Bank of Canada

The Bank of Canada, BoC (French: Banque du Canada) is Canada's central bank. The Bank was chartered by and under the Bank of Canada Act on July 3, 1934, as a privately-owned corporation. In 1938, the Bank was legally designated a federal Crown corporation, whose shares are owned by the Government of Canada, and executively administered by the Crown in Right of Canada through the Governor of the Bank of Canada. The Minister of Finance holds the entire share capital issued by the bank. "Ultimately, the [shares in the corporation comprising the] Bank [are] owned by the Minister of Finance on behalf of [the Crown] in Right of Canada."

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

• the formulation of monetary policy;
• as the sole issuing authority of Canadian banknotes;
• the promotion of a safe, sound financial system within Canada; and
• funds management and central banking services "for the federal government, the Bank and other clients."

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.

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 a Royal Commission and it reported it 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. Gerald Grattan McGeer was one of the most forceful voices in Canada advocating government intervention in the monetary system, and the nationalization of the credit system. His vision of monetary reform had predated the establishment of the Bank of Canada. 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. 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, fully owned by the Government of Canada and thus, in effect, by the Canadian taxpayers, with the Governor of the Bank of Canada appointed by Cabinet, by order of the Governor-General-in-Council.

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.

The Bank played an important role in financing Canada's war effort during World War II 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 fractional reserve banking rules of Canada were changed, so that the Bank of Canada could no longer dictate the amount of fiat currency reserves that Canadian (private) chartered banks must own. Since that time, the fractional-reserve 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.

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.

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%. 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.

Type of government institution

The Bank is not a government department as it performs its activities at arm's-length from the government; it is a Crown corporation owned by 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 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.

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 31, 2013 the Bank of Canada owned C$88 billion in Government of Canada debt. It had a net income in 2013 of $1.0 billion. The Bank of Canada matches its liabilities of $66 billion in currency outstanding and $22 billion in deposits from the government--to its assets owning $88 billion in Government of Canada debt. The bank notes in circulation have increased from $63.7 billion in two years to $66.6 billion during the year. In 2013, the Bank of Canada recorded total assets and total liabilities of $91 billion, its highest ever. The Bank of Canada lists cash on its 2013 balance sheet at $5.0 million in currency and foreign deposits. 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.

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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.

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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. 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

• Graham Towers (1934-1954)
• James Coyne (1955-1961)
• Louis Rasminsky (1961-1973)
• Gerald Bouey (1973-1987)
• John Crow (1987-1994)
• Gordon Thiessen (1994-2001)
• David A. Dodge (2001-2008)
• Mark Carney (2008-2013)
• Stephen Poloz (3 June 2013-)

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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. 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.

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See also

• Canadian dollar
• List of banks in Canada
• Canada Deposit Insurance Corporation
• Canadian federal budget
• Taxation in Canada
• Canadian public debt
• Economy of Canada
• Money creation

References

Further reading

• Watts, George S. (15 April 1993). Bank of Canada: Origins and Early History/La Banque du Canada:Origines et premieres annees. Kingston: McGill-Queen's University Press. ISBN 978-0886291839. 
• Powell, James (1 September 2009). The Bank of Canada of James Elliot Coyne: Challenges, Confrontation, and Change. Kingston: McGill-Queen's University Press. ISBN 978-0773535992. 

External links

• (English) (French) Bank of Canada official website
• Bank of Canada Act [B-2]

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