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For the period ended June 30, 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 August 23, 2023.

This Quarterly Financial Report should be read in conjunction with the condensed interim financial statements for the Second 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 second 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 June 30, 2023  December 31, 2022 June 30, 2022
Loans and receivables 525
Investments 327,560  378,206  422,945
Derivatives—indemnity agreements with the Government of Canada 28,834  31,346  31,269
All other assets* 1,108  1,153  1,136
Total assets 357,506  410,710  455,875
Liabilities and equity (deficiency)
Bank notes in circulation 117,712  119,726  116,637
Deposits 224,910  273,333  299,446
Securities sold under repurchase agreements 17,726  17,396  37,874
Other liabilities 296  352  953
Equity (deficiency) (3,138) (97) 965
Total liabilities and equity (deficiency) 357,506 410,710  455,875

* 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 13% to $357,506 million as at June 30, 2023, compared with their value as at December 31, 2022. The main driver of this decline was the maturity of investments.

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 13% to $327,560 million as at June 30, 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 $49,857 million during the first six 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 $35,779 million in Government of Canada bonds held at fair value and $14,078 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 $703 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 $28,834 million balance represents the fair value of the derivatives associated with the net unrealized losses on these assets as at June 30, 2023. Derivatives decreased by $2,512 million during the six-month period, mainly due to a slight decline in long-term bond yields. This is represented in the asset profile chart by “All other assets.”

Bank notes in circulation represents approximately 33% (29% as at December 31, 2022) of the Bank’s total liabilities. Bank notes in circulation decreased by 2% compared with December 31, 2022, to $117,712 million as at June 30, 2023. This decrease reflects a slight decline in the demand for bank notes.

Deposits consists of deposits made by the Government of Canada, members of Payments Canada and others. Although deposits were 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 18% to $224,910 million as at June 30, 2023, compared with December 31, 2022, reflecting continued quantitative tightening.

Securities sold under repurchase agreements increased by 2% to $17,726 million as at June 30, 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 $3,138 million as at June 30, 2023, primarily as a result of net losses of $3,002 million in 2023. As at June 30, 2023, the accumulated deficit was $4,088 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 $393 million and an investment revaluation reserve of $452 million, each as at June 30, 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 June 30
For the six-month period
ended June 30
   2023   2022   2023   2022  
Interest revenue 1,009  1,163  1,978  2,230 
Interest expense (2,339) (842) (4,658) (1,222)
Net interest income (expense) (1,330) 321  (2,680) 1,008 
Dividend revenue
Other revenue
Total income (loss) before operating expenses (1,323) 327  (2,671) 1,017 
Total operating expenses (169) (183) (331) (353)
Net income (loss) (1,492) 144  (3,002) 664 
Other comprehensive income (loss) (14) 137  (39) 357 
Comprehensive income (loss) (1,506) 281  (3,041) 1,021 

The Bank incurred a net loss of $1,492 million and $3,002 million for the three- and six-month periods ended June 30, 2023, respectively, 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 interest rate, from 0.25% in the first quarter of 2022 to 4.75% as at June 30, 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 large-scale asset purchase programs. In the second quarter and the first six months of 2023, interest revenue decreased by $154 million (or 13%) and $252 million (or 11%), respectively, compared with the same periods in 2022. This decrease was driven by the Bank’s lower average holding of interest-yielding investments during the period.

Interest expense consists mainly of interest incurred on deposits held by the Bank. During the second quarter and the first six months of 2023, the interest expense increased by $1,497 million and $3,436 million, respectively, compared with the same periods 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 effect since May 2022, in the interest rate paid on Government of Canada deposits.

Operating expenses for the second quarter and the first six months of 2023 decreased by 8% and 6%, respectively, compared with the same periods in 2022. This primarily reflects a decrease in costs for staff, and for bank note research, production and processing.

  • Staff costs decreased by $7 million (or 7%) and $13 million (or 7%) in the second quarter and the first six months of 2023, respectively, compared with the same periods in 2022, as a result of the following changes:
    • Salary costs increased by $13 million (or 10%) for the first six months of 2023 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 $26 million (or 36%) for the first six months of 2023, 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 $5 million (or 31%) and $15 million (or 52%) in the second quarter and the first six months of 2023, respectively, compared with the same periods 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 decreased by $3 million (or 11%) in the second quarter of 2023 but increased overall by $2 million (or 4%) in the first six months of the year compared with the same periods in 2022. This year-to-date fluctuation was driven by the Bank’s focus on its digital transformation and on strengthening its information technology systems.

Other comprehensive loss for the six-month period ended June 30, 2023, was $39 million. It consists of remeasurement losses of $51 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 $12 million increase in the fair value of the Bank’s investment in the Bank for International Settlements.

Comprehensive loss for the six-month period ended June 30, 2023, was $3,041 million, primarily due to the net loss of $3,002 million incurred during that period.

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 March 31, 2023.

Governing Council and Board of Directors

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 June 7, 2023. On July 12, 2023, it announced a further 25-basis-point increase in the policy interest rate.

Bill C-47 received Royal Assent from the Governor General on June 22, 2023. The Budget Implementation Act, 2023, No. 1 temporarily requires the Bank to apply any of its ascertained surplus to its accumulated deficit, despite the requirements in sections 27 and 27.1 of the Bank of Canada Act. The Bank must apply the surplus until the earlier of the following events occurs: either the accumulated deficit is equal to zero, or the surplus applied to the accumulated deficit is equal to the losses that the Bank incurred from the purchase of securities as part of the Government of Canada Bond Purchase Program.

Risk analysis

The “Risk management” section of the Bank’s Annual Report 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 June 30, 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 June 30, 2023, was a range of 4.8% to 5.0% (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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