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For the period ended March 31, 2023, unaudited

Context of the Quarterly Financial Report

The Bank of Canada is the nation’s central bank. The Bank’s mandate under the Bank of Canada Act is to promote the economic and financial welfare of Canada. Its activities and operations are undertaken in support of this mandate and not with the objective of generating revenue or profit. The Bank is committed to keeping Canadians informed about its policies, activities and operations.

This report has been prepared in accordance with section 131.1 of the Financial Administration Act and follows the guidance outlined in the Treasury Board of Canada’s Directive on Accounting Standards: GC 5200 Crown Corporations Quarterly Financial Report.

Bank management is responsible for the preparation of the report, which was approved by the Audit and Finance Committee of the Board of Directors on May 24, 2023.

This Quarterly Financial Report should be read in conjunction with the condensed interim financial statements for the first quarter of 2023 included in this publication and with the Bank’s Annual Report for the year ended December 31, 2022. Disclosures and information in the Annual Report 2022 apply to the current quarter unless otherwise updated in this quarterly report.

Supporting the economy and the financial system

To fulfill its mandate, the Bank has access to several tools to support the Canadian economy and financial system. When key financial markets became strained in March 2020 due to the COVID‑19 pandemic, the Bank responded by introducing several programs to provide liquidity and maintain market functioning. As markets gradually improved, most facilities and operations were suspended, discontinued or scaled back, and the Bank shifted the use of its tools, primarily to quantitative easing. As the economy rebounded, the Bank ended quantitative easing in 2021 and moved into a reinvestment phase. In 2022, the Bank stopped reinvestment and began quantitative tightening, where maturing bond holdings are not replaced. This has continued through the first quarter of 2023. Refer to the Bank’s website for the relevant press releases and market notices and more information on these measures.

Managing the balance sheet

Financial position
(in millions of Canadian dollars)
As at March 31, 2023  December 31, 2022 March 31, 2022
Loans and receivables 15,563
Investments 354,909  378,206  449,173
Derivatives—indemnity agreements with the Government of Canada 26,283  31,346  21,083
All other assets* 1,131  1,153  1,053
Total assets 382,327  410,710  486,872
Liabilities and equity (deficiency)
Bank notes in circulation 114,691  119,726  112,737
Deposits 253,478  273,333  336,460
Securities sold under repurchase agreements 15,485  17,396  36,009
Other liabilities 305  352  838
Equity (deficiency) (1,632) (97) 828
Total liabilities and equity (deficiency) 382,327  410,710  486,872

* All other assets includes cash and foreign deposits, capital assets and other assets.

The Bank’s holdings of financial assets are typically related to its role as the exclusive issuer of Canadian bank notes. However, the higher levels of assets in recent years result largely from activities undertaken as part of the Bank’s monetary policy and financial system functions. The value of the assets on the Bank’s balance sheet peaked in the first quarter of 2021. This value has since decreased as market conditions and the economy have improved and the Bank entered into quantitative tightening. The Bank’s total assets decreased by 7% to $382,327 million as at March 31, 2023, compared with their value as at December 31, 2022. The main drivers of this decline were the maturity of investments and a decrease in the value of the Bank’s indemnity agreements with the Government of Canada.

Loans and receivables is typically composed primarily of securities purchased under resale agreements (SPRAs). SPRAs are high-quality assets acquired through the securities repurchase (repo) market, in line with the Bank’s framework for market operations and liquidity provision. These assets include overnight repo operations and term repo operations. All SPRAs matured in 2022.

Investments decreased by 6% to $354,909 million as at March 31, 2023. This decrease was driven mainly by the following movements within the Bank’s holdings:

  • Government of Canada securities, which include nominal bonds and real return bonds, decreased by $21,231 million during the first three months of the year. This decrease is mainly due to bonds maturing and, in keeping with the Bank’s quantitative tightening, the proceeds not being reinvested. It resulted in declines of $14,191 million in Government of Canada bonds held at fair value and $7,040 million in Government of Canada bonds held at amortized cost.
  • The Bank engages in repo operations, which provide a temporary source of Government of Canada securities on an overnight basis to market participants. These operations also improve the availability of the Bank’s holdings of Government of Canada securities. Securities lent or sold under repurchase agreements decreased by $3,168 million compared with December 31, 2022, due to a decline in the volume of securities repo operations.

