For the period ended September 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 November 15, 2023.
This Quarterly Financial Report should be read in conjunction with the condensed interim financial statements for the third 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 third 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 | September 30, 2023 | December 31, 2022 | September 30, 2022 |
| Assets | |||
| Loans and receivables | 5 | 5 | 438 |
| Investments | 288,131 | 378,206 | 398,774 |
| Derivatives—indemnity agreements with the Government of Canada | 34,288 | 31,346 | 31,535 |
| All other assets* | 1,207 | 1,153 | 1,116 |
| Total assets | 323,631 | 410,710 | 431,863 |
| Liabilities and equity (deficiency) | |||
| Bank notes in circulation | 117,745 | 119,726 | 116,652 |
| Deposits | 199,465 | 273,333 | 288,878 |
| Securities sold under repurchase agreements | 10,581 | 17,396 | 24,885 |
| Other liabilities | 306 | 352 | 494 |
| Equity (deficiency) | (4,466) | (97) | 954 |
| Total liabilities and equity (deficiency) | 323,631 | 410,710 | 431,863 |
* 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 because market conditions and the economy have improved and the Bank began quantitative tightening. The Bank’s total assets decreased by 21% to $323,631 million as at September 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 24% compared with December 31, 2022, to $288,131 million as at September 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 $80,744 million during the first nine months of the year. This decrease is mainly due to bonds maturing and, in keeping with the Bank’s quantitative tightening, the proceeds are not being reinvested. Together, these resulted in declines of $59,021 million in Government of Canada bonds held at fair value and $21,723 million in Government of Canada bonds held at amortized cost.
- The Bank engages in repo operations, which provide market participants with a temporary source of Government of Canada securities on an overnight basis. 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 $7,915 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 $34,288 million balance represents the fair value of the derivatives associated with the net unrealized losses on these assets as at September 30, 2023. Derivatives increased by $2,942 million during the nine-month period, mainly due to an increase in long-term bond yields. This is included in the asset profile chart in “All other assets.”
Bank notes in circulation represents approximately 36% (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 $117,745 million as at September 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, and represents 61% (67% as at December 31, 2022) of the Bank’s total liabilities. This balance has declined by 27% to $199,465 million as at September 30, 2023, compared with December 31, 2022, reflecting continued quantitative tightening.
Securities sold under repurchase agreements decreased by 39% to $10,581 million as at September 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 $4,466 million as at September 30, 2023, as a result of net losses of $4,461 million for the first nine months of the year. As at September 30, 2023, the accumulated deficit was $5,547 million, after the statutory reserve of $25 million was drawn down 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 $520 million and an investment revaluation reserve of $456 million, each as at September 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 September 30 |
For the nine-month period ended September 30 |
|||
| 2023 | 2022 | 2023 | 2022 | |
| Interest revenue | 965 | 1,117 | 2,943 | 3,347 |
| Interest expense | (2,260) | (1,467) | (6,918) | (2,689) |
| Net interest income (expense) | (1,295) | 350 | (3,975) | 658 |
| Dividend revenue | - | - | 5 | 4 |
| Other income | 3 | 1 | 7 | 6 |
| Total income (loss) before operating expenses | (1,292) | (349) | (3,963) | 668 |
| Total operating expenses | (167) | (162) | (498) | (515) |
| Net income (loss) | (1,459) | (511) | (4,461) | 153 |
| Other comprehensive income (loss) | 131 | (11) | 92 | 346 |
| Comprehensive income (loss) | (1,328) | (522) | (4,369) | 499 |
The Bank incurred net losses of $1,459 million and $4,461 million for the three- and nine-month periods ended September 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, which increased from 0.25% in the first quarter of 2022 to 5.00% in the third quarter of 2023. In time, the Bank will return to a net income position. The net losses do 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 acquired through large-scale asset purchase programs. In the third quarter and the first nine months of 2023, interest revenue decreased by $152 million (or 14%) and $404 million (or 12%), 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, which was offset by an increase in the average yield on investments.
Interest expense consists mainly of interest incurred on deposits held by the Bank. During the third quarter and the first nine months of 2023, the interest expense increased by $793 million and $4,229 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 third quarter of 2023 increased by $5 million (or 3%) compared with the same period in 2022. This mainly reflects increases of $15 million in costs due to timing in bank note production, $2 million in costs for premises due to building repairs, and $2 million in costs for technology and telecommunications due to the Bank’s focus on its digital transformation and on strengthening its information technology systems. These increases were offset by a decrease of $15 million in staff costs, due to a decline in benefit expenses. For the nine-month period ended September 30, 2023, operating expenses decreased by $17 million (or 3%), compared with the same period in 2022.
- Staff costs decreased by $28 million (or 10%) compared with the same period in 2022, as a result of the following changes:
- Salary costs increased by $18 million (or 10%) 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 $45 million (or 44%), 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
- Premises costs increased by $5 million (or 23%) compared with the same period in 2022. The increase was driven by building repairs and alterations.
- Technology and telecommunications costs increased by $4 million (or 5%) 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 income (loss) for the nine-month period ended September 30, 2023, was $92 million. It consists of a remeasurement gain of $76 million on the Bank’s defined-benefit plans as a result of increases in discount rates,2 offset by a decrease in the fair value of the plans’ assets. It also consists of a $16 million increase in the fair value of the Bank’s investment in the Bank for International Settlements.
Comprehensive loss for the nine-month period ended September 30, 2023, was $4,369 million, primarily due to the net loss of $4,461 million incurred during that period.
Looking ahead through 2023
| The Bank’s 2023 Plan (in millions of Canadian dollars) |
|||||||
|---|---|---|---|---|---|---|---|
| 2023 budget | 2023 forecast | ||||||
| For the year ended December 31 | $ | % | $ | % | |||
| Staff costs | 419 | 52 | 340 | 48 | |||
| Bank note research, production and processing | 60 | 7 | 54 | 8 | |||
| Premises costs | 35 | 4 | 37 | 5 | |||
| Technology and telecommunications | 118 | 15 | 112 | 16 | |||
| Depreciation and amortization | 78 | 10 | 74 | 11 | |||
| Other operating expenses | 96 | 12 | 86 | 12 | |||
| Total expenditures | 806 | 100 | 703 | 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
Changes in personnel, operations and programs have occurred since June 30, 2023.
Governing Council and Board of Directors
No changes were made to the membership of the Governing Council or Board of Directors during the quarter.
Operations and programs
The Bank announced an increase of 25 basis points in the policy interest rate on July 12, 2023. On September 6, 2023, and on October 25, 2023, the Bank announced that it would maintain its policy rate.
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 September 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.
Condensed interim financial statements
- 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. 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 September 30, 2023, was a range of 5.6% to 5.7% (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. 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.[←]