Bank of Canada

Bank of Canada
Banque du Canada
Logo

Logo
Headquarters

Headquarters
Headquarters Ottawa, Ontario, Canada
Coordinates 45°25′15″N 75°42′11″W / 45.42088°N 75.702968°W / 45.42088; -75.702968Coordinates: 45°25′15″N 75°42′11″W / 45.42088°N 75.702968°W / 45.42088; -75.702968
Established 1935
Governor Stephen Poloz
Central bank of Canada
Currency Canadian dollar
CAD (ISO 4217)
Bank rate 0.50%
Interest on reserves 0.25%
Website www.bankofcanada.ca

The Bank of Canada, BoC (French: Banque du Canada) is Canada's central bank.[1] The bank was chartered by and under the Bank of Canada Act[2] on July 3, 1934, as a privately owned corporation. In 1938, the bank was legally designated a federal Crown corporation. The Minister of Finance holds the entire share capital issued by the bank. "The capital shall be divided into one hundred thousand shares of the par value of fifty dollars each, which shall be issued to the Minister to be held by the Minister on behalf of Her Majesty in right of Canada."[3]

The essential role of the bank, as Canada's central bank, is to "promote the economic and financial well-being of Canada."[4] More specifically, the responsibilities of the bank are:

The Bank of Canada headquarters are located at the Bank of Canada Building, in the nation's capital, Ottawa. The edifice also houses the Currency Museum, which opened in December, 1980.[11]

History

On March 11, 1935, the Bank of Canada began operations, following the granting of Royal Assent to the Bank of Canada Act. Initially, the bank had been founded as a privately owned corporation, a move taken in order to ensure the bank would be free from partisan political influence. Earlier, in 1933, Prime Minister R.B. Bennett had instituted the Royal Commission on Banking and Currency[12] and it reported its policy recommendations in favour of the establishment of a central bank for Canada. The Royal Commission's members had consisted of Britain's chief propagandist during the early part of World War II, Lord Macmillan, who supported central banking, as well as various British and Canadian bankers. Also involved was John Edward Brownlee, the then-Premier of Alberta, petitioning in favor of a central bank because western farmers wanted government-cost-regulated credit.[13] In 1938, under Prime Minister William Lyon Mackenzie King, the Bank of Canada, by Act of the Parliament of Canada became "a special type of " Crown corporation.

"The Bank shall be under the management of a Board of Directors composed of a Governor, a Deputy Governor and twelve directors appointed in accordance with this Act. ... The Governor and Deputy Governor shall be appointed by the directors with the approval of the Governor in Council."[14] "Before a person starts to act as a director, an officer or an employee of the Bank, he or she shall take an oath, or make a solemn affirmation, of fidelity and secrecy, in the form set out in the schedule, before a commissioner for taking affidavits."[3]

Prior to the creation of the Bank of Canada, HM Canadian Treasury had been responsible for printing Canada's banknotes. The Bank of Montreal, then the nation's largest bank, acted as the government's banker. A major proponent was the Royal Bank of Canada, which wanted to see the government business taken away from its rival. When the central bank was founded, the Government of Canada claimed it was constrained by its foreign debts and it would be less costly to borrow money if it could be repaid in debased currency. The Government also claimed it was constrained by its inability to deal directly on Canada's foreign debts. The farmers were joined by manufacturing interests and other groups in favor of a depreciating currency, all demanding the institution of a central bank. The original name, the Bank of Canada (commercial), had been a private bank and was therefore renamed the Canadian Bank of Commerce. In 1949, the private banks were ordered to remove their currency from circulation, and the Bank of Canada then became the sole issuer of legal tender banknotes in and under Canada.[15]

The bank played an important role in financing Canada's war effort during World War II[16] by printing money and buying the government's debt. After the war, the bank's role was expanded as it was mandated to encourage economic growth in Canada. An Act of Parliament in September 1944 established the subsidiary Business Development Bank of Canada (BDC) to stimulate investment in Canadian businesses. Prime Minister John Diefenbaker's central-bank monetary policy was directed towards increasing the money supply to generate low interest rates, and incentivize full employment. When inflation began to rise in the early 1960s, then-Governor James Coyne ordered a reduction in the Canadian money supply.

