TORONTO (Reuters) – After the Bank of Canada posted its first ever quarterly loss, the federal government plans to introduce laws enabling the central bank to retain profits fairly than remit them to the federal government, BoC Governor Tiff Macklem said.
The brand new laws would give the Canadian central bank the means to revive positive equity on its balance sheet.
The BoC’s balance sheet is prone to slip into negative equity in the approaching years, a position wherein liabilities exceed assets, because it pays out a better rate of interest on settlement balances than it earns on the federal government bonds it bought to support the economy through the COVID-19 crisis.
Settlement balances, which stood at about C$200 billion ($149 billion) in December, are deposits on the central bank held by financial institutions. The speed on those deposits has climbed in lockstep with the BoC’s benchmark rate of interest, which is up 425 basis points since March.
Several other major central banks that expanded their balance sheets, resembling the Federal Reserve, also face negative equity issues.
“The Minister of Finance has recently communicated to me that the federal government intends to introduce legislative amendments that may allow the bank to retain earnings to offset losses,” Macklem said in a news conference on Wednesday following the central bank’s decision to boost rates of interest by 1 / 4 of a percentage point, adding that the losses don’t have any impact on monetary policy.
“Once positive equity is restored, we might resume our normal remittances to the Government of Canada,” Macklem said.
Unlike a business bank, a central bank issues currency in addition to settlement balances, so there is no such thing as a indication that a move into negative equity can be a threat to the BoC’s solvency.
The central bank reported a net lack of C$511 million within the third quarter of 2022, while its equity stood at C$954 million. The C.D. Howe Institute, a Canadian think tank, estimates cumulative losses of between C$3.6 billion and C$8.8 billion over the subsequent two to a few years.
Canada’s central bank typically earns more income on its assets than it pays on its liabilities after which remits its net income to the federal government. In 2021, its remittance was C$2.7 billion.
Before the pandemic, the Bank of Canada’s liabilities consisted largely of banknotes in circulation, on which it pays no interest, but settlement balances have since surged to finance the balance sheet expansion.
Last April, the central bank began the means of shrinking the scale of its balance sheet, a move generally known as quantitative tightening.
($1 = 1.3387 Canadian dollars)
(Reporting by Fergal Smith; Editing by Denny Thomas and Paul Simao)
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