Chapter 14 Structure of Central Banks and the Bank of Canada © 2005 Pearson Education Canada Inc The Bank of Canada (The Bank) • • • The Bank was created by the Bank of Canada Act in 1934 and started operations on March 11, 1935 Initially the Bank was a private institution but was nationalized in 1938, so is now a national institution with headquarters in Ottawa The Bank also has regional offices in Toronto, Vancouver, Calgary, Montreal, and Halifax Unlike a private bank that operates in pursuit of profit, the Bank of Canada is responsible for the country’s monetary policy and for the regulation of Canada’s deposit-based © 2005 Pearson Education financial institutions Canada Inc 14-2 Establishment of Selected Central Banks Country Year central bank was established Sweden 1656 United Kingdom 1694 France 1800 Belgium 1850 Germany 1875 Japan 1882 Italy 1893 Switzerland 1905 United States 1913 Canada 1935 © 2005 Pearson Education Canada Inc 14-3 The Political Environment and the Bank of Canada Since the inception of the Bank of Canada there have been seven governors: 1935-1954, Graham Towers 1955-1961, James Coyne 1961-1973, Louis Rasminski 1973-1987, Gerald Bouey 1987-1994, John Crow 1994-2000, Gordon Thiessen © 2005 Pearson2001-, Education David Dodge Canada Inc 14-4 Formal Structure of the Bank of Canada Responsibility for the operation of the Bank rests with a Board of Directors, which consists of fifteen members • the governor (currently David Dodge, who is the chief executive officer and chairman of the Board of Directors) • the senior deputy governor, • the deputy minister of finance, and • twelve outside directors The Board appoints the governor and senior deputy governor with the government’s approval, for a renewable term of years The outside directors are appointed by the minister of finance, with Education cabinet approval, for a 3-year term © 2005 Pearson Canada Inc 14-5 The Functions of the Bank The functions of the Bank of Canada are • • • • bank note issue government debt and asset management services central banking services, and monetary policy management © 2005 Pearson Education Canada Inc 14-6 Bank Note Issue Before the creation of the Bank, the federal government and the early banks issued notes designed to circulate as currency By 1945, however, the bank had a monopoly over note issue in the country The Bank also conducts ongoing research, working closely with private sector partnerships and note-issuing authorities in other countries, in order to improve costeffectiveness, increase the durability of bank notes, and reduce counterfeiting © 2005 Pearson Education Canada Inc 14-7 Government Debt and Asset Management Services As the federal government’s fiscal agent, the Bank • provides debt-management services for the federal government such as advising on borrowings, managing new debt offerings, and servicing outstanding debt • manages the government’s foreign exchange reserves held by the Exchange Fund Account of the Department of Finance • engages in international financial transactions, on behalf of the government, in order to influence exchange rates © 2005 Pearson Education Canada Inc 14-8 Central Banking Services As Canada’s central bank, the Bank of Canada • serves as the lender of last resort if a bank faces a liquidity crisis, thereby preventing bank runs and panics This lending is closely coordinated with the two federal regulatory agencies that are set up specifically to regulate financial institutions - OSFI and CDIC • has explicit responsibility for the regulatory oversight of the national payments system, operated by the CPA • acts as the holder of deposit accounts of the federal government, the directly clearing members of the CPA, international organizations such as the IMF, and other central banks.Education © 2005 Pearson Canada Inc 14-9 Monetary Policy Although in Canada the ultimate responsibility for monetary policy rests with the government, the Bank employs such tools as • open market operations and, to a lesser extent, the • shifting of government balances between it and the directly clearing members of the CPA to implement changes in the M The Bank’s ultimate objective is to keep low Low is closely related to the goal of steady economic growth, because businesses are more likely to invest to increase productivity and economic growth when is low Low is also desirable because it protects the purchasing © 2005 Pearson Education power of pensioners and those on fixed incomes Canada Inc 14-10 Bank of Canada Independence Factors making Bank of Canada independent Bank has ‘operational’ (or ‘instrument’) independence Bank has moved towards greater ‘transparency’ in its operations The Bank’s Governing Council publishes the Monetary Policy Report (every May and November), since 1999 the Update to the Monetary Policy Report (every January and July), the Bank of Canada Review, and the Bank of Canada Banking and Financial Statistics Bank increased the number of press conferences, press releases, and speeches, and also reorganized its regional offices, with the objective of improving communication and its assessment of economic conditions across Canada © 2005 Pearson Education Canada Inc 14-11 Bank of Canada Independence Factors making Bank of Canada dependent Joint responsibility system (since 1967 when the Bank of Canada Act was amended) Minister of Finance can issue a directive to the Bank indicating the specific policy changes that the Bank must follow The directive, however, must be published indicating not only the new policy that the Bank is supposed to undertake but also the period during which it is to apply Overall: Bank of Canada is quite independent but not on paper © 2005 Pearson Education Canada Inc 14-12 Formal Structure of the Fed © 2005 Pearson Education Canada Inc 14-13 Federal Reserve Districts © 2005 Pearson Education Canada Inc 14-14 Informal Structure of the Fed © 2005 Pearson Education Canada Inc 14-15 Fed Independence Factors making Fed independent Members of Board have long terms Fed is financially independent: This is most important Factors making Fed dependent Congress can amend Fed legislation President appoints Chairmen and Board members and can influence legislation Overall: Fed is quite independent Other Central Banks Bank of England least independent: Govt. makes policy decisions European Central Bank: most independent—price stability primary goal Bank of Canada and Japan: fair degree of independence, but not all on paper Trend to greater independence: New Zealand, European nations © 2005 Pearson Education Canada Inc 14-16 Explaining Central Bank Behavior Theory of bureaucratic behavior Is an example of principalagent problem Bureaucracy often acts in own interest Implications for Central Banks: Act to preserve independence Try to avoid controversy: often plays games Seek additional power over banks Should the Bank of Canada be Independent? Case For: Independent Bank likely has longerrun objectives, politicians don't: evidence is independence produces better policy outcomes throughout the whole Avoids political business cycle Less likely deficits will be inflationary Case Against: Bank may not be accountable Hinders coordination of monetary and fiscal policy Bank has often performed badly © 2005 Pearson Education Canada Inc 14-17 ... executive officer and chairman of the Board of Directors) • the senior deputy governor, • the deputy minister of finance, and • twelve outside directors The Board appoints the governor and senior... Report (every May and November), since 1999 the Update to the Monetary Policy Report (every January and July), the Bank of Canada Review, and the Bank of Canada Banking and Financial Statistics... Switzerland 1905 United States 1913 Canada 1935 © 2005 Pearson Education Canada Inc 14-3 The Political Environment and the Bank of Canada Since the inception of the Bank of Canada there have