Monetary authorities seek to minimize risk and protect taxpayers
When the bank says they want to protect taxpayers, I know that's a LIE
Canada’s central bank is proposing changes to how it manages financial-market operations and deploys emergency lending as it seeks to minimize risk and protect taxpayers.
Change is needed to ensure the smooth functioning of the country’s financial system in normal times and to prepare for another shock that could freeze credit availability, as occurred during the 2007-2008 global financial crisis, Bank of Canada Senior Deputy Governor Carolyn Wilkins said on Tuesday.
The proposed changes were addressed in consultation papers the Bank of Canada released on Tuesday. Among the proposals, the central bank is considering accepting mortgages as collateral under its emergency-lending programs as part of a broad rethinking of financial-market procedures. It is looking for feedback from market participants and will accept comments until July 4.
During the crisis, the Bank of Canada established a temporary facility, which grew to 42 billion Canadian dollars ($34.7 billion), to ease financial pressure at securities dealers, while the federal government injected liquidity through the purchase of insured mortgages from lenders.
To boost liquidity, the Bank of Canada is proposing is to reduce the amount of government bonds it buys at auctions for its balance sheet. The move would increase the amount of newly-issued government debt available to other buyers, Ms. Wilkins said.
It also proposes to conduct regular longer-term repurchase transactions, or repos. Repo transactions are structured like an overnight loan that is backed by collateral, generally bonds and other debt securities, and carry interest. The central bank already conducts overnight operations as required, and the change would allow the Bank of Canada to carry out repo transactions with a term longer than overnight.
Ms. Wilkins said longer-term repos would give the central bank “timely insight about liquidity conditions in short-term funding markets.” The central bank proposes to begin term repo operations in the fall, with the goal of building up a portfolio in six months of C$7 billion to C$10 billion in such transactions.
The central bank is also eyeing the creation of a new repo facility that can be activated in the event of severe, market-wide liquidity woes, with financing available for up to a month to primary dealers and other institutions.
Meanwhile, it proposes restrictions on emergency funding for banks unable to acquire liquidity unless they can demonstrate a plan to shore up capital or wind up operations if recovery efforts fail.This reminds me of the whole mortgage backed security scam?
Under its proposed new policies, the central bank would accept mortgages as collateral for emergency lending assistance, “but only as a last resort when other sources of collateral have been exhausted.”
“This should translate into a significantly larger capacity for eligible financial institutions to draw on [emergency lending assistance],” it said. Direct use of mortgages as collateral would be taken only in extreme circumstances when financial stability is threatened and other viable sources of collateral, including private-label residential mortgage-backed securities, have been exhausted.
The Bank of Canada is also looking at extending emergency lending to credit unions in extraordinary cases.