Derivatives—indemnity agreements with the Government of Canada refers to the agreements that were put in place to indemnify the Bank and allow it to support Government of Canada, provincial and corporate bond markets. Losses resulting from the sale of assets within the Government of Canada Bond Purchase Program, the Provincial Bond Purchase Program and the Corporate Bond Purchase Program are indemnified by the Government of Canada, whereas any gains on disposal would be remitted to the government. The $26,283 million balance represents the fair value of the derivatives associated with the net unrealized losses on these assets as at March 31, 2023. Derivatives decreased by $5,063 million during the three-month period, mainly because long-term bond yields fell. This is represented in the asset profile chart by “All other assets.”

Bank notes in circulation represents approximately 30% (29% as at December 31, 2022) of the Bank’s total liabilities. Bank notes in circulation decreased by 4% compared with December 31, 2022, to $114,691 million as at March 31, 2023. This decrease reflects seasonal variations.

Deposits consists of deposits made by the Government of Canada, members of Payments Canada and others. Although deposits were maintained at a lower level before the COVID‑19 pandemic, they now represent the largest liability on the Bank’s balance sheet. This balance has declined by 7% to $253,478 million as at March 31, 2023, compared with December 31, 2022, reflecting continued quantitative tightening.

Securities sold under repurchase agreements decreased by 11% to $15,485 million as at March 31, 2023, compared with December 31, 2022. This liability represents the repurchase price for securities repo operations and overnight reverse repo operations. The Securities Repo Operations program supports core funding markets and the proper functioning of the Government of Canada securities market. Overnight reverse repos help to effectively implement monetary policy by withdrawing intraday liquidity, thus complementing the standing deposit and lending facilities.

Deficiency increased to $1,632 million during the first quarter of 2023, primarily as a result of net losses of $1,510 million. As at March 31, 2023, the accumulated deficit is $2,596 million, after drawing down the statutory reserve of $25 million in the fourth quarter of 2022. Deficiency also includes the following offsetting amounts: $5 million of authorized share capital, a special reserve of $100 million, an actuarial gains reserve of $409 million and an investment revaluation reserve of $450 million, each as at March 31, 2023. Refer to Note 10 in the financial statements for more information about the Bank’s deficiency.

Results of operations

Results of operations
(in millions of Canadian dollars)
For the three-month period ended March 31 2023   2022  
Interest revenue 969  1,067 
Interest expense (2,319) (380)
Net interest income (expense) (1,350) 687 
Other income
Total income (loss) before operating expenses (1,348) 690 
Total operating expenses (162) (170)
Net income (loss) (1,510) 520 
Other comprehensive income (loss) (25) 220 
Comprehensive income (loss) (1,535) 740 

The Bank incurred a net loss of $1,510 million in the first quarter of 2023, primarily because the interest incurred on deposits was greater than the interest earned on investments. The interest expense on deposits was higher as a result of increases in the Bank’s policy rate throughout 2022 from 0.25% in the first quarter of 2022 to 4.50% in the first quarter of 2023. In time, the Bank will return to a net income position. The net loss does not affect the Bank’s ability to carry out its mandate.

Interest revenue depends on market conditions, their impact on the interest-bearing assets held on the Bank’s balance sheet, and the volume and blend of these assets. The Bank earns interest on its investments in Government of Canada securities, on SPRAs (if any) and on assets resulting from the large-scale asset purchase programs. In the first quarter of 2023, interest revenue decreased by $98 million (or 9%) compared with the same period in 2022. This decrease was driven by the Bank’s lower average holding of interest-yielding investments, partially offset by higher yields during the period.

Interest expense consists mainly of interest incurred on deposits held by the Bank. During the first quarter of 2023, the interest expense increased by $1,939 million (or 510%) compared with the same period in 2022, as a result of rises in the Bank’s policy interest rate. The increase was partially offset by a lower average volume of deposits during the period and by a decrease to 0% in May 2022 in the interest rate paid on Government of Canada deposits.

Operating expenses for the first quarter of 2023 decreased by 5% compared with the same period in 2022. This primarily reflects a decrease in costs for staff and for bank note research, production and processing, offset by an increase in costs for technology and telecommunications.

  • Staff costs decreased by $6 million (or 6%) compared with the same period in 2022, as a result of the following changes:
    • Salary costs increased by $6 million as vacancies were filled to deliver the Bank’s core mandates, including the new Retail Payments Supervision mandate, and as progress was made on strategic initiatives. The annual compensation adjustment also contributed to this increase.
    • Benefits and other staff costs decreased by $12 million, mainly due to a decline in the expense associated with the Bank’s defined-benefit plans. This decline was a result of a rise in the discount rates used for their calculation.1
  • Bank note research, production and processing expenses decreased by $10 million (or 77%) compared with the same period in 2022. This decrease was driven by lower volumes of bank notes being printed. The timing of bank note production varies from one year to the next based on the annual production plan and market demand.
  • Technology and telecommunications costs increased by $5 million (or 22%) compared with the same period in 2022. This increase was driven by the Bank’s focus on its digital transformation and on strengthening its information technology systems.

