1 / 23

Bank of Canada’s Response to the Financial Market Turmoil

Bank of Canada’s Response to the Financial Market Turmoil. Conference on Business, Banking, and Finance 28-29 May 2009. Ron Allenby, Assistant Director Financial Markets Department Bank of Canada.

asher
Télécharger la présentation

Bank of Canada’s Response to the Financial Market Turmoil

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Bank of Canada’s Response to the Financial Market Turmoil Conference on Business, Banking, and Finance 28-29 May 2009 Ron Allenby, Assistant Director Financial Markets Department Bank of Canada * The views expressed here are my own, and do not necessarily reflect the views of the Bank's Governing Council.

  2. Overview • The Crisis: causes and impacts • Central Bank Actions: the Bank of Canada’s evolving liquidity framework • Results • Lessons Learned

  3. TheCrisis: Causes • Low US interest rates for extended period • US banking system deregulation • Search for higher yield: growth in securitization; increased leverage; increased risk taking • Real estate boom: ease of lending standards

  4. TheCrisis: Causes • US real estate prices stop increasing • Poor performance of subprime mortgages: concerns with asset-backed securities • ABCP market freeze in Canada • Reduced confidence in structured products: increased awareness of risk

  5. TheCrisis: Impacts • Uncertainty in banking sector re: future funding needs and distribution of losses related to mortgages and structured products • More cautious liquidity and credit management: tensions in money markets; bank funding costs rise • Spill-over of credit market turmoil into asset prices: decline in equities; impact on financial institutions • Several waves over 2007-2008

  6. The Crisis: Impacts Globally, banks are affected

  7. Bankof Canada’s Actions Strategy: • Continued focus on monetary policy objective – reinforcing target rate during periods of stress; aggressive reductions in overnight interest rate. • Provision of extraordinary liquidity to core market participants. • Support of global initiatives – central bank cooperation and communication; leadership in creating a sounder financial system

  8. Bank of Canada’s Actions Importance of Liquidity: • Liquidity required for efficient pricing – banking and market-making are key functions, but endogenous liquidity generation had broken down • Financial system stability moredependent on efficient pricing – in large part because of securitization and mark-to-market accounting • Traditional central bank liquidity framework insufficient – altering liquidity through monetary policy, or in the core payments systems, or through a reallocation of liquidity to banks insufficient when markets centre of storm

  9. Traditional Liquidity Framework • Monetary Policy: • Intervene at one-day, with a limited set of highly regulated counterparties, against only the most liquid of collateral • Standing Liquidity Facility: at target +/- 25 basis points • Buyback operations (at target rate) Financial Stability: Emergency Lending Assistance (restricted to core financial institutions, broad collateral) • Stigma - perceived to be precursor to supervisory intervention

  10. BoC Revised Liquidity Framework Margins of Change to Liquidity Framework: • Term: lending beyond one day • Collateral: wider range of eligible securities • Counterparties: wider range of financial institutions • Size: value of operations evolve with Bank’s assessment of requirements • New Facilities: Term PRA, Term PRA for Private Sector Instruments, Term Loan Facility; temporary increase to USD swap agreement

  11. Bank of Canada’s Actions Evolution of the Liquidity Framework • Summer 2008: • US Treasury securities and ABCP accepted as collateral under SLF • February 2009: • Term PRA for private sector instruments amended • Autumn 2008: • 1 and 3-month term PRAs introduced. Frequency & size of operations increased and list of eligible counterparties expanded • Term PRA for private sector money market instruments introduced • Term loan facility introduced • US dollar swap facility announced • April 2009: • 6 and 12-month term PRAs introduced • QE/ CE framework for monetary policy • December 2007: • 1-Month term PRAs introduced • Expansion of securities eligible as collateral under SLF

  12. Liquidity Provision: Results • Liquidity extensions, as a percentage of banking system assets and GDP, is relatively low in Canada • Changes in the Bank of Canada balance sheet: assets have grown; holding a broader range of assets • Bank funding costs have declined • But, some markets have not recovered: significant decline in outstanding ABCP

  13. Results

  14. Results Bank funding costs have declined

  15. Results

  16. Lessons Learned • Central banks have a role in liquidity provision, from both a monetary policy and financial system stability perspective • Monetary policy transmission is affected by asset-market liquidity; support of the inter-bank market may be required to maintain control over overnight rates • Intervention may be required when liquidity problems have a system-wide significance; but, must be reasonable assurance that action can mitigate the problem and contribute to stability.

  17. Lessons Learned Principles of Intervention: • Target intervention to problems with system-wide importance • Intervention should be graduated and commensurate with the severity of the problem • Tailor the response/tools to the problem • Capability to transact with extensive set of counterparties and collateral • Capability of aiding cross-border liquidity distribution

  18. Lessons Learned Principles of Intervention, continued: • Intervention should not be distortionary • Reduce potential stigma problems through design of liquidity facility • Encourage usage of central bank programs, but as a back-stop • Mitigate moral hazard by clarifying objectives and principles • Exit strategy should be considered along with design of facility

  19. Appendix

  20. Liquidity Facilities

  21. Liquidity Provision *Cash value **Par Value Source: Bank of Canada

  22. Monetary Policy Response • Since December 2007, the BoC has lowered the policy rate from 4.50% to 0.25%. • The Bank is committed to hold the target overnight rate at the effective lower bound of 0.25% until the second quarter of 2010 conditional on the inflation outlook.

  23. Macro-prudential Regulation & Global Initiatives Macro-prudential Regulation: • In cooperation with domestic partners, focus on system-wide issues and appropriate regulatory responses • Examine how to best coordinate management of both risks to individuals (depositors, investors) and risks to the system Global Objectives: • Coordinate on international regulatory frameworks • Standards of transparency, infrastructure • Examine role for central banks not only as providers of liquidity to institutions, but to markets

More Related