The Bank of Canada (the "Bank") issued on May 5, 2015
"Bank of Canada Emergency Lending
Policies", a consultation paper setting forth proposed
updates to the Bank's emergency lending policies. The proposed
changes consist of the following:
Changes to the conditions for Emergency Lending
Assistance ("ELA") – The Bank proposes to
eliminate the requirement for a solvency opinion as a condition to
the provision of ELA. This requirement would instead be replaced
with a requirement to have established a credible recovery and
resolution framework. This proposed change is due to the fact that
the Bank views solvency opinions as only informative, since they
are limited to a point in time and it can be difficult in practice
to differentiate between solvency and liquidity. Recovery and
resolution plans are more meaningful in the context of ELA,
particularly since the objective of providing ELA is to assist with
the recovery or resolution of the institution.
Expansion of federal ELA to provincially regulated
deposit-taking institutions (such as provincially
regulated credit unions, caisses populaires or centrals) –
The Bank proposes to consider making ELA available to provincially
regulated deposit-taking institutions. ELA would only be available
where the following criteria are met: (i) the institution must be a
member of the Canadian Payments Association, (ii) the applicable
province must indemnify the Bank for any losses as a result of the
institution defaulting on its ELA loan, (iii) the Bank must in its
own judgment deem the ELA to be important to maintain the stability
of the Canadian financial system, and (iv) at the time of the ELA
request, the institution must have in place a credible and
appropriate resolution or recovery (as applicable) framework, in
the opinion of the Bank.
Acceptance of mortgages as eligible collateral for
ELA – The Bank proposes at its discretion to accept
mortgages as eligible collateral for ELA. These would only be
accepted as a last resort after all other sources of collateral
have been exhausted. The Bank also indicates that it would first
look to private-label residential mortgage-backed securities as
collateral prior to choosing to take direct assignments of
mortgages, given the legal and operational costs and complexities
involved in taking security against individual mortgages.
Framework for provision of ELA to financial market
infrastructures ("FMIs") – The Bank
proposes a framework for the provision of ELA to FMIs. Canadian
domiciled designated FMIs are eligible for ELA in the Bank's
discretion, while foreign-domiciled designated FMIs are only
eligible for more limited support from the Bank for Canadian-dollar
liquidity where the central bank of the foreign jurisdiction has
engaged in its own ELA.1 The Bank would charge at a
minimum the Bank Rate (and could charge a higher rate of interest
at its discretion) for ELA to FMIs, and would be willing to accept
a broad range of collateral at its discretion. The Bank would also
take into account potential systemic risk to the Canadian financial
system in determining whether to provide ELA.
The Bank also announced that it intends to create a new
Contingent Term Repo Facility that could be used at the Bank's
discretion to address severe market-wide liquidity problems. This
facility would be available to primary dealers and, if necessary,
other types of institutions, and would offer liquidity for terms of
up to one month.
Comments on the Consultation Paper are due July 4, 2015.
1 The Consultation Paper states that "Eligibility
for ELA will remain limited to designated systems, with ELA being
available to Canadian-domiciled FMIs at the Bank's discretion.
Lead central banks overseeing foreign-domiciled FMIs are
responsible for ensuring that emergency liquidity is available for
those systems. However, the Bank of Canada could facilitate the
lead central bank's provision of Canadian-dollar liquidity
should the lead central bank choose to do so." The current
Canadian-domiciled designated FMIs are the Large Value Transfer
System (LVTS), CDSX and the Canadian Derivatives Clearing Service
(CDCS), while the current foreign-domiciled designated FMIs are the
Continuous Linked Settlement Bank (CLS Bank) (overseen by the
Federal Reserve Board) and LCH.Clearnet Limited's SwapClear
Service (overseen by the Bank of England).
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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