the structure of central banking and the bank of canada

The Bank was created by the Bank of Canada Act in 1934 and started operations in 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 financial institutions.

Chapter 15

The Structure of Central Banking and the Bank of Canada

Origins of the Bank of Canada I

• The Bank was created by the Bank of Canada Act in 1934 and started operations in 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

Origins of The Bank of CanadaII

Formal Structure of the Bank of Canada I

• Responsibility for the operation of the Bank rests with a Board of Directors, which consists of fifteen

• the governor (currently Mark Carney, 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

Formal Structure of the Bank of Canada II

• The Board appoints the governor and senior deputy governor with the government’s approval, for a

renewable term of 7 years.

• The outside directors are appointed by the minister of finance, with cabinet approval, for a 3-year term.

• In 1994 the Board of directors established a new senior decision making authority called the Governing Council• The Council is chaired by the governor and is composed

of the senior deputy governor and four deputy governors

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

• Monetary Policy

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 cost-effectiveness, increase the durability of bank notes, and reduce counterfeiting

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

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 • 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

Monetary Policy

The Bank employs such tools as:

• open market operations (purchase/sale of Gov bonds)• shifting of government balances between it and the

direct clearing members of the CPA to implement changes in the money supply

• The Bank’s ultimate objective is to keep inflation low

• Low inflation is closely related to the goal of steady economic growth

• Low inflation protects the purchasing power of

Bank of Canada Independence I

• Bank has instrument (operational) independence but not goal independence (ability to set the goals of

Bank of Canada Independence II

Factors making Bank of Canada dependent

1 Joint responsibility system (since 1967 when the Bank of Canada Act was amended)

2 Minister of Finance can issue a directive to the Bank indicating the specific policy changes that the Bank must follow

-published, set out new policy, period that it applies.

• While the ultimate authority rests with the

The Changing Face of the Bank of Canada

accountability in its operations

Monetary Policy Report and the Update to the Monetary Policy Report

and speeches, and reorganized its regional offices, with the objective of improving communication

U.S Federal Reserve System

• U.S central bank, the Federal Reserve System (“The Fed”)

• Board of Governors of the Federal Reserve System

• Federal Reserve Banks

• Federal Open Market Committee (FOMC)

Structure and Independence of Foreign Central Banks

The Federal Reserve System

Federal Reserve IndependenceFactors making Fed independent

1 Members of Board have long terms

2 Fed is financially independent: This is most important

Factors making Fed dependent

1 Congress can amend Fed legislation

2 President appoints Chairmen and Board members and can influence legislation

Overall: Fed is one of the most independent central banks in the world

Central Bank Independence

Other Central Banks

1 European Central Bank: highly independent

2 Bank of England: similar to Bank of Canada since 1997

3 Japan: increased formal independence since 1998

4 Trend to greater independence: New Zealand, European nations

Explaining Central Bank Behaviour

Theory of bureaucratic behaviour

1.Is an example of principal-agent problem2.Bureaucracy often acts in own interestImplications for Central Banks:

1.Act to preserve independence2.Try to avoid controversy

3.Seek additional power over banks

The Case for Independence I

Case For:

1 Independent Bank likely has longer-run objectives, politicians may not

2 Avoids political business cycle

3 Less likely deficits will be inflationaryCase Against:

1 Bank may not be accountable

2 Hinders coordination of monetary and fiscal policy

The Case for Independence II

central banks are better able to contain inflation and not at the expense of output fluctuations and high unemployment