The Bank of Canada (BoC) is Canada’s central bank and is located in Ottawa, the capital of Canada.
Its principal role is “to promote the economic and financial welfare of Canada,” as defined in the Bank of Canada Act.
Canada’s central bank was founded in 1934 and opened its doors in March 1935. In 1938, it became a Crown corporation belonging to the federal government.
The Bank still exists “to regulate credit and currency in the best interests of the economic life of the nation.”
The Bank of Canada’s four main areas of responsibility are:
- Monetary policy: The Bank influences the supply of money circulating in the economy, using its monetary policy framework to keep inflation low and stable.
- Financial system: The Bank promotes safe, sound, and efficient financial systems, within Canada and internationally, and conducts transactions in financial markets in support of these objectives.
- Currency: The Bank designs, issues and distributes Canada’s banknotes.
- Funds management: The Bank is the “fiscal agent” for the Government of Canada, managing its public debt programs and foreign exchange reserves.
In practice, however, it has a more narrow and specific internal definition of that mandate: to keep the rate of inflation (as measured by the Consumer Price Index) between 1% and 3%
The most potent tool the Bank of Canada has to achieve this goal is its ability to set the interest rate for borrowed money.
Because of the large amount of trade between Canada and the United States, specific adjustments to interest rates are often affected by those in the US at the time.
The Bank of Canada is the sole entity authorized to issue currency in the form of banknotes in Canada.
The bank does not issue coins, they are issued by the Royal Canadian Mint.
Canada no longer requires banks to maintain fractional reserves with the Bank of Canada.
Instead, banks are required to hold highly liquid assets such as treasury bills equal to 30 days of normal withdrawals (liquidity coverage), while leverage is primarily tied to adequate loss-absorbing capital, mainly Tier 1 (equity) capital.
The Bank of Canada, although it is run through the Canadian government, is ultimately owned by the people.
The bank was formed in 1934 as a private corporation, but within four years it became a Crown corporation and was taken over by the government.
Unlike other government agencies, however, the bank’s governor and senior governor are appointed by the bank itself.
Who Runs the Bank
The Governing Council
The Bank of Canada is led by the Governing Council, the policy-making body of the Bank, which is responsible for:
- conducting monetary policy
- promoting a safe and efficient financial system
The Governing Council is made up of the Governor, the Senior Deputy Governor, and four Deputy Governors.
The Governing Council’s main tool for conducting monetary policy is the target for the overnight rate (also known as the key policy rate). This rate is normally set on eight fixed announcement dates per year.
The Council reaches its decisions about the rate by consensus, rather than by individual votes, as is the case at some other central banks.
The Executive Council
The Bank’s Executive Council is made up of the Governing Council and the Chief Operating Officer. Together, they chart the strategic direction of the Bank.
As the Bank’s Chief Executive Officer, the Governor ultimately has full control over the business of the Bank. His responsibilities include:
- chairing the Board of Directors;
- leading the Bank’s Governing Council, and
- conducting monetary policy to achieve an inflation target agreed upon by the Bank and the Government of Canada.
The Governor and the Senior Deputy Governor are appointed by the independent directors with the approval of the Governor in Council (the federal Cabinet) for a seven-year term.
This allows the Governor to adopt the medium- and longer-term perspective essential to conducting effective monetary policy.
The Senior Deputy Governor
The Senior Deputy Governor is the deputy executive of the Bank of Canada. She:
- oversees the Bank’s strategic planning and operations;
- shares responsibility for the conduct of monetary policy as a member of the Bank’s Governing Council; and
- is a member of the Bank’s Board of Directors.
The Board of Directors
The Board of Directors is appointed by the Minister of Finance for a three-year term, subject to the approval of the Governor in Council.
It is composed of the Governor, the Senior Deputy Governor, 12 outside directors, and the Deputy Minister of Finance (who has no vote).
Their responsibilities include:
- providing general oversight of the management and administration of the Bank
- reviewing the Bank’s general policies (on matters other than monetary policy and for approving the Bank’s corporate objectives, plans, and annual budget)
- keeping the Bank informed about prevailing economic conditions in their respective regions
- appointing the Governor and Senior Deputy Governor Monetary policy is neither formulated nor implemented by the outside directors.