Purpose and function
At the Bank of Canada, our balance sheet differs from that of other financial institutions. Its size and composition have to do with the unique role we play as Canada’s central bank. Assets and liabilities on our balance sheet are key to supporting our core functions and ensuring our independence, rather than generating profit.
In normal circumstances, holdings of financial assets are mostly driven by our role as the exclusive issuer of Canadian bank notes:
- We supply financial institutions with the notes needed to satisfy the demand for currency by businesses and the public. Issuing bank notes creates a liability, typically one of the largest on our balance sheet.
- Government of Canada deposits represent another large liability.1
- To offset these liabilities, we hold financial assets, which are primarily Government of Canada securities. Given that the level of bank note or government deposit liabilities are determined by external factors, we acquire the assets to offset them, entirely in response to changes in these liabilities.
However, in exceptional circumstances, we may choose to actively and deliberately change the size and composition of financial assets on our balance sheet to meet objectives for monetary policy or financial stability.
When we acquire assets to offset government deposits and the issuance of bank notes, we refer to these assets as being acquired under normal course. Accordingly, the size and composition of the asset side of the balance sheet is primarily being driven by what is happening on the liability side.
As laid out in the Statement of Policy Governing the Acquisition and Management of Financial Assets, asset purchases conducted under normal course are governed by three key principles: prudence, transparency and neutrality. These purchases are mainly debt securities issued by and securities guaranteed by the Government of Canada. We also acquire assets under regular term repurchase transaction (repo) agreements to help manage the balance sheet.
These assets help to promote operational independence and to carry out our responsibilities under the Bank of Canada Act.
Exceptional circumstances for policy purposes
We may also undertake a range of financial market transactions with eligible counterparties to help stabilize the financial system and achieve financial conditions consistent with our desired monetary policy stance. When we acquire assets in support of policy objectives, we say these assets are acquired under exceptional circumstances for policy purposes.
These transactions include long-term repos, where we temporarily lend to financial institutions and take a broader range of financial assets as collateral.2 They may also include purchases of longer-term assets or the extension of longer-term loans. For both repos and asset purchases, the composition of the balance sheet is asset driven, and the size and composition of the liabilities will respond to changes made on the asset side. We fund all or part of the operations through the creation of settlement balances—deposits from members of the payment system held at the Bank of Canada.
Table 1: The Bank of Canada’s balance sheet under different environments
|Normal course||For policy purposes|
|Main driver of balance sheet management decisions||Liability side and growth in bank notes||Asset side and the desired policy objective|
||Broad range of debt securities including purchases in secondary markets and expanded term repos|
|Liabilities||Settlement balances managed to a particular target level||Unconstrained growth in settlement balances to fund asset purchases|
When the exceptional support provided by lending and asset purchases is no longer needed—for instance, because financial markets resume functioning normally or the economy recovers—we can reduce our asset holdings and settlement balances toward their normal size.
Actions to normalize the balance sheet may involve:
- reducing or stopping the purchase of certain asset types
- allowing assets to mature
- selling certain assets
Growth in bank notes over time will naturally reduce the level of any excess settlement balances.
Supporting our core functions
We can implement monetary policy through two different frameworks, depending on how we manage our balance sheet and supply liquidity to the payment system.
- In an interest rate corridor system, we supply limited settlement balances (close to zero) and actively manage the balance sheet to maintain a target level on a daily basis.3 Learn more about implementing monetary policy in this system.
- In a floor system, we create at least enough settlement balances to drive the overnight rate down to equal the deposit rate. Learn more about how this system was implemented in March 2020 to support market functioning.
When we conduct extraordinary lending and asset purchases for policy purposes, it is generally necessary to implement monetary policy using the floor system, with settlement balances growing to fund these purchases.
Table 2: Key distinctions between the operational frameworks
|Interest rate corridor system||Floor system|
|Target rate||The target is set at the mid-point of the deposit and lending rates.||The deposit rate is set equal to the target rate.|
|Settlement balances4||The Bank seeks to supply only the amount of settlement balances needed for payment system liquidity.||The Bank supplies excess settlement balances beyond what is required for payment system liquidity.|
|Trading||Participants need to trade among each other to redistribute settlement balances.||Participants have less need to trade settlement balances.|
|Operations||Fine-tuning occurs using:
||Asset purchases result in excess settlement balances.|
We have a range of tools to support the efficient functioning of Canadian financial markets. We can provide extraordinary liquidity for financial system stability, as we did during the COVID‑19 pandemic response. As well, when Government of Canada securities are in high demand, we can make a portion of our holdings available through our securities repo operations.
