The Bank of Canada lost $522 million in the third quarter of this year, marking the first loss in its 87-year history.
In the central bank's latest quarterly financial report, it says revenue from interest on its assets did not keep pace with interest charges on deposits at the bank, which have grown amid rapidly rising interest rates.
The Bank of Canada's aggressive interest rate hikes this year have raised the cost of interest charges it pays on settlement balances deposited in the accounts of big banks.
That's while the income the central bank receives from government bonds it holds remains fixed.
The Bank of Canada dramatically expanded its assets during the pandemic as part of its government bond purchasing program. Also known as quantitative easing, the policy was part of the central bank's efforts to stimulate the economy.
That expansion in assets is now costing the central bank, as it paid for the government bonds with the creation of settlement balances.
Speaking before the House of Commons finance committee last week, Bank of Canada governor Tiff Macklem addressed the expected losses.
He said losses don't affect the central bank's ability to conduct monetary policy.
He noted the size and duration of the losses will depend on the path of interest rates and the evolution of the economy.
"Following a period of losses, the Bank of Canada will return to positive net earnings," he said.
The Bank of Canada is looking to the federal government for a solution to balance its books.
While there are a few options available, some economists say the problem before the central bank is largely an accounting one rather than a monetary policy concern.
This report by The Canadian Press was first published Nov. 29, 2022.
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The Bank of Canada issues
The Bank of Canada issues the Canadian dollar and has an operational ability to create any amount desired. Consequently, no matter what accounting losses may accrue, the BoC and its owner the federal government can continue operating normally and indefinitely.
What deserves more scrutiny is that the Bank has decided to pay billions more dollars in interest payments to financial institutions while the federal government is increasing its bond interest rate to wealthy investors.
This occurs at a time when the government claims it must be fiscally prudent, cannot afford to cushion the public's pain from higher prices, and that larger deficits lead to more inflation.
Fiscal and monetary policy that delivers austerity to the masses and largesse to the elites will pose a big problem for a Liberal government hoping for re-election.
Footnotes:
1. BANK OF CANADA FINANCIAL STATEMENTS (YEAR ENDED 31 DECEMBER 2014)
http://gazette.gc.ca/rp-pr/p1/2015/2015-05-09/html/notice-avis-eng.html
"As the nation’s central bank, the Bank is the ultimate source of liquid funds to the Canadian financial system and has the power and operational ability to create Canadian-dollar liquidity in unlimited amounts at any time. "
2. How the Bank of Canada Creates Money for the Federal Government: Operational and Legal Aspects
Library of Parliament https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublicatio...
"By recording new and equal amounts on the asset and liability sides of its balance sheet, the Bank of Canada creates money through a few keystrokes. The federal government can spend the newly created bank deposits in the Canadian economy if it wishes."
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".....there is no external limit to the total amount of money that the Bank of Canada may create for the federal government."
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"The Bank of Canada's money creation for the Government of Canada is an internal government process. This means that external factors, such as financial markets dysfunction, cannot cause the federal government to run out of money."
> 3. The ECB Explains Why Central Banks Can't Go Bankrupt in a Footnote
> http://www.bloomberg.com/news/articles/2016-04-05/the-ecb-explains-why-c...
>
> "In talking about profitability of a central bank the ECB says in its paper that it is not necessary for a central bank to make money, as this is not a useful measure of the efficacy of the bank. While noting that profitability may be useful for a central bank's credibility, the paper makes the critical point that losses made by a central bank do not lead to the bank needing to be recapitalized, or the bank becoming insolvent.
>
> The ECB makes this point in a footnote on page 10:
>
> "Central banks are protected from insolvency due to their ability to create money and can therefore operate with negative equity."
>
> Central banks cannot run out of money because they are the ones that create the money. And you cannot run out of something you can create yourself."
>
4. WSJ acknowledges UK government can never run out of money
http://bilbo.economicoutlook.net/blog/?p=34714
"When a News Corp newspaper starts writing articles that reflect the insights provided by Modern Monetary Theory (MMT) you know that progress in the dissemination of those ideas is being made. Even if they don’t get things exactly right. The Dow Jones & Company (owned by News Corp) daily, the Wall Street Journal carried an article last week (October 31, 2016) – Message from the Gilt Market: U.K. Can Never Run Out of Pound – which leaves no room for doubt. The London-based journalist Jon Sindreu wrote that “Among facts that take a stubbornly long time to sink in, here’s one: Countries that borrow in their own currencies never have to default on their debt”."
5. Alan Greenspan, former U.S. Federal Reserve Chairman
http://www.federalreserve.gov/boarddocs/speeches/1997/19970114.htm
"...... monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies .......a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."
6. Raising the policy interest rate: a false economic consensus
https://rabble.ca/economy/raising-the-policy-interest-rate-a-false-econo...
"Today, tightening the access to credit is not the most effective way to fight inflation. It is time to put forward interventions that really help those affected by the rising cost of living."
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The use of monetary policy to fight inflation roughly corresponds to a transfer of funds from the pockets of households to banks vaults and their shareholders. This solution entails a class bias."
7. Inflation, wages, and profits
https://rwer.wordpress.com/2022/06/07/inflation-wages-and-profits/
"corporations are taking advantage of current conditions to raise prices, both to increase their profits and to lower workers’ real wages..traditional attempts to contain inflation through monetary policy will hurt workers but not their employers or the tiny group that sits at the top of the economic pyramid."
8. Low Interest Rates and Bank Profitability – The International Experience So Far
https://www.rba.gov.au/publications/bulletin/2021/jun/low-interest-rates...
"There is stronger evidence that bank profits decline in prolonged low interest rate environments."
9. These 4 Key Sectors Can Be Especially Profitable In A Rising Interest Rate Environment
https://finance.yahoo.com/news/4-key-sectors-especially-profitable-16171....
Financial Services
"Financial services, which can include banks, insurance firms and brokerage companies, is one of the key industries that benefits from a sharp rise in interest rates.
For example, profit margins can increase during this time, especially with banks. With higher rates, banks can charge higher rates on consumer loans. Interest rates on other types of financing like credit cards, car loans and payday loans also increase."
10. The desperate need for a paradigm shift in establishment macroeconomics, Prof. Mario Seccareccia
https://www.policyalternatives.ca/sites/default/files/uploads/publicatio...
"How can central bankers morally justify raising the income of one group, the rentiers, in order to constrain the growth of another social group, the wage earners, in the name of combatting inflation? This begs the obvious question of “combatting inflation for whom?” Because of its contradictory nature, a monetary policy instituted by central banks that is concerned uniquely with fighting inflation has a permanent bias against wage growth."
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