【正文】 arket. ? The interest rate charged on those loans is called the overnight rate. ? The Bank carries out moary policy by raising and lowering the overnight rate (target) 10 Framework for the implementation of Mo. Policy Important concepts Large Value Transfer System (LVTS) Electronic clearing and settlement system of realtime financial wholesale transactions by FIs (over $50,000). Owned and operated by the Canadian Payments Association CPA CPA. Its membership prises the Bank of Canada and virtually all of Canada39。s bank and nonbank deposittaking financial institutions. {Find the types of FIs that prise the CPA} An LVTS participant is a member of the CPA which participates in the LVTS and maintains a settlement account at the Bank of Canada. {Find the names of all participants in the LVTS (in the inter)} 11 [Cont’d Important concepts] ? Automated Clearing Settlement System (ACSS) The ACSS is a deferred settlement system through which all payments not processed by the LVTS are handled, ., retail settlement balances. (., cheques, travellers cheques, money orders, preauthorized debits and fund transfers, direct deposited items, debit and credit charges, etc.).Also operated by the CPA. All LVTS participants also participate directly in the ACCS and are known as direct clearers. 12 [Cont’d Important concepts] Objective of LVTS: Eliminate Systemic risk The risk to the entire payments system due to the inability of one financial institution to fulfill its payment obligations in a timely fashion. How? Each participant knows in real time its largevalue, wholesale transactions (over $50,000). This information eliminates most of the uncertainty from settlement balance prediction. Settlement of payments concludes at end of each banking day (through the transfer of funds in their settlement accounts at the BofC.) BofC requires each LVTS member to bring its SB with BofC to zero. Otherwise,it has to borrow from other FIs or BofC 13 [Cont’d Important concepts] Overnight Market The market at which major participants (LVTS) in the money market borrow and lend oneday funds to each other at the overnight rate in order to cover their transactions during the day. The overnight rate operates within an Operating Band of 50 basis points. The Operating band is the reference range of interest rates in which LVTS participants will trade among themselves with not incentive to trade outside of this range. Why? The BofC implements moary policy by changing the target for the overnight rate (midpoint of the operating band). 14 [Cont’d Important concepts] ? Operating Band for the Overnight Interest Rate Bank rate is the interest rate the BofC charges to LVTS participants for loans ? At the end of the day each participant must bring its settlement balance with the BofC close to zero. ? If SB is () BofC standing facilities lend at Bank rate. If SB is (+) borrow at Bank rate minus 50 basis points. (For wholesale transactions, or a the bank rate % for retail ACCS transactions. In both cases BofC requires collateral) ? FIs usually adjust positions with each other at a presettlement trading period by clearing balances at more favourable rates among themselves in the overnight interbank market. ? In general, this will achieve a zero settlement balance for each participant on wholesale transactions. Bank Rate, ib = 2190。 Overnight rate, ior (%) S* = Net supply of SB other than those obtained by standing facilities (minimum amount to clear by LVTS participants) = 2188。 Operating Band Target Overnight Rate, i*or= 2 189。 15 THE MARKET FOR SETTLEMENT BALANCES AND THE OVERNIGHT RATE ? The market for settlement balances is where the overnight interest rate is determined, and this is why we turn to a supply and demand analysis of this market to analyze how the tools of moary policy affect the overnight rate. Supply Curve ? The supply curve for SB is defined by the BofC two standing liquidity facilities ? At ib the supply curve of overnight SB from the Bank’s lending facility is perfectly elastic, indicating that the equilibrium overnight i rate cannot exceed the bank rate, no matter how high the demand for settlement balances may be. ? At ib50 basis points, the supply curve is also perfectly elastic, indicating that the Equilibrium i cannot fall below the lower limit of the operating band. ? The vertical segment of the supply curve for settlement balances indicates the supply of SB other than those obtained through the BofC’s standing liquidity facilities. ? Assuming the BofC is targeting a level of SB of S*, the supply of settlement balances is represented by the supply curve shown in Fig. 2. 16 Demand Curve