【正文】 nflationary pressures from building. (REINFORCED WITH SRAs) How the BofC Keeps inflation From Moving Above the Target Range [Fig 6] 31 3. Bank of Canada Lending – Lending of last resort – Advantages ? Prevent bank failures ? systemic risk – Disadvantages ? Moral Hazard – Sept 11,2021The response to the Sept. 11 terrorist attacks the G7’s group promised their central banks would deep liquidity flowing to financial markets. Similarly, the Fed injected more than US$100 billion, into the . banking system to keep it functioning through loans and open market operations at the fed funds rate. 4. Government Deposit Shifting (Cash Management) Used to neutralize or manipulate reserve or BS holdings of direct clearers through drawdown and redeposit of government deposits of direct clearers。 % S S D1 D2 i Open Market Operations by Bank of Canada using SPRAs Equilibrium in the overnight interest rate SPRAs are used to influence the market interest rate to decrease at a desired level (by targeting the overnight interest rate at the midpoint of the operating band) ? Increase indirectly the Money Supply (see next slide graph) Fig 3 SPRA D3 Today (9:00 am): BofC announces new target rate Yesterday 27 Effect of BofC intervention via SPRAs on the Money Supply (MS) . MS* Demand i*or= 2190。 % = 2188。 % i*or= 2190。 % Overnight rate, ior S* = Net supply of SB other than those obtained by standing facilities = 2188。 Operating Band Target Overnight Rate, i*or= 2 189。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。1 Ch. 7 Moary Policy: Tools,Goals and Targets (by Mishkin et al. 2021 Ref. book) General Overview Role of BofC “To promote economic and financial wellbeing of Canada” by achieving specified goals, mainly low and stable inflation. ? How? Mostly through Moary Policy via manipulation of interest rates and money supply. 2 Out