Since the 1980s, keeping inflation low has been the main priority of the Bank of Canada. In the early 1990s, the reserve rules of Canada were changed, so that the Bank of Canada could no longer dictate the amount of currency reserves that Canadian chartered banks must own. Since that time, the currency reserves of Canada's chartered banks have been internal corporate bank policy.

Roles and responsibilities

The mandate of the Bank of Canada is defined in the Bank of Canada Act preamble and it states,

WHEREAS it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada.[2]

The bank's current mission statement is: The Bank of Canada's responsibilities focus on the goals of low, stable and predictable inflation; a safe and secure currency; a stable and efficient financial system in Canada and internationally; and effective and efficient funds-management services for the Government of Canada, as well as on its own behalf and for other clients.[10]

In practice, however, it has a more narrow and specific internal definition of that mandate: to keep the rate of inflation (as measured by the Consumer Price Index) between 1% and 3%. Since the bank's creation, the average annual inflation rate was 3.13%.[17] The most potent tool the Bank of Canada has to achieve this goal is its ability to set the interest rate for borrowed money.

The Bank of Canada is the sole authority authorized to issue currency in the form of bank notes in Canada. The bank does not issue coins; they are issued by the Royal Canadian Mint.

$1 Bank of Canada note issued in 1935.

Type of government institution

Some believe the bank is not a government department as it performs its activities at arm's-length from the government; however, this is false. It is a Crown corporation, and gets its ultimate direction from the Minister of Finance. As the Bank of Canada Act states, "There should emerge a difference of opinion between the Minister and the Bank concerning the monetary policy to be followed, the Minister may, after consultation with the Governor and with the approval of the Governor in Council, give to the Governor a written directive concerning monetary policy, in specific terms and applicable for a specified period, and the Bank shall comply with that directive."[18] Shares are directly held by the Minister of Finance on behalf of Her Majesty in right of Canada which are registered by the bank in the name of the Minister in the books of the bank at Ottawa, and the bank's earnings go into the federal treasury. The governor and senior deputy governor are appointed by the bank's board of directors. The Deputy Minister of Finance sits on the board of directors but does not have a vote. The bank submits its spending to the board of directors, while federal departments submit their spending estimates to the Treasury Board. Its employees are regulated by the bank and not the federal public service agencies.[2]

Bank of Canada's balance sheet

The bank has a zero book value policy on its balance sheet—matching total assets to total liabilities—and transfers any equity above this amount as a dividend to the Government of Canada. As of December 30,2015 the Bank of Canada owned C$95 billion in Government of Canada debt. It had a net income in 2014 of $1.039 billion. The Bank of Canada matches its liabilities of $76 billion in currency outstanding, $23 billion in deposits from the government and $3.5 billion in other liabilities—to its assets owning $95 billion in Government of Canada debt and $7.5 billion in other assets.[19] Bank notes in circulation have increased from $70 billion at the end of 2014 to $76 billion at the end of 2015. The Bank of Canada lists cash on its 2014 balance sheet at $8.4 million in currency and foreign deposits.[20] The Bank of Canada's books are audited by external auditors who are appointed by Cabinet on the recommendation of the Minister of Finance, and not by the Auditor General of Canada.

Response to 2007–08 financial crisis

The Bank of Canada 2008 balance sheet expanded to $78.3 billion from $53.7 billion from the previous year. After the financial crisis, these emergency asset purchases were unwound and removed from the central bank's balance sheet. This action represented a fifty percent increase in the size of the central bank's balance sheet. This central bank transaction was referenced under "securities purchased for resale" from Canada's major banks. It was termed advances to members of the Canadian Payments Association and were liquidity loans made under the bank’s standing liquidity facility as well as term advances made under the bank’s commitment to provide term liquidity to the Canadian financial system.[21]

Governor

The head of the Bank of Canada is the governor, who is appointed by the bank's board of directors. The governor is appointed for a seven-year term, and can be dismissed by the government. In case of a profound disagreement between the government and the Bank, the Minister of Finance can issue written instructions for the bank to change its policies.[2] This has never actually happened in the history of the bank to date. In practice, the Governor sets monetary policy independently of the government. Canadian banknotes are signed by the governor and deputy governor of the Bank of Canada.

