Remarks by Toni Gravelle
Deputy Governor of the Bank of Canada
CFA Society Toronto
March 23, 2021
Toronto, Ontario
(via webcast)
Market stress relief: the role of the
Bank of Canada's balance sheet
Introduction
Good afternoon. I always enjoy engaging with CFA charterholders, even virtually.1
It's hard to believe we've been dealing
with COVID-19 for as long as we have. The past
year has had a profound impact on people's lives, both in terms of their health and their
economic and financial well-being.
Canadians count on the Bank of Canada to make sure that the financial system works
smoothly, especially in tough times when they depend on credit more than usual. So, a
year ago, the Bank took unprecedented actions to ensure that the financial system
could keep functioning normally and the economy could recover.
Those goals are intertwined. Markets have to work for the economy to work-not just for
bankers and investment managers, but for Canadians of all walks of life.
An essential part of markets working well is liquidity: the ability to buy, sell, lend or
borrow with relative ease. Think of it as the grease that keeps markets lubricated.2
1
CFA (chartered financial analyst) is one of the highest distinctions in the investment management
profession.
2
T. Gravelle,
For more on the importance of liquidity, see "Economic Progress Report: Keeping Markets
(speech delivered virtually to the Greater Sudbury Chamber of Commerce, Sudbury, Ontario,
Working,"
the Bank's response
June 4, 2020). As well, for a summary of to the COVID-19 pandemic and how
P. Beaudry,
largescale purchases of financial assets fit into it, see "Our Quantitative Easing Operations:
(speech
Looking Under the Hood," delivered virtually to the Greater Moncton Chamber of Commerce, the
Fredericton Chamber of Commerce, and the Saint John Region Chamber of Commerce, Fredericton,
Moncton and Saint John, New Brunswick, December 10, 2020).
I would like to thank Ron Morrow, Tamara Gomes and Tiago Figueiredo
for their help in preparing this speech.
Not for publication before March 23, 2021
13:15 Eastern Time
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When COVID-19 struck last year, it caused enormous uncertainty about how the next
weeks and months would play out. And whenever the economic outlook becomes
extremely uncertain, market participants seek to hold cash. Suddenly, investors large
and small were scrambling to sell their financial assets-even those normally
considered risk-free, such as Government of Canada bonds-so they could meet their
margin calls and build up their cash buffers. With this dash for cash so widespread,
everyone was looking to sell assets and few were willing to buy. Markets came under
extreme stress and seized completely. Households and businesses also became extra
cautious: companies were drawing down their lines of credit at an unusually fast pace,
and households were building up their savings or deferring loan payments.
Bank's
At the height of the crisis, the top priority was to quickly restore well-functioning
markets so that households, businesses and governments could still access credit-
either directly from markets or from banks and credit unions.
The Bank was well positioned for this challenge. As a central bank, we have a mandate
to be on the look-out for system-wide stresses, and we have the tools-that leverage
our balance sheet-to fix them. I would like to emphasize, however, that our decision to
act was not something we considered lightly. There is a high bar for using these
extraordinary tools. The last time we stepped in to address issues like these was more
than a decade ago, during the global financial crisis.
I'll
With that in mind, begin by reviewing how the Bank responded to market-wide stress.
I'll
Then, talk about the thinking behind our actions and update you on the status of our
facilities because markets returned to working normally some time ago.
actions have grown the Bank's balance sheet I'll
Our substantially. So close by
discussing some policy implications of this and what my Governing Council colleagues
and I are considering as we explore how the balance sheet could evolve from here.
How we responded to market-wide stress
Let me first expand a bit more on what happened when COVID-19 struck.
By early last March, as the world was realizing we were in a global pandemic,
uncertainty and fear gripped markets. A dash-for-cash mentality took hold across
financial market participants, and liquidity dried up throughout the financial system.
The Bank responded swiftly and supplied extraordinary liquidity, in line with our role as
which I'll discuss
lender of last resort, later. We launched a broad suite of programs-
including some that we used during the global financial crisis and others that we created
from scratch.