Types of assets
These are the major financial asset items on the Bank’s balance sheet.
Chart 1: Bank of Canada assets (month end)
Government of Canada treasury bills and bonds
Government of Canada bonds make up the largest holdings on our balance sheet (Chart 1).6 They can be acquired at auctions (primary market) or through the secondary markets (after initial issuance). Primary market purchases are conducted on a non-competitive basis (passive participation) by buying at the average yield of successful auction bids. We report these bond holdings on our balance sheet at their amortized cost. This reflects the fact that they are typically held to maturity. They correspond primarily to bank notes outstanding, which tend to increase steadily over time.
Secondary market purchases are typically done for policy purposes, via competitive offers through a reverse auction process. For example, we have acquired Government of Canada bonds through the Government of Canada Bond Purchase Program (also known as quantitative easing). In reporting the bonds acquired for policy purposes on the balance sheet, we record them at their fair market value to reflect the fact that they could be sold before they mature, as one of the options for eventual balance sheet normalization.
Treasury bills may also be purchased, with the quantity largely depending on our need for assets. In normal course, we hold these types of securities to maturity, and their balance sheet treatment mirrors this objective (i.e., amortized cost).
Canada Mortgage Bonds
Canada Mortgage Bonds provide additional flexibility in the range of high-quality assets we can acquire.7 In normal course, we choose the amounts of individual bond purchases to limit market distortions and minimize the impact on market prices. These bonds are normally held to maturity and thus recorded at amortized cost on the balance sheet.
Added to this category are the assets acquired through the Bank’s Canada Mortgage Bond Purchase Program. This pandemic response program took place predominantly in the secondary market.
Under the Standing Liquidity Facility, we provide routine collateralized loans to payment system participants as necessary to cover a negative end-of-day cash position. This lending occurs at the top of our operating band or “bank rate.”
On a more exceptional basis, the Standing Term Liquidity Facility allows us to provide eligible, sound financial institutions with temporary collateralized term advances.8 While this program was implemented during the COVID‑19 response, it is a standing facility and was announced prior to the pandemic.
The Bank can also provide advances to financial institutions that have requested Emergency Lending Assistance (ELA) from the Bank. ELA is a last-resort, collateralized loan or advance provided by the Bank, at its discretion, to eligible financial institutions and financial market infrastructures that are facing serious liquidity problems.
The two types of repos that appear on the balance sheet in normal course serve different purposes.
We typically conduct regular biweekly term repo operations to temporarily acquire assets for balance sheet management. In combination with treasury bills, these assets provide flexibility to offset seasonal and short-term fluctuations in liabilities.
As well, these term repo operations provide information on conditions in short-term funding markets. In normal course, the target amount for term repos has been set at 10 percent of financial assets, plus or minus 5 percent.
Finally, term repos may be used to inject extraordinary amounts of liquidity into the financial system and support funding conditions for financial institutions in times of stress. We used this operation during the global financial crisis of 2008–09 and again in the COVID‑19 response.
To support market functioning during COVID‑19, we expanded the term repos conducted with eligible participants by temporarily extending the frequency, size, term and types of eligible securities. As well, we expanded the list of institutions eligible to access term repos through activating the Contingent Term Repo Facility, which provides Canadian-dollar term funding on a standing, bilateral basis.
Additions during the COVID‑19 pandemic
As part of the pandemic response, we added various financial asset types to our balance sheet via the following programs:
- Provincial Money Market Purchase Program
- Provincial Bond Purchase Program
- Bankers’ Acceptance Purchase Facility
- Commercial Paper Purchase Program
- Corporate Bond Purchase Program
Each program has an individual entry in the weekly publication of our financial position. The facilities were introduced to address specific needs that arose during the crisis. These programs have now been discontinued.
During the second quarter of 2020, indemnity agreements with the Government of Canada were put in place so that we could support the provincial, corporate and Government of Canada bond markets. If the Bank decides to sell assets, any losses resulting from these sales within the Government Bond Purchase Program, Provincial Bond Purchase Program, Provincial Money Market Purchase Program, Commercial Paper Purchase Program and Corporate Bond Purchase Program are indemnified by the federal government. Gains on disposal are remitted to the government.
