Three Players in the Money Supply Process
I.
The central bank
–
the government agency that oversees the banking system and is
responsible for the conduct of monetary policy
II. Banks (depository institutions)
–
the financial intermediaries that accept deposits from individuals and
institutions and make loans
III. Depositors
–
individuals and institutions that hold deposits in banks
The Bank of Canada’s Balance Sheet
Bank of Canada
Assets
Liabilities
Securities
Currency in circulation
Loans to financial institutions
Reserves
 To understand the finances of a central bank, it is helpful to know how it
operates in support of its mandate.
 Liabilities
– currency in circulation: in the hands of the public
– reserves: deposits (settlement balances) at the Bank of Canada and vault cash
 Assets
– government securities: holdings by the Bank of Canada that affect money supply and earn
interest
– loans to financial institutions: provide loans (advances) to banks and charge the bank rate
The Large Value Transfer System (LVTS) and
Canadian Monetary Policy

Canada's approach to implementing monetary policy requires that a small
portion of the Bank's assets be available as collateral for sale and
repurchase operations.

Implementing monetary policy based on an inflation target and flexible
exchange rate focuses on influencing short-term interest rates through the
setting of the overnight rate.

On each fixed announcement date, the Bank of Canada announces the
target overnight rate, which is the interest rate that financial institutions
charge each other for overnight loans.
What is LVTS ?

Large Value Transfer System (LVTS) is an electronic wire system
introduced by the Canadian Payments Association (CPA) in February
1999 to facilitate the transfer of irrevocable payments in Canadian
dollars across the country.
The LVTS is owned and operated by the Canadian Payments
Association (CPA), a not for-profit organization created by an Act of
Parliament in 1980.
The CPA consists of 118 members, including banks, centrals, trust
and loan companies, and other financial institutions.

The CPA’s Chair and Deputy Chair are both appointed from the
Bank of Canada.
How large is it?

On average in 2014, LVTS was used to clear and settle
about $154 billion in Canadian dollar payments each
business day.
 Close to 31,540
LVTS payments were processed each
day, with the average value of a transaction in the range
of over $4.9 million.
LVTS Participants, Direct Clearers
LVTS Risk Controls
 The risk-control structure for LVTS rests on four elements:
I.
the multilateral net debit position of each participant is calculated on a
payment-by-payment basis, in real time, by the central computer supporting the
system;
II.
the participants’ net debit positions are subject to ceilings;
III.
the participants have together pre-pledged, to the Bank of Canada, appropriate
securities with a value sufficient to cover the largest single permitted net debit
position, thus ensuring settlement for the participants even if one of them were
to default;
IV.
the Bank of Canada has agreed to guarantee settlement in the extremely
unlikely circumstance that more than one LVTS participant were to fail on the
same day during LVTS operating hours and the sum of the exposures of failed
institutions were to exceed the collateral pledged to support their positions.
Advantage of LVTS
LVTS system is secure and allows for same day
settlement and availability of funds
 LVTS payments which pass all risk controls tests will
result in funds which are guaranteed, considered final
and irrevocable
 LVTS payments are assigned a Payment Confirmation
Reference Number (PCRN), which provides indisputable
proof of receipt of payment by a financial institution
How LVTS works?

Throughout any given day, LVTS members send payments back and forth to
each other.

When the transactions are added up at the end of the day, some financial
institutions may be short of funds, while others may have funds left over.

To settle these differences, LVTS members borrow from, and lend money
to, each other every day, on a one-day (overnight) basis.
 The interest rate paid on these and other overnight loans is called the
“overnight rate.”