Bank of Canada Overhauls Rules to Keep Markets Working in Crises

Canada’s central bank is overhauling its rules to keep financial markets operating, incorporating lessons from the 2008 crisis, Bank of Canada Senior Deputy Governor Carolyn Wilkins said Tuesday.

The changes range from allowing private investors to buy more new government bonds to denying bailout funding to institutions that don’t have so-called living wills, Wilkins said in a speech in Montreal.

New rules imposed after a financial crisis that cost the global economy $10 trillion, including demands that taxpayers aren’t on the hook for future problems, have made trading more difficult and expensive, Wilkins said.

“Weighed against the cost of another crisis, it’s a small price to pay,” said Wilkins, who led a committee on global market liquidity that wrote new rules on capital requirements. Her speech didn’t touch on current monetary policy and she said the moves have no impact on how the policy rate is set.

Those pressures are also being seen in Canada, which had the soundest banks through the crisis according to the World Economic Forum, underpinning one of the fastest recoveries in the Group of Seven.

The changes unveiled today will help avoid trading freezes that destroyed some global banks and halted Canada’s own C$32 billion market for asset-backed commercial paper, the senior deputy said.

The proposed changes also would create a fund to purchase assets from major institutions for up to one month in times of stress, and to accept mortgages as collateral “as a last resort” on emergency loans, she said.

The bank will scale back its purchases of new benchmark bonds at government auctions to 10 percent of the total value from 20 percent, the central bank said in a public consultation paper released earlier today. The move will allow more of the highest-quality debt to be held by private investors and improve trading, Wilkins said.

“We’re hearing a lot of commentary about how liquidity may be diminishing in secondary bond markets, especially for corporate bonds” globally, she said.

The central bank seeks to create a “Contingent Term Repo Facility” that would correct “severe liquidity problems” at major dealers she said, similar to an earlier program that grew to C$42 billion during the crisis. The term repos allow for the purchase of assets from investors by the central bank for a fixed period.

Canada also aims to clarify that its last-resort loans to solvent institutions with short-term difficulties will be restricted to those who have “credible frameworks for recovery and resolution,” she said. The so-called Emergency Lending Assistance program may also be expanded to cover some provincial credit unions, Wilkins said.

She didn’t comment today on the situation in January when Canada’s major lenders declined to immediately pass on all of a surprise central bank rate cut. Private lenders aren’t obligated to match central-bank moves and since that initial hesitancy they have returned with fresh special mortgage rate offers as a drop in global bond yields lowered their costs.

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