The LVTS (introduced in 1999) electronic, real-time net settlement network designed to provide immediate finality and settlement to time-critical transactions LVTS participants know in real time their large-value, wholesale transactions (over $50,000). Transactions account for < 1% of the total number of transactions They make up 94% of the value of transactions in Canada
Trang 2– electronic, real-time net settlement network
– designed to provide immediate finality and
settlement to time-critical transactions
• LVTS participants know in real time their
large-value, wholesale transactions (over $50,000)
• Transactions account for < 1% of the total
number of transactions
• They make up 94% of the value of transactions
in Canada
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The Large Value Transfer System (LVTS) II
• The LVTS uses multilateral netting — only the
net credit or debit position of each participant vis-à-vis all other participants is calculated for settlement
Trang 4• The LVTS has been put in place to eliminate
systemic risk In fact, participants can make a payment only if:
• they have positive settlement balances in their
accounts with the Bank of Canada,
• posted collateral (such as T-bills and bonds), or
• explicit lines of credit with other LVTS participants
Trang 5• These items are cleared through the Automated
Clearing Settlement System (ACSS), an electronic payments system also operated by the CPA
• The ACSS aggregates interbank payments and
calculates the net amounts to be transferred from and to each participant's settlement account with the Bank of Canada
• Direct Clearers are subset of LVTS participants who
participate directly in the ACSS
Trang 6known as the overnight interest rate
• The Bank of Canada implements monetary
policy by changing the overnight interest rate.
• Such changes influence other short-term
interest rates and the exchange rate
Trang 7• The Bank’s objective is to keep the overnight
rate within a band of 50 basis points
• Since December 2000, the Bank operates
under a system of eight “fixed” dates
throughout the year for announcing changes to the operating band
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The Operating Band for the Overnight
Interest Rate III
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The Bank’s Standing Liquidity Facilities I
• At the end of each day, each LVTS participant must
bring its settlement balance with the Bank close to
zero
• The Bank therefore stands ready (standing facilities)
to provide or absorb liquidity with an overnight
duration to participants facing unforeseen liquidity
shocks
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The Bank’s Standing Liquidity Facilities II
• The initiative is on the side of the LVTS participant A participant may use the Bank’s lending facility to
obtain (against eligible collateral) overnight liquidity in case of a shortage, or it may use the deposit facility to make deposits in case of excess liquidity
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The Bank of Canada and the Operating band
• If the overnight rate increases toward the upper limit
of the operating band, then the Bank will lend at the bank rate to put a ceiling on the overnight rate
• If the overnight rate falls toward the lower limit of the operating band, then the Bank will accept deposits
from LVTS participants at the bank rate less 50 basis points – putting a floor on the overnight rate
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The Bank of Canada and the Operating band
• If the overnight rate increases toward the upper limit
of the operating band, then the Bank will lend at the bank rate to put a ceiling on the overnight rate
• If the overnight rate falls toward the lower limit of the operating band, then the Bank will accept deposits
from LVTS participants at the bank rate less 50 basis points – putting a floor on the overnight rate
Trang 14– As the overnight interest rate decreases the
opportunity cost of holding desired reserves falls and ceteris paribus, the quantity of reserves
demanded rises
– Rd slopes downward
Trang 15– Between ib -0.50 and ib, banks will not borrow from the Bank and borrowed reserves (BR) equal zero (cheaper to borrow in overnight market)
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The Channel/Corridor System for the Overnight Rate
• In terms of Figure 17-2, the equilibrium
interest rate will always be within the
operating band
• The system enables the Bank to keep the
overnight interest rate in the narrow
channel/corridor with an upper limit of ib and a lower limit of ib- 0.50
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How Monetary Policy Affects the Economy II
• Changes in the overnight rate influences other interest rates and the exchange rate
• The level of short term interest rates and the
exchange rate of the Canadian dollar
determine the monetary conditions in which
the economy operates
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Nominal Interest Rates and Monetary Policy
• Bank of Canada uses nominal overnight
