Bank of Canada | Carolyn A. Wilkins talk at CD Howe Institute | May 4, 2020

It’s a pleasure to participate in the C.D. Howe webcast today. I wish the circumstances were better.

So much has happened so quickly. In the early days of March—just eight weeks ago—Canada had fewer than 30 COVID-19 cases and no community transmission. Now there are almost 60,000 cases.

It will be a while before I forget where I was at the outset of all this: Baltimore at a G7 meeting of deputies from finance ministries and central banks. We discussed our growing concerns about what was to come for many people and practical ways that we could move quickly to cushion the blow while complementing each other’s actions. Oil prices had already plummeted 35 percent since early January, and financial markets were showing increasing signs of stress. Our sense of urgency was palpable, and we knew that decisive actions were critical to building a strong bridge to the other side.

This is what has happened around the world since then:

• fiscal authorities took the lead because they are best-placed to mitigate the economic impact of unprecedented containment measures;
• regulatory authorities eased up on capital buffers to create balance sheet space for banks to meet increased demand for credit; and
• central banks reduced policy rates and implemented programs to help mitigate the economic fallout and lay the groundwork for recovery.

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In Canada, these actions have been highly complementary.

Today I’d like to walk you through the main policy initiatives that the Bank of Canada has taken—our objectives, the benefits we’re seeing so far, and how we’re managing risks. I’ll also talk a little about factors that will shape the recovery.

Reinforcing the bridge to economic recovery

Let me start with the context. The COVID-19 pandemic is a serious health threat, and public health actions are needed to contain the spread of the virus. These actions are impacting the global economy right now. Every sector of the Canadian economy is affected—energy, travel and hospitality, and service industries are being hit particularly hard.

We expect this situation will cause Canadian gross domestic product to plunge as much as 15 to 30 percent in the second quarter from its level in late 2019. We haven’t published a full forecast yet because so many factors are still unknown. But even in a good scenario, lost output will be made up only gradually as containment measures are lifted, people return to work and production ramps up.

Canadian governments at all levels have taken extraordinary actions to build and reinforce a bridge to recovery by limiting hardship and minimizing any lasting damage that could impair a return to growth. That’s why many actions are designed to help tide businesses over and maintain relationships between people and their employers so they can restart quickly. There are, for instance, wage subsidies, commercial rent assistance and important loan programs led by Export Development Canada and the Business Development Bank of Canada.

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The Bank of Canada’s initiatives are reinforcing this bridge. Actions to date have been in two classes.

The first is monetary policy actions:

• We have lowered the overnight rate by a cumulative 150 basis points since early March to 25 basis points—we’ve said that this is the effective lower bound.
• The speed and magnitude of these cuts reflect Governing Council’s view of the severity of the situation and its impact on inflation pressures. The oil price shock since the beginning of the year, with WTI now around 70 percent lower, justifies much of this; its effects will be strongest in energy-intensive regions and will ripple across Canada.
• Lower rates may not spur much demand right now, but they are laying the foundation for when the recovery gets underway, once containment measures are lifted.

The second class of actions is to repair market functioning so that lending channels continue to function.

The World Health Organization (WHO) declared COVID-19 a global pandemic on March 11. By then, the gravity of the situation was sinking in. Stress was radiating throughout core Canadian funding markets, and we had seen the three largest point declines in the stock market in US history.

I was on more calls than I can count—with financial institutions, counterparts from other central banks, domestic colleagues from the Department of Finance, the Office of the Superintendent of Financial Institutions and the Canada Mortgage and Housing Corporation (CMHC). These conversations helped us design a strategy that targeted the most pressing issues and could be implemented quickly.

Our priority was to restore the functioning of core short-term funding markets, which are even more critical to businesses and individuals experiencing temporary disruptions to their income. We had understood from our calls with banks that draws on lines of credit were coming at lightning speed, and that their expected loan payment deferrals would add to funding requirements. One lesson I learned from the 2007-09 global financial crisis was that banks will scale back lines of credit when sources of funding become too uncertain.

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Our programs are therefore aimed squarely at:

• Short-term funding markets for banks so that they can continue to serve businesses and individuals. This includes term repo operations conducted against a wide range of high-quality collateral for terms of up to two years. There’s also a Standing Term Liquidity Facility open to a broader set of financial institutions. It’s good to see banks using these facilities so that they can provide loans to households and businesses.
• Markets that provide working capital for Canadian companies and public authorities. For instance, we are purchasing bankers’ acceptances (BA), commercial paper and short-term debt from all provinces. The markets for these securities are critical to meeting business needs: unexpected expenses, disruptions to receivables, even payroll.
• The Government of Canada (GoC) treasury bill (T-bill) market. The Bank has temporarily increased take-up of T-bill auctions from a maximum of 25 percent to 40 percent. There are increased demands for cash from fiscal actions taken to support the economy through this difficult time. Two examples of this are the 75 percent wage subsidy program and the delay in cash flow from deferring tax payments until the end of August.

It’s early days, but we can already see the benefits of these programs. Activity has resumed and spreads have narrowed across the markets we are operating in. One example is the BA market, where spreads relative to overnight index swaps have come in from a high of 120 basis points to around 20 basis points. We’re seeing reduced take-up on our BA purchases and some of our other operations as a result. This is good news.

There is, nonetheless, still considerable uncertainty. Market makers for fixed income and other financial assets have pulled back. That’s understandable. Market making becomes prohibitively risky when the prices of securities are fluctuating widely. Buyers and sellers are finding it difficult to trade at a time when there is a heightened desire to rebalance portfolios.

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This dynamic is particularly problematic when it occurs in the market for GoC bonds because they are held as the safest Canadian-dollar asset and are a benchmark for other asset prices. If the GoC bond market isn’t functioning well, no other Canadian-dollar market will either.

We decided to implement a GoC Bond Purchase Program to address the strains we were seeing in that market. We’ve committed to purchasing a minimum $5 billion of GoC securities in the secondary market each week until the recovery is well underway.

We also were seeing strains in other longer-term funding markets that could make it harder for other government authorities and companies to execute stable longer-term financial plans. Although the current situation will be temporary, business people here know that you cannot adequately manage risks based on short-term funding alone. That is why we are implementing programs to buy a wider range of bonds in the secondary market. We’ve committed to buy up to $50 billion in provincial debt across all provinces and up to $10 billion in high-quality Canadian-dollar corporate debt. We are purchasing Canada Mortgage Bonds (CMBs) to support the functioning of the CMB market, which is an important source of financing for mortgage lending to Canadian homeowners. This also complements CMHC’s Insured Mortgage Purchase Program.

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Open Banking Consultations in Canada Delayed

Department of Finance Canada | Advisory Committee on Open Banking | Apr 29, 2020

Hello,

As an engaged stakeholder, we wanted provide you an update on the status of the review into the merits of open banking, specifically with regard to the stakeholder consultations, planned for this spring.

In light of the restrictions on public gatherings, put in place to stem the spread of Covid-19 and in order to give stakeholders the opportunity to focus their efforts on pressing, pandemic-related matters, the consultations initially planned for this spring are now on hold until the fall at the earliest.

During the intervening period, our Committee will continue the work to develop materials for stakeholder consultation. We wish you and your families the best during this difficult time and look forward to a dynamic and fruitful consultation process in the not too distant future.

We will continue to keep you apprised of any developments in this regard.

Source:  via email to NCFA

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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