Supplying the funding that financial institutions needed
We started by addressing the severe, immediate liquidity issues affecting financial
institutions in Canada. We knew that if we helped supply them with funding, they would
be able to meet the greater demand for credit that was coming from other parts of the
financial system as well as from households and businesses.
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So, the first action we took was to inject significant amounts of liquidity into the financial
system by ramping up our repo operations.3
the Bank's
Ramping up term repos is go-to tactic for alleviating acute market-wide
funding shortages and supporting market functioning more generally. We increased the
frequency and size of these operations-peaking at $24 billion per operation-and
offered funds for longer terms. In addition, we let financial institutions use a wider range
of securities as collateral, which made it easier for us to lend them larger amounts than
usual. Through these extended term repos, we lent roughly $200 billion to financial
institutions in March and April.
We also launched our contingent term repo facility, which broadened the list of financial
institutions that we engage with for these operations. This provided liquidity access to
large asset managers that are active in repo markets.
Restoring and maintaining well-functioning markets
The dash for cash caused liquidity to dry up sharply in several core fixed-income
markets-including, surprisingly, the market for Government of Canada (GoC) bonds.
The impact on the market for GoC bonds was particularly worrisome. These debt
securities are considered very safe and serve as the benchmark, or reference rate, for
market can't function smoothly, it's
almost every other credit market. If the GoC bond
hard for the rest of the system-and the economy-to work properly.
Starting in mid-March last year, the Bank rolled out several new asset purchase facilities
to support liquidity and restore smooth functioning in a wide range of markets.4 Our
ability to do this quickly and effectively is a testament to the calibre, dedication and
expertise of our staff.
The Bank's
purchases helped rebalance the lopsided trading flows in core debt
markets, allowing buyers and sellers to set prices. Also, because securities dealers only
have so much room for risk on their own balance sheets, our purchases helped free up
dealers'
capacity to provide liquidity in these markets.
Short-term funding pressures
To complement our extended repo operations, we started with programs designed to
unfreeze markets that are key sources of short-term funding for businesses and
governments.
For example, to bolster the capacity of commercial banks to support businesses'
to buy bankers'
shortterm credit needs, we launched a facility acceptances. We also began
purchasing commercial paper to provide funding for a wide range of companies and
financial institutions.
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Government of Canada bond purchases
As well, we began making large-scale purchases of GoC bonds in the secondary
market.
We launched the Government of Canada Bond Purchase Program (GBPP) at a weekly
pace of at least $5 billion, across the spectrum of short- and longer-term bond
maturities.
I'll discuss in a few minutes, the
As focus of the program later pivoted from restoring
market functioning to providing additional monetary policy stimulus while our policy
interest rate is at its effective lower bound of 0.25 percent.5
Provincial and corporate bond purchases
Also, in April, we announced we would be launching programs to thaw other important
bond markets and support their functioning through purchases in the secondary market.
We pledged to buy up to $50 billion of provincial bonds and up to $10 billion of
highquality corporate bonds.
The thinking behind our actions
Collectively, our actions and those that other major central banks took in their own
jurisdictions helped to stabilize global financial conditions. The steps we took in Canada
to support core markets reflected our responsibility to act as lender of last resort when
the financial system is short of liquidity and not working properly.
role
This role goes back centuries. The original description of a central bank's as lender
Britain's
of last resort came in 1802 from Henry Thornton, an economist and leader in
wasn't until
abolitionist movement. But it the late 1800s that British journalist Walter
Bagehot created the better-known dictum that, in a crisis, a central bank should lend
freely to sound institutions, against good collateral, and at penalty rates.6
Bagehot was referring to central banks lending to individual banks that faced a sudden
funding squeeze, such as a run on their deposits. But in modern times, where financial
markets have become another important source of funding, the lender-of-last-resort role
Today's
of central banks has evolved. lender of last resort can be thought of as a
liquidity provider of last resort-ready to resolve market-wide stresses when the
financial system cannot find its footing or when debt markets are frozen.
At the same time, Bagehot noted that while it was important to reduce financial stress, it
was also critical to do so in ways that mitigate moral hazard. This remains true today.
Moral hazard emerges whenever market participants or other economic actors feel that
they can engage in risky behaviour without bearing consequences if things go wrong.
