THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 487

CHAPTER 17 Tools of Monetary Policy 455 6000 5000 4000 3000 2000 1000 F I G U R E 17- 11 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 Bank of Canada Advances to Members of the Canadian Payments Association, 1975 2008 (in millions of dollars) Source: Statistics Canada CANSIM II Series V36663 always been successful in preventing financial crises Two examples of the use of the Bank s lending weapon to avoid bank panics are the provisions of huge loans to the Canadian Commercial Bank and the Northland Bank in 1985 (see the Inside the Central Bank box, Emergency Lending Assistance to Troubled Banks) Discretionary Liquidity Operations Not only can the central bank be a lender of last resort to banks, but it can also play the same role for the financial system as a whole In fact, under the Bank of Canada Act, under extreme conditions on a financial market or financial system, the Bank of Canada has the authority to provide liquid funds to any (financial or nonfinancial) Canadian or foreign entities, for the purpose of promoting the stability of the financial system Such central bank intervention can help prevent financial panics that are not triggered by bank failures, as was the case in the United States during the recent financial crisis that started in August 2007 (see the Inside the Central Bank box, Federal Reserve Lender-of-Last-Resort Facilities During the Subprime Financial Crisis) Recently, central banks around the world have been facing significant challenges in implementing monetary policy because of the financial-market turmoil and the subprime credit crisis in the United States In response to these challenges, central banks have been improving and refining their financial infrastructures to address turmoil in the financial markets Although there are differences across countries in institutional arrangements for the conduct of monetary policy, most central banks have responded to the recent financial turbulence in a similar fashion, providing liquidity directly to the financial system, called aggregate system or macro liquidity To address market failure and financial instability at times of crisis, central banks rely on discretionary liquidity operations, the maturity of which depends on their objective, independent of the maturity of the reference rate The Bank of Canada, for example, recently introduced new facilities to address aggregate system liquidity at times of financial instability In particular, the Bank introduced term repos, known in Canada as term Purchase and Resale Agreements (PRAs), and term securities lending.9 Let s see how these new facilities are used in providing liquidity to specific markets as opposed to lending directly to banks For more details, see Walter Engert, Jack Selody, and Carolyn Wilkins, Financial Market Turmoil and Central Bank Intervention, Financial System Review (June 2008), 71 78