interest rate as operating instrument
• Effects on the monetary policy on economic
activity are from the real interest rate affecting consumption and investment
• Short term nominal rates affect short and term real interest rates under assumption of
long-sticky prices
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Open Market Operations I
• Open market operations relate to the Bank of
Canada selling/buying government bonds
• Open market purchases expand bank reserves
and the monetary base, lowering interest rates and raising the money supply
• Open market sales reduce bank reserves and the monetary base, increasing interest rates and
reducing the money supply
Trang 23Meant to offset other factors affecting MB
The Bank conducts open market operations on
government bills and bonds as the market for
these instruments is most liquid and have the
largest trading volume
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SPRAs and SRAs I
• In 1985, the Bank introduced repos, which in Canada
are known as Special Purchase and Resale Agreements (SPRAs)
• In 1986, the Bank introduced reverse repos, known in
Canada as Sale and Repurchase Agreements (SRAs)
• By 1994, the Bank stopped conducting open market
operations in government of Canada T-bills and bonds and its most common operations since then have been repurchase transactions, either SPRAs of SRAs
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SPRAs and SRAs II
• Special Purchase and Resale Agreements (SPRAs) are a
tool to reduce undesired upward pressure on the
overnight rate
• Sale and Repurchase Agreements (SRAs) are a tool to
reduce undesired downward pressure on the overnight rate
• SPRAs and SRAs are conducted with primary dealers
(formerly known as jobbers) - the Big Six and the
major investment dealers
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The Bank’s Use of SPRAs to Reinforce the Target i or I
1 If overnight funds are traded at a rate higher than
the target i or, the Bank enters into SPRAs at a
price that works out to the target i or
2 Hence, SPRAs relieve undesired upward pressure
on i or
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The Bank’s Use of SRAs to Reinforce the Target i or, I
1 If overnight funds are traded at a rate below the
target i or, the Bank enters into SRAs at a price that
works out to the target i or
2 Hence, SRAs relieve undesired downward
pressure on i or
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Advantages of SPRAs and SRAs
1 Bank of Canada has complete control over
their volume
2 Are flexible and precise
3 Are easily reversed
4 Can be implemented quickly
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Settlement Balances Management
• Bank of Canada also targets the level of
settlement balances in the system
• Typically, target level is announced the
previous day
• Bank neutralizes the impact on settlement
balances via open-market buyback operations
• Bank neutralizes SRA operations as well.
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Receiver General Auctions I
• Bank of Canada neutralizes public auctions of Receiver General balances
• E.g net government receipt of $100
Bank of Canada Assets Liabilities
Government Deposits -100
Settlement Balances +100
LVTS Participants Assets Liabilities
Settlement Balances -100 Government Deposits +100
Trang 36Government Deposits +100
Settlement Balances -100
LVTS Participants Assets Liabilities
Settlement Balances -100 Government Deposits -100
Trang 37Exchange Fund Account -100
Deposits at the Bank of Canada +100
Trang 39– Bank makes statements about future path of its
policy rate in order to influence long-term rates
• Quantitative Easing
– purchase of financial assets by the central bank
through creation of excess reserves (settlement balances)
• Credit Easing
– purchase of private sector assets by central bank in critical markets
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Standing Lending Facility
• Bank stands ready to lend (given suitable collateral)
overnight settlement balances to LVTS participants with negative clearing balances
• Lending rate is i b (25 points higher than target
overnight rate)
• Large increase in demand for reserves shifts demand
right and equilibrium ior increases
• At ib, standing lending facility puts ceiling on overnight
rate (point 2)
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Lender of Last Resort
• Bank of Canada important in preventing
financial panics
• Acts as lender of last resort.
• Provides emergency lending assistance (against eligible collateral) for maximum of 6 months
• Prevents bank failures and financial panics
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Discretionary Liquidity Operations
• Bank can be lender of last resort to entire
financial system
• Has authority to provide liquid funds to any
financial or non-financial Canadian or foreign entity to promote stability of the financial
system
– Term PRAs
– Term Securities Lending
Trang 45• Volume of normal advances not fully controlled by
Bank
• Not easily reversed