Moral hazard can be limited by offering extraordinary liquidity only in severe situations
and by ensuring that such actions have a predetermined expiry date or are unwound
they're
when no longer needed. Once crisis tools have served their purpose, central
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don't
banks should scale them back to show that they are emergency measures and
reflect business as usual. Facilities can also be structured in ways that discourage
market participants from relying on them to manage their funding needs in normal
a cost that's
times-for example, by offering liquidity at above typical market rates.
response to
The Bank's market-wide stress last year included some programs that
carried different degrees of punitive pricing and others that did not. Because our top
priority was to thaw frozen markets quickly, we felt that punitive pricing could undermine
that critical objective in some cases. We also lent at prevailing market-determined rates
through an auction process but sought to constrain the unwarranted use of most of the
facilities in other ways.7
We will be reviewing our various extraordinary actions to assess whether they were
calibrated ideally and whether we could do anything differently in future episodes of
market stress.8 Major central banks, international authorities and regulators, and policy
organizations such as the Financial Stability Board are actively studying these issues
too. In addition, we are all looking at whether any further structural reforms could be
made to improve the resilience of the financial system and minimize the likelihood that
our extraordinary tools will be needed in the future.9
The main point is that when central banks provide liquidity, we have to do so in ways
that don't encourage
market participants to take undue risks in normal times. Our
actions must be targeted at specific issues and scaled back as those are resolved.
Adjusting as market conditions improve
That is why we gradually adjusted our facilities as conditions improved.
In the autumn, we wound down a couple of facilities, including the program to support
markets for bankers' acceptances. We also
fine-tuned our repo operations, making
them less frequent and scaling back the types of collateral that we would accept.
I'd like to
And now announce that, in the coming weeks, the Bank will suspend or
discontinue our remaining market liquidity-focused crisis programs.
Specifically, we will suspend our current term repo operations indefinitely beginning
mid-May. Similarly, the contingent repo facility will be deactivated in early April.
We can take these steps because now there is ample system-wide liquidity for financial
institutions to draw from. This is both in terms of their own unusually high levels of
deposits, as Canadians save more during the pandemic, and the large amount of
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cash-more specifically, settlement balances-that we have added to the financial
system.10
In addition, three asset purchase programs-for commercial paper, provincial bonds
and corporate bonds-will not be extended beyond their upcoming planned one-year
end dates. Corporate and provincial borrowers have unfettered access to fully functional
debt markets. And credit spreads for most of these borrowers are either at or below
So it's
prepandemic levels. clear that these extraordinary facilities are no longer required.
Rest assured, though, that the Bank will be ready to reactivate any of these market
programs should severely stressed market conditions ever re-emerge.
Bank's balance sheet
Where the stands now
As I said at the outset, our facilities and purchases of financial assets have grown the
Bank's balance sheet considerably. It now stands at close to $575 billion, more than
four times bigger than before the pandemic, when it was $120 billion (Chart 1).
Chart 1: Bank of Canada total assets, weekly data
Can$ billions
700
600
500
400
300
200
100
0
Jan-2020 Apr-2020 Jul-2020 Oct-2020 Jan-2021
GoC bonds (excluding RRBs) GoC treasury bills Repos Bankers' acceptances All other assets
Note: RRBs are real return bonds. In this chart, Government of Canada (GoC) bonds purchased in primary markets are measured a t amortized
costs. All other bonds, including GoC bonds purchased in secondary markets, are measured at fair value. "All other assets" includes provincial
treasury bills and bonds, corporate bonds and commercial paper. A full list of assets can be found on the Bank of Canada's website.
Source: Bank of Canada Last observation: March 17, 2021
Ultimately, our actions to support liquidity and markets provided timely support for the
economy, too. They ensured that the impact of our very low policy interest rate-which
has been at 0.25 percent since late last March-could be felt in all corners of the
economy and that credit could keep flowing to Canadians to set the stage for recovery.
Bank's
But it's useful to think of the assets added to the balance sheet as falling into
roughly two separate buckets serving different objectives.
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The first bucket contains our holdings generated from the programs and facilities aimed
at supporting market functioning.
