August 12, 1998
Credit and credit aggregates, Financial institutions, Financial markets, Financial services, Financial stability, Financial system regulation and policies, International financial markets, Lender of last resort, Market structure and pricing, Monetary policy implementation, Payment clearing and settlement systems
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Buying Back Government Bonds: Mechanics and Other Considerations
With the elimination of the federal deficit, the Bank of Canada, the Department of Finance, and financial market participants are examining ways to manage the reduction in the stock of marketable debt. This paper summarizes three different methods—reverse auction, over-the-counter purchases, and conversions—that could be used to buy back Government of Canada bonds before they […] -
May 13, 1998
Canada-U.S. long-term interest differentials in the 1990s
Long-term Canada-U.S. interest spreads have changed remarkably during the 1990s. The unusually wide spreads of the first half of the decade have given way to an unprecedented run of negative yield differentials. In this article, the author examines the conceptual aspects of yields on international assets and their application to the Canada-U.S. situation. Prior to 1995, investors were unsure that, over the long run, inflation would meet the targets set by the government and the Bank. Policy credibility was undermined by large budget deficits and political uncertainty. In the second half of the decade, confidence was re-established as the fiscal positions of governments improved, long-run price stability became established, and political concerns about Quebec lessened. As long as these fundamentals hold, long-term rates should remain relatively low, even when short-term rates rise. -
May 11, 1998
The use of forward rate agreements in Canada
In this article, the authors identify forward rate agreements, or FRAs, as short-term interest rate guarantee instruments negotiated by two parties, one of which is typically a bank. In outlining the main features of FRAs, the authors contrast them with BAX contracts (futures contracts on bankers' acceptances that are negotiated through the Montreal Exchange). The article then describes how market participants use FRAs to cover short-term interest rate risk. The final section deals with the way the Bank of Canada uses information from the FRA market as an indicator of interest rate expectations. Econometric models used to retrieve information from FRA rates, as well as the underlying assumptions, are discussed in an appendix. -
The Financial Services Sector: Past Changes and Future Prospects
The financial services industry has been undergoing significant change in recent years. This paper analyzes some key developments affecting the industry and examines some important issues facing the industry and its regulators. -
The Canadian Banking System
This paper examines the major changes in the Canadian banking system since the Second World War, with special attention paid to the differences between Canadian and U.S. developments over this period. -
December 13, 1997
The overnight market in Canada
The overnight market is an active forum where participants with a temporary surplus or shortage of funds can lend or borrow until the next business day. The level of interest rates in the overnight market has always been closely linked to the Bank of Canada's monetary policy operations. In this article, the authors describe the evolution of the market from its roots in the 1950s, the development of the Bank's monetary policy operations in the market, and how the market operates today. They also examine the outlook for the overnight market, particularly the implications of the new Large-Value Transfer System. -
Constraints on the Conduct of Canadian Monetary Policy in the 1990s: Dealing with Uncertainty in Financial Markets
Canada's economic performance in the first half of the 1990s was adversely affected by high premiums in interest rates that were brought on by political and economic uncertainties. -
November 12, 1997
Clearing and settlement systems and the Bank of Canada
Clearing and settlement systems are essential to the smooth functioning of a modern market-based economy such as Canada's. During the past decade, there have been significant efforts in Canada and abroad to improve electronic clearing and settlement systems that handle payments obligations, either uniquely or in conjunction with transactions related to the purchase and sale of a broad range of financial instruments such as debt, equity, foreign exchange, or derivatives. This article examines some of the risks faced by participants and end-users of these systems and reviews the Bank of Canada's role in relation to these systems. For a number of years, the Bank has been involved informally with major clearing and settlement systems with a view to ensuring that systemic risk is adequately controlled. In July 1996, the Payment Clearing and Settlement Act was proclaimed. This Act formalized the role of the Bank in the oversight of clearing and settlement systems for the purpose of controlling systemic risk. The article provides an overview of the Bank's responsibilities. It also describes certain new powers that the Act made available to the Bank that could be exercised in its dealings with clearing and settlement systems. -
August 13, 1997
The new bank note distribution system
In this article, the author outlines the recent changes made to the way Canada's bank notes are distributed. The new system allows financial institutions to exchange notes directly with one another at designated points across the country, rather than through Bank of Canada agencies, as was previously the case. The institutions communicate with the Bank of Canada through a computerized inventory-management system. Two Bank of Canada operations centres monitor note quality and supply new notes to the financial institutions. While the Bank continues to maintain firm control over the distribution of Canada's bank notes, the management of information rather than physical notes will improve efficiency and allow significant cost savings to the Bank of Canada and to the government.