Governors

Research and development

The Bank of Canada has a team of chemists, physicists, and engineers it had assembled for the development of the Canadian Journey Series who determine potential counterfeiting threats and assess substrate materials and potential security features for use in banknote designs.[24] It is part of the "Four Nations Group" of central banks, which includes the Reserve Bank of Australia, the Bank of England, and the Bank of Mexico, that collaborate on banknote security research, testing, and development.[24]

See also

References

  1. ↑ "Lender of Last Resort". Bank of Canada. Retrieved 2013-03-20.
  2. 1 2 3 4 "Bank of Canada Act (R.S.C., 1985, c. B-2)" (PDF). Canada Department of Justice. 4 March 2013. Retrieved 2013-03-20.
  3. 1 2 Branch, Legislative Services. "Consolidated federal laws of canada, Bank of Canada Act". laws-lois.justice.gc.ca. Retrieved 2015-10-18.
  4. ↑ "Frequently Asked Questions—What is the Bank of Canada?". Bank of Canada. Retrieved 2013-03-20.
  5. ↑ "Bank of Canada - Monetary Policy". Bank of Canada. Retrieved 2013-03-20.
  6. ↑ "Currency". Bank of Canada. Retrieved 2013-03-20.
  7. ↑ "Banknote Printing and Currency Processing". Giesecke & Devrient (G&D). Retrieved 2013-03-20.
  8. ↑ "Financial System". Bank of Canada. Retrieved 2013-03-20.
  9. ↑ "Funds Management". Bank of Canada. Retrieved 2013-03-20.
  10. 1 2 "Frequently Asked Questions—What does the Bank do?". Bank of Canada. Retrieved 2013-03-20.
  11. ↑ "About the Museum". Bank of Canada. Retrieved 2013-03-20.
  12. ↑ "Proceedings of the Royal Commission on Banking and Currency, Canada, Ottawa,1933". Scribd. 30 December 2008. Retrieved 2013-03-20.
  13. ↑ Powell (December 2005). A History of the Canadian Dollar (PDF). Bank of Canada. pp. 47–49. ISBN 0-660-19571-2. Retrieved 2013-03-20.
  14. ↑ http://laws-lois.justice.gc.ca/eng/acts/b-2/FullText.html|title
  15. ↑ "Bank Note Series". Bank of Canada. Retrieved 2013-03-20.
  16. ↑ Mackenzie, Hector M. "Mutual Aid". The Canadian Encyclopedia. Retrieved 2013-03-20.
  17. ↑ "Inflation Calculator". Bank of Canada. Retrieved 2013-03-20.
  18. ↑ http://laws-lois.justice.gc.ca/eng/acts/b-2/page-6.html#h-6
  19. ↑ http://www.bankofcanada.ca/wp-content/uploads/2016/01/wfs080116.pdf
  20. ↑ "2014 Annual Report" (PDF). Bank of Canada. 28 February 2015. Retrieved 2016-02-22.
  21. ↑ Annual Report 2008 (PDF). Bank of Canada. 27 February 2009. ISSN 1487-0452. Retrieved 2013-03-20.
  22. ↑ "Mark Carney named new Bank of England governor". BBC News (bbc.co.uk). 26 November 2012. Retrieved 2013-03-20.
  23. ↑ Quinn, Greg (2 May 2013). "Stephen Poloz Named Bank of Canada Head Replacing Carney". Bloomberg (bloomberg.com). Retrieved 2013-05-02.
  24. 1 2 Brown, Maura, ed. (20 June 2011). "Paying with Polymer: Developing Canada’s New Bank Notes" (PDF). Bank of Canada Review (Bank of Canada) (Supplement). Retrieved 7 March 2014.

Further reading

External links

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