The second bucket holds our GoC bond purchases. As I noted a few minutes ago, at
the height of the market stress, these purchases were largely aimed at supporting
market functioning. You may recall I also said that, as we moved into summer, the
purchases'
main impact shifted to bolstering our monetary policy stimulus.
Making large-scale purchases of GoC bonds is known as quantitative easing, or QE.
what's
QE works through different channels, and the importance of each depends on
happening in markets and the economy.11 During times of market stress, QE purchases
mostly help improve liquidity, ensuring that the GoC bond market and other debt
markets can function smoothly. But once stresses have dissipated, QE purchases also
help lower borrowing costs for households, businesses and governments by putting
downward pressure on bond yields and lending rates throughout the financial system.
The first bucket-our support for market functioning-caused the rapid growth of the
balance sheet during the worst part of the crisis last year, roughly from March to the end
of June.
By the end of April 2021, though, GoC bond holdings are expected to be the largest
piece of the balance sheet by far-at roughly $350 billion, or more than 70 percent of
total assets. This is not unusual because GoC bonds are typically the largest asset on
What's different
our balance sheet. now is the sheer size of those holdings.
against the size of our economy, the value of QE assets that we've
Still, measured
We're
purchased since last March is broadly similar to that of many other central banks.
below the Bank of England, about tied with the US Federal Reserve and ahead of the
European Central Bank and the Swedish Riksbank
(Chart 2).
By another measure, however, our purchases stand out. Our GoC bond purchases
since last March represent a little over 35 percent of the total amount of GoC bonds that
are outstanding-by far the highest among this group of central banks (Chart 3).
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Chart 2: Government bond purchases as a share
Chart 3: Holdings of government bonds as a
of 2020Q1 annualized gross domestic product share of total government bonds outstanding
%
%
35 50
30
40
25
30
20
15
20
10
10
5
0 0
United Euro area United Canada Sweden Sweden United Canada United Euro area
Kingdom States
Kingdom States
From March 2020 Before March 2020 From March 2020 Before March 2020
All nominal sovereign bond purchases include purchases at primary
Note: All nominal sovereign bond purchases include purchases at primary auctions for balance sheet management. Note that the last observation
for the euro area purchases is January 21, 2021. Data for Sweden and the
auctions for balance sheet management. Note that the last observation
for the euro area is January 21, 2021. Data for Sweden and the euro area euro area may also include inflation-protected securities. Last observation
may also include inflation-protected securities. Purchases from March for government bonds outstanding is February 2021, except for the euro
2020 include primary and secondary market purchases.
area, which is as of 2020Q3.
Last observation: for
Sources: Bank of England, European Central
Sources: Bank of England, European Central purchases March 16, 2021;
Bank, US Federal Reserve Bank, Bank of Last observation: Bank, US Federal Reserve Bank, Bank of for outstanding,
Canada, Sveriges Riksbank and Bloomberg March 16, 2021 Canada, Sveriges Riksbank and Bloomberg February 2021
Whether you consider our holdings relatively large or relatively small depends on the
metric you look at. Let me now turn to how these could evolve.
of our programs' asset
The future holdings
The increase in the balance sheet from programs directed at market functioning will
largely roll off because many of those were focused on shorter-term market support.
This has already happened for our purchases of short-term assets such as bankers'
acceptances and commercial paper.
For short-term funding facilities, such as term repos, the process is well underway: most
significantly, about $120 billion is set to roll off between mid-March and the end of April.
the Bank's balance
As it does, sheet-after being relatively stable since July-will
decline to about $475 billion, about $100 billion smaller than its current level.
In terms of the longer-term asset holdings, the program to buy corporate bonds
currently sits at about $200 million in assets, while the program to buy provincial bonds
sits at just over $17 billion. At this point, the Bank doesn't intend to sell any of the assets
purchased through either of these programs.
Of note, at the end of June we will release transaction-level details for the asset
purchase programs that are expiring and for the facilities and programs that we have
already discontinued. This supports our commitment to be fully transparent about our
actions once the programs end. The new details will complement our regular reporting
of the total assets purchased through these programs since we launched them.