The indemnity agreements are accounted for as derivatives. At the time of the balance sheet publication, they appear on the balance sheet as one of the following:
- a liability if the market value adjustment of indemnified assets is in a positive position
- an asset if the market value adjustment of the indemnified assets is in a negative position
Other assets on the balance sheet include property, equipment, intangible assets and other non-investment items.
Types of liabilities
These are the major liability items on the balance sheet.
Chart 2: Bank of Canada liabilities (month end)
Bank notes in circulation
Traditionally, bank notes in circulation represent the majority of total liabilities (Chart 2).9 Typically, the growth rate in bank notes broadly follows the growth rate in the economy (in terms of nominal gross domestic product), or roughly 5 percent yearly on average.
Seasonal fluctuations in the demand for bank notes (such as around year-end) must also be offset with additional assets in normal course. Given the temporary nature of these seasonal increases, we typically conduct term repos to offset them.
Deposits by the Government of Canada
As the central bank, we are the banker for the federal government. In normal course, a relatively small portion of deposits meets the government’s operational and day-to-day funding needs, while the majority is maintained for prudential liquidity purposes.10, 11
Deposits by members of Payments Canada
Payments Canada members who are direct participants in Lynx—Canada’s wholesale payments system—maintain settlement accounts at the Bank of Canada. These accounts are generally referred to as settlement balances. We determine the total level of deposits across all participants; prior to the pandemic, we targeted $250 million. This allowed us to implement monetary policy via the interest rate corridor system.
On March 20, 2020, we announced that the Bank would cease targeting settlement balances during the response to the pandemic, allowing them to increase as asset purchases increased. As a result, we switched to implementing monetary policy using the floor system.
Deposits by other entities
We hold cash accounts for a limited set of other entities. These include foreign central banks, international financial institutions, designated clearing and settlement systems, and other domestic federal government agencies.
While the amount of these deposits is small compared with other liabilities, it has grown in recent years, due in part to regulators’ desire to reduce financial system risk.12 By leaving their deposits with the Bank of Canada, rather than with commercial banks, these entities can avoid exposing systemically important infrastructures to banker risk.
Historically, we have conducted overnight reverse repos mainly to reinforce the target for the overnight rate. We achieve this by selling securities holdings for cash on an overnight basis.
In 2020, we implemented securities repo operations to provide primary dealers with a temporary source of Government of Canada nominal bonds and treasury bills that are scarce. These operations support the efficient functioning of the securities financing market.
- 1. Government of Canada deposits include those that support its prudential liquidity plan to meet domestic payment obligations if access to normal funding markets is disrupted.[←]
- 2. Bank of Canada assets and liabilities are reported in the month-end statement of financial position (with a more granular breakdown in the supplement).[←]
- 3. The Bank transfers government balances on its balance sheet to the system participants using the Receiver General auctions. This transfer achieves the targeted settlement balances.[←]
- 4. Access a summary of market operations indicators for monetary policy implementation.[←]
- 5. A repo is a transaction in which a party sells a security and simultaneously agrees to repurchase it at a given price after a specified time. Repos are classified under “Loans and receivables” on the Bank’s statement of financial position, under the line item “Securities purchased under resale agreements.” The Bank may also conduct overnight reverse repos in which it receives cash and sells securities temporarily, which appear as “Securities sold under repurchase agreements” on the Bank’s statement of financial position. This item appears as a liability and is infrequently used but could be implemented to support the target rate.[←]
- 6. See Bank of Canada assets and liabilities: Month-end (formerly B1).[←]
- 7. In November 2018, the Bank announced that it would begin purchasing government-guaranteed securities. We purchased our first Canada Mortgage Bond in December 2018 for $250 million.[←]
- 8. A breakdown of the forms of advances are contained in the monthly supplement to the balance sheet.[←]
- 9. See Bank of Canada assets and liabilities: Month-end (formerly B1), notes in circulation.[←]
- 10. See Note 7 to the financial statements in the 2019 Annual Report for further information on the Bank’s financial risk management framework. Unlike those of some other countries, Canada’s foreign reserves are not held by the central bank. Rather, the Government of Canada’s Exchange Fund Account is the main repository of Canada’s official international reserves and is reflected in the Public Accounts.[←]
- 11. The Government announced the prudential liquidity plan in the Debt Management Strategy for 2011–12 and implemented it by the second half of 2013.[←]
- 12. See The Bank of Canada’s Risk-Management Standards for Designated FMIs.[←]