Deputy governor Toni Gravelle made the BoC’s first direct comments since the failure of Silicon Valley Bank sent shockwaves through the global banking system
with rival UBS Group – a series of events reminiscent of the financial crisis of 2007 and 2008.
The crisis in the banking system has forced central bankers in the U.S. and Europe back into their role as lenders of last resort. After the failure of Silicon Valley Bank, the U.S. Federal Reserve announced a US$25-billion lending facility that allows regional U.S. banks to swap their non-liquid assets for cash in the event of a bank run. It also began lending hundreds of billions of dollars to banks through its discount window.
Mr. Gravelle’s speech was mostly a retrospective look at how the Bank of Canada responded to market stresses in the early months of the COVID-19 pandemic. However, the history lesson offered a roadmap for how the central bank might respond to future crises. “Our go-to game plan to relieve severe market dysfunction focuses on providing collateralized lending in the form of repos to banks. We then rely on the banks to pass this funding into the broader financial system,” Mr. Gravelle said.
During the market breakdown in March and April of 2020, the central bank also began buying Government of Canada bonds from market participants to prevent this crucial market from seizing up. This program later morphed into the bank’s Quantitative Easing program, which saw it purchase around $330-billion worth of federal government bonds in a bid to restore market functioning and then hold down interest rates.
Mr. Gravelle also used the speech to lay out the bank’s timeline for reducing the size of its balance sheet, which expanded massively as a result of the QE program. The bank is currently letting the bonds it owns mature without replacing them, a process known as Quantitative Tightening, or QT.
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