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Considerations for adjusting QE
Regarding our ongoing purchases of GoC bonds, Governing Council is evaluating how
the process of adjusting these could unfold.
During the current purchase phase of QE, we continue to add monetary policy stimulus
because our GoC bond holdings are growing. In October, we recalibrated the program
to focus more directly on longer-term borrowing rates. This reduced the amount of term
risk that market participants need to absorb, putting downward pressure on term
premiums. This shift in composition allowed us to reduce our weekly purchases to a
minimum of $4 billion, without reducing the overall stimulus coming from QE.
At the time of our January Monetary Policy Report, we indicated that if the economy
or stronger than our economic projection, we won't need as much
plays out in line with
QE stimulus over time. And in our March policy decision statement, we said that as we
continue to gain confidence in the strength of the recovery, we will gradually adjust the
pace of our QE purchases. We also indicated that first-quarter growth appears to be
better than we expected in January. We will have a new full economic projection at our
April policy decision.
I want to be clear here: moderating the pace of purchases while adding to our holdings
would simply mean that we are still adding stimulus through QE but at a slower pace. It
would not mean we are removing stimulus. We would be easing our foot off the
accelerator, not hitting the brakes.
When we start gradually dialling back the amount of incremental QE stimulus that we
are adding, we will eventually get down to a pace of QE purchases that maintains-but
no longer increases-the amount of stimulus being provided. That is, a pace where our
GoC bond holdings are largely stable and we reinvest the proceeds of maturing assets.
At that point, the accumulated amount of GoC bond holdings would still represent a
significant amount of stimulus in the system.
like to
I'd stress a few things about our journey to this reinvestment phase of QE.
First, the process for getting there will be gradual and in measured steps.
Second, the timing of these moderations to the pace of purchases, and the amount of
time that we take to get to the reinvestment phase, will be guided by our evolving
assessment of the macroeconomic outlook and the strength and durability of the
recovery.
And third, adjusting the pace of QE purchases won't necessarily mean that we have
changed our views about when we will need to start raising the policy interest rate.
These decisions are distinct. We have committed to continuing our QE program-by
which we mean positive net purchases-until the recovery is well underway. Meanwhile,
a decision on the policy rate is linked to the economic outcomes described in our
forward guidance-which says that we will leave the policy rate at 0.25 percent until
economic slack is absorbed so that the 2 percent inflation target is sustainably
wouldn't
achieved. In the forecast that we published in January, we projected this
happen until into 2023. So, we would arrive at the reinvestment phase of QE some
amount of time before we start to increase the policy interest rate.
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Eventually, we will reach a point where Governing Council is of the view that the
outcomes outlined in our forward guidance have been achieved and that we will need to
start raising our policy rate in order to sustainably achieve our inflation objective.
How long it takes to transition through these different steps will, of course, depend on
how the trajectories for economic activity and inflation unfold. As part of this journey, we
will be mindful of the possibility that our stimulative monetary policy-while essential to
achieving our inflation objective-could increase financial vulnerabilities.
Rest assured that throughout the normalization process for monetary policy, we will
make every effort to communicate clearly and in a timely manner.
Conclusion
It's time
for me to conclude.
We have come a long way from how things were a year ago when severe market-wide
stresses forced the Bank to act as lender of last resort to the financial system.
Our efforts in the face of COVID-19 have had their intended effect. Financial markets
have been working much better for some time. Partly as a result of markets functioning
smoothly, the economy continues to recover, and the downturn last year-while sharp
and severe-was not as bad as it could have been if market stresses had persisted.
The Bank's plans to suspend or
discontinue several facilities and programs reflect the
fact that these were extraordinary central bank actions. It was always our intention to
withdraw them once we became confident that financial markets could function without
this added support. Such actions must be reserved for times of severe market stress.
As such, they are not a substitute for the steps that market participants take on their
own in normal times to manage risk.
While the assets we acquired in the recent crisis to support market functioning will
decline, our QE program that supports our monetary policy actions is continuing to add
the Bank's balance
to sheet.
As new information on the strength of the recovery arrives, Governing Council will
continue discussions about gradually adjusting the pace of our QE-related purchases.