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Bank of Canada ready to step in if global financial crisis causes ‘spillovers’ to banks here

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The Bank of Canada stands ready to protect Canadian banks from a global financial collapse should the current banking crisis in the US and Europe spread to Canada, but the central bank does not believe they need to intervene. Is not.

Bank of Canada Deputy Governor Toni Gravell said Wednesday at the National Bank Financial Services Conference that banks are “ready to act and provide liquidity support to the financial system in the event of severe market-wide stress. I am,” he declared.

He specifically noted the near-collapse of the UK pension system following then-Prime Minister Liz Truss’ devastating tax cuts last September, and said the Bank of Canada would be better prepared for such a crisis. , said banks will be able to provide liquidity as well. , but pension funds and others face financial stress.

Learning from the pandemic crash

Gravelle said central banks have learned many lessons from the COVID-19 crisis and would do things more efficiently if a similar major crisis hits and the markets crumble.

In that light, the bank has released a new discussion paper on how the Bank of Canada has responded.”Unparalleled levels of financial market turmoil“When the pandemic effectively brought the entire Canadian economy to a halt.

After the fact, many critics complained that banks acted too forcefully, cutting interest rates and promising to keep them low, but analyzes by central banks around the world suggested the economic system was on the brink of collapse. I have shown that

“Investors sought liquidity by selling financial assets and drawing out loans and lines of credit,” says a new report summary.

“The speed, scale and one-way nature of these transactions has almost completely disrupted market functioning.”

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In addition to lowering interest rates, the central bank has funded the economy by purchasing not only Canadian government bonds but other assets, injecting money into the economy to prevent a systemic financial collapse.

Gravelle, one of the banks’ top specialists in managing market stability, said while banks were ready to reverse the suspension and use their extraordinary tools to protect the financial system, “bars It is very expensive for banks to do so.”

Credit Suisse is a “wake-up call”

While many of Canada’s banks are concerned about the Silicon Valley Bank collapse earlier this month, Gravel said, “More importantly, UBS’s acquisition of Credit Suisse was a little more of a wake-up call.” led officials from the Financial Stability Department of Destroy contingency plans.

In a Q&A session after his speech, National Bank eminent economist Warren Lovely was asked how seriously the dangers to Canada and its banks should be taken.

The failure of Silicon Valley Bank was a shock, but it was the forced acquisition of Credit Suisse that caused Canadian regulators to shatter their contingency plans. (Arnd Wiegmann/Reuters)

“You said that you are monitoring the current situation closely and that you are ready to act if necessary. We are immune to any spillovers,” Lovely said. “Can you tell me how nervous you are now?”

While that track record may mean that not all Canadians trust the Bank of Canada’s assessment, Gravelle’s response has been resolutely encouraging.

“The Canadian banking sector is in a very different place than the local banks in the United States,” he said. “However, with respect to the current crisis, our current assessment is that, while we are watching closely, we have little concern about stress in the financial system.”

Media coverage has mostly focused on interest rates, but central banks have many moving parts, and anyone who thinks the Bank of Canada’s job is easy and could do better would be wise to listen. I guess. Gravel Speech and Discussion beginning.

Avoidance of moral hazard

Gravelle also said that the purchase of assets to protect financial institutions “felt that investors and market participants could take extraordinary risks without bearing consequences if things went wrong.” If “, it will be formulated to avoid moral hazard.

“In other words, having central banks intervene once, they come to expect that they will intervene again, even if there is only a slight indication of market stress.

To mitigate the effects of moral hazard, central banks limit their actions to the most extreme cases. That means investors could suffer big losses before the central bank intervenes. It also encourages rescued investors to buy back securities from banks. Canada as soon as the crisis is over.

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