Bank of Canada Primer - What do They Do? — Financial Advisors

Bank of Canada Primer – What do they do? PDF View

August 6, 2021

On July 14th, 2021 the Bank of Canada issued a press release that they had held their “target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. “ They then went on to say that “this is reinforced and supplemented by the Bank’s quantitative easing (QE) program, which is being adjusted to a target pace of $2 billion per week.”

But what does all this financial jargon mean? Let’s first try to define what the Bank of Canada is and what they do. Then, we’ll tie that in to these common statements that you see and hear in the financial media. We’ll do this over two separate articles.

The Bank of Canada was established in 1935 following consultations that began during the great depression. Its purpose then; as it now, is to “regulate credit and currency in the best interests of the economic life of the nation.” Its principal role, as per the Bank of Canada Act is to “promote the economic and financial welfare of Canada.”

The Bank of Canada is run by a governing council who are responsible for both monetary policy and “promoting a safe and efficient financial system.” This council is made up of a Governor, Senior Deputy Governor, and four Deputy Governors. The current Governor is Tiff Macklem, the 10th Bank of Canada Governor since its inception, who was appointed on June 3, 2020 for a seven year term. Past Governors include Stephen Poloz, Mark Carney, and David Dodge.

An important feature of the Bank of Canada is its separation from the political process. Although it is owned by the federal government, the Bank of Canada has “considerable independence” from federal government influence. At the Bank of Canada’s inception, it was considered (and still remains) important to separate the power to spend money (Federal Government) from the power to create money (Bank of Canada). Also, we know that the activity and policies of our politicians tends to be short term in nature. Having independence from party politics allows the Bank of Canada to develop policies that have medium- and long-term perspectives in mind.

The bank has four key areas of responsibility. They are as follows:

Monetary Policy
The Financial System
Currency
Funds Management

Let’s take a quick look at each one of these.

Monetary Policy: This essentially involves influencing the supply of money that circulates in our economy in order to keep inflation “low and stable.” We will discuss this in more detail in our next article.

The Financial System: The Bank of Canada oversees the entire financial system in Canada with a goal of “fostering a stable and efficient financial system.” By doing this they protect and promote Canada’s “economic and financial welfare.” There are a number of ways that the Bank of Canada does this, but they are beyond the scope of today’s article. We may revisit them in the future.

Currency: The Bank of Canada “designs, issues, and distributes Canada’s bank notes.” In other words, they print money. Of course it’s more complicated than simply turning on the printing press and hitting “print”. There is the design process, which considers security, functionality, recognisability, and a reflection of Canada. In addition, the Bank of Canada is currently researching how the “demand and use of cash” is changing as well as the ongoing development and use of digital currencies throughout the world.

Funds Management: The Bank of Canada is the “’fiscal agent’ for the Government of Canada, managing its public debt programs and foreign exchange reserves.” But what does this mean? Here are a few of their functions as ‘fiscal agent’:

When you pay your taxes, you pay the Receiver General. The Bank of Canada oversees Receiver General Accounts by managing the inflows to (from taxes) and outflows from (for government spending) on behalf of the government.
The Bank of Canada maintains foreign exchange reserves, which “provides general liquidity for the government and helps to promote orderly conditions in the Canadian-dollar foreign exchange market.”
When the federal government runs deficits, they need to borrow money. They do this by issuing (selling) debt securities such as treasury bills and bonds. The Bank of Canada helps the government sell these securities, thus helping them raise the money they need to cover their deficits (and maturing debts).

Note: The 2020-21 deficit was $354.2 billion. The 2021-22 deficit is expected to be $154.7 billion. The national debt is currently at approximately $1.1 trillion (https://www.debtclock.ca/). Also, as a refresher, the “deficit” is an annual calculation of how much the government’s expenses exceeds revenues (or” surplus,” when revenues exceed expenses), while the national debt is the entire amount that the federal government owes. To make it simple, consider running a surplus or deficit the equivalent of reviewing your own after tax income and monthly expenses, while consider the national debt as the equivalent of the amounts owed on your mortgage, line of credit, and/or credit cards. The government owes about 1.1 trillion dollars to various lenders around the world. Every time they run a deficit that amount grows. If they happen to run a surplus, it can be used to shrink the debt.

These securities are sold in global financial markets through distributers and dealers such as Canada’s banks, who in turn sell them to their clients (large pension plans, mutual funds, sovereign entities, etc.).

Other functions include providing banking services to “direct participants in Canada’s designated payment systems”; and providing cash and securities accounts to certain federal Crown Corporations, foreign central banks and official international financial organizations.

In our next article, we’ll dive a little deeper into Monetary Policy so as to provide a better understanding of (a) the tools that the Bank of Canada uses to achieve their goals, and (b) the information that is discussed in the news when policy announcements are made.

You can also find a tremendous amount of information from the Bank of Canada Website (bankofcanada.ca), the primary source for this article and the next.

If you’d like to discuss this topic further, please call us at (780) 426-2400, or e-mail us at LGKWealth@gamil.com to schedule an appointment.