Other comprehensive loss for the first quarter of 2023 was $25 million. It consists of remeasurement losses of $35 million on the Bank’s defined-benefit plans as a result of decreases in discount rates,2 offset by an increase in the fair value of the plans’ assets. It also consists of a $10 million increase in the fair value of the Bank’s investment in the Bank for International Settlements.

Comprehensive loss for the first quarter of 2023 was $1,535 million, primarily due to the net loss of $1,510 million incurred in the first quarter of 2023.

Looking ahead through 2023

The Bank’s 2023 Plan
(in millions of Canadian dollars)
2023 budget
For the year ended December 31 $   %  
Staff costs 419  52 
Bank note research, production and processing 60 
Premises costs 35 
Technology and telecommunications 118  15 
Depreciation and amortization 78  10 
Other operating expenses 96  12 
Total expenditures 806  100 

The year 2023 represents the second year of the Bank’s 2022–24 strategic plan, Delivering on Our Promise. The Bank’s financial management framework enables decisions about allocating resources to achieve the Bank’s strategic objectives, mitigate risks and invest in the Bank’s people and tools in a fiscally prudent manner.3

Staff costs represents the largest portion of the Bank’s expenditures. Other expenditures include the cost of enhancing systems and tools to support operations, sustain the Bank’s resilience posture and prepare for the future. These costs also support the Bank’s new mandates, continue its digital transformation and reduce its risk.

Operational highlights and changes

Significant changes in personnel, operations and programs have occurred since December 31, 2022.

Governing Council and Board of Directors

On January 16, 2023, the Bank announced the appointment of Nicolas Vincent as the Bank’s new external, non-executive Deputy Governor for a term of two years, effective March 13, 2023. Mr. Vincent’s appointment fills the vacancy created by the departure of Timothy Lane in September 2022.

On April 4, 2023, the Bank announced that Deputy Governor Paul Beaudry will leave the Bank at the end of July 2023. Mr. Beaudry will return to his academic position at the University of British Columbia. Mr. Beaudry was appointed as a Deputy Governor in February 2019.

On May 12, 2023, the Bank announced the appointment of Rhys R. Mendes as Deputy Governor, effective July 17, 2023. Mr. Mendes’ appointment fills the vacancy created by the departure of Paul Beaudry in July 2023.

Operations and programs

The Bank announced an increase of 25 basis points in the policy interest rate on January 25, 2023.

Risk analysis

The “Risk management” section of the Bank’s Annual Report for the year ended December 31, 2022, outlines the Bank’s risk management framework and risk profile. This section also reviews the key areas of risk—financial, operational, strategic, and environmental and climate-related. The financial risks are discussed further in the notes to the financial statements of December 31, 2022, which are included in the Report. Note 4 of the condensed interim financial statements for March 31, 2023, also provides an update on these financial risks. Although the pandemic has triggered more financial risks and volatility than usual involving some of the assets the Bank holds, the risks identified in the Annual Report remain the key ones for the Bank.

On April 24, 2023, the Bank released its first annual Disclosure of Climate-Related Risks, outlining the risks that climate change poses to its mandate and operations. This is a stand-alone report, prepared in accordance with recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure.

Condensed interim financial statements

  1. 1. Benefit costs for a given period are based on the discount rate as at December 31 of the preceding year (e.g., the rate at December 31, 2022, was used to calculate the benefit expenses for 2023). Discount rates and related benefit costs share an inverse relationship: as rates decrease, benefit expenses increase (and vice versa). The discount rates used to calculate the pension benefit plans and other benefit plan expenses ranged from 2.6% to 3.1% for 2022 and from 5.0% to 5.1% for 2023. This increase will result in decreased benefit costs for 2023, all else being equal.[]
  2. 2. The net defined-benefit liabilities are measured using the discount rate in effect as at the period-end. The rate applicable to the net defined-benefit liabilities as at March 31, 2023, was a range of 4.8% to 4.9% (a range of 5.0% to 5.1% as at December 31, 2022). See Note 9 to the condensed interim financial statements for more information.[]
  3. 3. The Bank’s forecasts for its operations do not include projections of net income (loss) and financial position. Such projections would require assumptions about interest rates, which could be interpreted as a signal of future monetary policy.[]

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