To understand the finances of a central bank, it is helpful to know how it operates in support of its mandate. The Bank's balance sheet is fairly straightforward, compared with those of major Canadian financial institutions, with its assets and liabilities supporting one or more of its functions.

The most significant single item on the Bank's balance sheet is the liability created through the issuance of Canadian bank notes under the Bank's currency function. The face value of the bank notes issued is an asset in the hands of the Canadian public but represents a financial liability to the Bank of Canada. These liabilities tend to increase over time with the growth in demand for bank notes, which is directly related to the growth in the Canadian economy. The bank note liability is supported by the Bank's financial assets in the form of Government of Canada bonds and treasury bills. Seasonal fluctuations in bank note demand are managed by acquiring treasury bills and other short-term assets, such as term repurchase agreements, that mature when the seasonal demand for bank notes is expected to abate.

The Bank of Canada's financial assets support its operational independence to conduct monetary policy by providing an independent revenue stream outside of the government's budget process. A portion of this revenue is used to fund the Bank's operations and reserves; the remaining net revenue is remitted to the Receiver General periodically throughout the year.

Canada's approach to implementing monetary policy requires that a small portion of the Bank's assets be available as collateral for sale and repurchase operations. Implementing monetary policy based on an inflation target and flexible exchange rate focuses on influencing short-term interest rates through the setting of the overnight rate. On each fixed announcement date, the Bank of Canada announces the target overnight rate, which is the interest rate that financial institutions charge each other for overnight loans. The operating range for this rate is set by policy, allowing direct clearing members of the Canadian Payments Association (CPA) to hold deposits with the Bank at the target rate minus 25 basis points, or to take collateralized advances at the target rate plus 25 basis points. When required, the Bank will also offer purchase and resale agreements and sale and repurchase agreements to maintain the overnight rate near the target.

The Bank's financial assets also support the financial system function. Every day, relatively small advances are routinely made under the Bank's standing liquidity facility. Financial intermediaries are usually able to allocate liquidity among themselves without having to make significant use of the Bank's collateralized advance and deposit facilities. However, in exceptional circumstances, advances could become significant if the Bank is required to provide emergency lending assistance to a liquidity-challenged financial institution. The last such event was in 1986. Advances from the Bank can be funded by the outright sales of treasury bills, government securities repurchase agreements (repos), or the issuance of interest-bearing liabilities.

The Bank's investments, managed through the funds management function, consist primarily of government securities in a proportion that broadly mirrors the structure of the federal government's domestic marketable debt. This makes the Bank's balance sheet a neutral factor in the government's debt-management and fiscal-planning activities. The Bank also operates a securities-lending program to support the efficiency of the market for Government of Canada securities by providing a temporary secondary source of securities. When specific Government of Canada treasury bills or bonds are in short supply in the secondary market and are trading below a predetermined threshold interest rate in the repo market, the Bank will lend up to 50 per cent of its holdings in these securities on an overnight basis in exchange for other securities.

Unlike most central banks, the Bank does not hold foreign exchange reserves on its balance sheet, Canada's official international reserves are held in a separate entity, the Exchange Fund Account, which the Bank manages on behalf of the federal government.