Tipology : Encyclopedia
Category:   Financial system   |   Regulation and supervisory  

Abstract

The Bank of Canada (BOC) is a financial institution that serves as Canada's primary central bank. The “Bank of Canada Act” of 1934 founded the institution as a privately owned corporation but in 1938, the bank became a Crown corporation belonging to the monarch in right of Canada. Unlike many central banks, the BOC is not a commercial bank and does not offer public bank services. It is the only issuer of banknotes and holding a monopoly on the printing and issuing of the Canadian banknotes, the central bank directly influences the value of the country’s currency. Furthermore, its 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. Recently the BOC has made some important changes in the way it implements monetary policy like explicit target of inflation (1-3%) or increasing transparency and reducing market uncertainty. These measures, together with other financial factors, have allowed Canada to reduce the issues of the global economic crisis of 2008.

A Special Type of Crown Corporation

Before to 1934, Canada did not have a central bank and for long time the political debates focused on the issue of private or public ownership for central banking system. At the heart of the issue was the nature of the BOC’s relationship with the federal government.

Legislators were concerned that the BOC remain free from political interference, while at the same time remaining responsive to the financial and economic priorities set out by the federal Finance Department. The issue of BOC independence is still a hot topic today.

On March 11, 1935, the central bank began operations. Initially the bank was founded as a privately owned corporation in order to ensure it was free from political influence. Soon after the bank opened, a new Government introduced an amendment to the “Bank of Canada Act” to nationalize the institution. The new Government nationalized the bank in 1938, buying all of its shares from the private banks that were its original owners. In 1938, it became a special type of Crown corporation (Crown corporations are peculiar Canadian hybrid entities), fully owned by the Government but the bank is not a Government Department as it performs its activities at arm's-length from the Government. 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 Bank of Canada also has a governance framework that reflects its unique mandate and role.

Core Functions

The Bank of Canada has a primary mandate of keeping inflation within the 1-3% range, which it has been able to achieve. The BOC administers the nation’s currency, protects its value, and acts as the government's and chartered banks' official banker but the Bank of Canada's most important function is to set monetary policies that will promote a healthy economy. This is accomplished primarily through taking steps to raise and lower interest rates.

According to the preamble in the “Bank of Canada Act”, the Bank's mandate is to:

- Regulate credit and currency

- Control and protect the external value of the national monetary unit

- Use monetary action to mitigate fluctuations in the general level of production, trade prices, and employment.

The Bank of Canada constantly maintains liquidity of financial institutions that are a part of the financial system. As a lender of last resort, the BOC provides immediate liquidity to institutions of the system accredited to it, if they encounter problems of the kind.

The bank closely interacts with financial markets through its presence in the foreign exchange markets. It realizes Government securities trading and management, influences interest rates by establishing an overnight rate.

Furthermore, the BOC is a fiscal agent of the Canada Government. The role of the fiscal agent is connected with certain responsibilities that can be compared to public funds management.

The bank manages tax administration accounts used for collecting and spending money by the Government. It guarantees that these accounts have enough funds for day-to-day needs, and that the surplus will be invested into deposits.

Also, the bank manages Government exchange reserves. These reserves provide major liquidity to the Government assets and help to create proper conditions to establish the Canadian dollar exchange rate in the forex market.

The BOC is the only bank responsible for creating and distributing the official Canadian currency, the Canadian dollar.

The “Bank of Canada Act”, which defines the bank's functions, has been amended many times since 1934. But the preamble to the Act has not changed. The Bank still exists "to regulate credit and currency in the best interests of the economic life of the nation."

Management of the Bank

The mandate of the BOC is spelled out in the “Bank of Canada Act”, under this Act, management of the bank is assigned to Board of Directors that appoints the Governor and Senior Deputy Governor.

The Governor is Chair of the Board of Directors and with the Deputy Governor shall each be appointed for a term of seven years during good behavior, are eligible for re-appointment on the expiration of their terms of office.

The Board is composed of the Governor, the Senior Deputy Governor and 12 independent directors appointed to three-year renewable terms by the Governor in Council (the Cabinet). The Deputy Minister of Finance is an ex officio non-voting member of the Board. The Board of Directors provides general oversight of the management and administration of the bank with respect to strategic planning, financial and accounting matters, risk management, human resources, and other internal policies.

Furthermore, the bank shall be under the management of Governing Council. The Governing Council is the policy-making body of the Bank. It consists of the Governor, Senior Deputy Governor, and four Deputy Governors. It is responsible for monetary policy, decisions aimed at promoting a sound and stable financial system, and the strategic direction of the bank. The Council arrives at its decisions about the rate by consensus, rather than by individual votes as is the case at some other central banks.

Although the Bank enjoys substantial independence, the “Bank of Canada Act” gives the finance minister the right to issue a formal, written policy directive to the Bank of Canada if, after consultation, disagreement on policy persists.

The Bank of Canada is required to submit each year its audited financial statements accompanied by a report by the Governor to the Minister of Finance. The Annual Report is presented to Parliament by the Minister and a copy is published in the Canada Gazette.

Tab. 1: Organization Chart of BOC

Source: BOC

Relationship with the Government

The Bank of Canada’s relationship with the Government consists of both formal and informal mechanisms.

Formal Instruments:

- The outside Board of Directors appoints the Bank Governor and the Senior Deputy Governor, with the government's approval.

- The Finance Minister appoints a new director or reappoints a director when his/her term of office expires.

- The Deputy Finance Minister sits on the Governing Council and the Board of Directors, but does not vote.

- The Bank of Canada submits an annual report to the Department of Finance. The Governor must be available for questioning on the report by the House of Commons Standing Committee on Finance.

Informal Instruments:

- The “Bank of Canada Act” instructs the Governor to “consult regularly on monetary policy and on its relation to general monetary policy.” In practice this means that the Governor of the Bank meets weekly with the Finance Minister.

- Together with the Department of Finance, the Bank of Canada participates in the Financial Institutions Supervisory Committee (FISC) that meets regularly to share information, coordinate actions and advise the federal government on financial system issues.

References

BANK OF CANADA ACT, http://laws-lois.justice.gc.ca/eng/acts/B-2/page-1.html

BANK OF CANADA (2012) Annual report

BANK OF CANADA website, www.bankofcanada.ca

INTERNATIONAL MONETARY FUND (1998) The Bank of Canada's Monetary Policy Framework - Have Recent Changes Enhanced Central Bank Credibility?, FMI Working Paper

JACKSON K. J. (2013) Financial Market Supervision: Canada’s Perspective, Congressional Research Service

WATTS G. S. - RYMES T. K. (1993) Bank of Canada: Origins and Early History, Carleton University Press

Editor: Giovanni AVERSA