance its ability to respond to any future episodes of intense market-wide stress.”
Comments on both papers are due by July 4.