Pierre Duguay: Bank of Canada's perspective on the stability of the
Canadian financial system
Opening statement by Mr Pierre Duguay, Deputy Governor of the Bank of Canada, to the
House of Commons Standing Committee on Finance, Ottawa, 5 March 2009.
* * *
Good morning. Thank you for inviting me here to discuss the Bank of Canada's perspective
on the stability of the Canadian financial system.
As we have consistently emphasized, stabilization of the global financial system is a
precondition for economic recovery, both globally and in Canada. To that end, policymakers
around the globe have acted aggressively and creatively by initiating a series of
unprecedented actions aimed at stabilizing the global financial system. Central banks
throughout the world, including the Bank of Canada, have provided unprecedented liquidity
to keep the financial system functioning.
Because the crisis we are facing is global in nature and began outside our borders, most
solutions must be found at the international level. We are taking part in discussions with our
international colleagues on ways to strengthen financial stability globally. I would note that
there has been a great deal of interest worldwide in the resilience of Canada's financial
institutions in the face of the global economic crisis. Unlike their counterparts in other major
economies, Canadian banks have not been materially affected by the financial crisis. They
have managed to raise capital during this troubled period to support continued lending and to
make up for some of the decline in the demand for securitized products as well as the exit of
non-bank lenders which had relied on securitization for financing their activities. In contrast,
banks in most other major economies have suffered significant losses and have required
significant capital injections from their governments. Thus, Canada has maintained much
healthier credit conditions since the onset of this global recession than have been seen in
other major countries. Still, the Canadian financial sector has felt the effects of the global
turmoil which has increased funding needs while at the same time raising the costs and the
uncertainty of term funding. In response, the Bank of Canada has made significant efforts to
support liquidity in financial markets.
Our actions aimed at stabilizing the Canadian financial system since the global crisis began
18 months ago have been unprecedented and significant. The Bank of Canada has moved
aggressively by expanding the provision of term purchase and resale agreements (PRAs) to
a total of $41 billion at its peak in December, and $35 billion currently. Term PRAs provide
liquidity to key market participants for terms of up to three months against a wide range of
securities. The Bank has widened the range of assets that it will accept in these operations
and has extended the range of counterparties with whom it will transact. We also introduced
a new Term-Loan Facility for those financial institutions that participate directly in the Large
Value Transfer System, taking their non-mortgage loan portfolios as collateral. Last week,
the Bank announced a new term PRA facility for private sector instruments that expands on
the private sector term PRA facility that we set up last autumn for money market instruments.
The facility is opened to a broader range of participants, against a broader range of eligible
securities, and it is available for a longer term and at a lower minimum bid rate. The liquidity
from this new facility should provide indirect support to credit growth in Canada by improving
secondary-market liquidity and increasing demand for corporate securities.
I would like to point out that these facilities have been financed, not by expanding the supply
of central bank money to the financial system, but rather through the sale of treasury bills,
either from the Bank's own portfolio or from new issues whose proceeds are in turn held on
deposit at the Bank of Canada. I would also note that, on a consolidated basis, the
Government of Canada earns net income from these operations, represented by the spread
between the yield on our own term PRAs and by the yield on treasury bills. Furthermore,
there is little risk to the taxpayer in these operations, as we require participants to pledge a
greater amount of collateral than the amount of money borrowed.
These liquidity operations have resulted in a significant reduction in spreads at the short end
of the market. CDOR-OIS spreads have narrowed substantially since last fall, when
conditions were extremely negative. Improvements are especially notable at shorter
maturities (such as 1-month) and are largely attributable to the liquidity facilities that have
been put in place. Spreads at 3 months which peaked at about 125 basis points in Canada,
are now close to more normal levels; that is, about 25 basis points.
While the Bank of Canada's liquidity operations are focused on short-term financing, the
Government of Canada has introduced measures aimed at supporting long-term financing for
businesses and consumers. Let me highlight two. One is the Insured Mortgage Purchase
Program, which allows financial institutions to fund new financing by selling pools of insured
residential mortgages to CMHC; another is the Canadian Secured Credit Facility under which
the Business Development Bank of Canada will buy term asset-backed securities backed by
loans and leases on vehicles and equipment.
All of these measures are helping to meet a rising demand from business and individuals
who have been finding it difficult in this environment to raise adequate funds. We have all
heard reports about ongoing tightening in both the availability and the pricing of credit.
Nonetheless, our latest figures show continued strong growth in total household credit - 9.6
per cent in January compared with the same period one year earlier - and limited
deceleration in growth of total business credit. The latter stood at 4.2 per cent in January
compared with the same period one year earlier as accelerating growth in bank lending has
helped to offset a contraction in market financing. We will continue to closely monitor credit
growth and credit conditions in Canada.
In conclusion, as we are all very well aware, the Canadian economy is feeling the effects of
the global turmoil and recession. Authorities have put a lot of fiscal and monetary stimulus in
place - in Canada and globally - to support the recovery. However, as I noted at the outset,
stabilization of the global financial system remains a precondition for the global and
Canadian economic recoveries. Investor and public confidence has been badly shaken, but
will recover with the timely implementation of ambitious plans in some major countries to
address toxic assets and to recapitalize financial institutions. However, if these national and
multilateral measures are not timely, bold, and well-executed, Canada's economic recovery
will be both attenuated and delayed.
I would now be pleased to answer your questions.