The Bank of Canada
Objectives & Functions
The Bank of Canada
• The Bank is Canada’s central bank
• established in 1934 as a private enterprise
but became a “crown corporation” in 1938
• not under direct jurisdiction of the federal
department of finance, but coordinates
policies together
• managed by a Board of Directors that are
appointed by the Federal Cabinet
• B of D appoint a Governor and Deputy
Govenor
Objectives of the Bank of Canada
• (these are set out in the Bank Act)
• To regulate credit and currency in the best
interests of economic life of the nation
• To control and protect the value of the
Canadian dollar
• To control by its influence, fluctuations in
the general level of production, trade, prices
and employment as much as possible
through monetary action
• Generally, to promote the economic and
financial welfare of Canada
In summary, the Bank of Canada is in charge of
trying to provide stable prices, full employment,
economic growth and a viable balance of payments.
Functions of the Bank of Canada
• 1. Issues all currency
– all paper money is signed by the Governor and
Deputy Governor of the B of C. This bank is
the only institution authorized to issue paper
currency and coins
– all money issued by the Bank is backed by
some asset owned by the Federal Government
Functions of the Bank of Canada
• 2. Acts as the Banker’s Bank
– it holds the chartered banks deposits
– chartered banks settle debts among one another
by writing cheques on their deposits with the B
of C.
– makes loans to chartered banks and to the
federal gov’t if such loans are condisered to be
“good for the country”
– sets the interest rate for loans to chartered banks
“bank rate”.
– Keeps a record of all chartered banks’ balance
sheets -- to ensure they are properly managed
Functions of the Bank of Canada
• 3. Serves as the Federal Governments Bank
– provides expert advice
• advises the government on financial matters
(Federal Department of Finance)
- holds Fed. Gov’t Deposits
•it receives all gov’t revenues and provides an account
for paying all gov’t bills
•most of the gov’t bank deposits are with the chartered
banks
Functions of the Bank of Canada
- issues bonds
•acts as the gov’t agent in the sale of gov’t securities
(eg. Selling bonds to finance the deficit)
- sells treasury bills
•weekly treasury bill (t-bill) sales are handled by the B
of C.
•T-bills have no stated rate of interest -- they are sold
at auction at a discount (below face value)
•T-bills are short-term securities that are sold to meet
its’ short term borrowing requirements
Functions of the Bank of Canada
• 4. Controls Exchange Rates
– controls the value of the dollar
– to appreciate the dollar, the B of C buys
Canadian dollars with its reserve of foreign
currencies (causing less supply)
P
Canadian dollar
S2
$1.00U.S. = $.68Cdn PE2
S1
$1.00U.S. = $.65Cdn PE1
D
QE2
QE1
Q
S  , Q , P
Functions of the Bank of Canada
– To depreciate the dollar the B of C sells
Canadian dollars and holds reserves of foreign
currencies (more supply).
P
Canadian dollar
S1
$1.00U.S. = $.65Cdn PE1
S3
$1.00U.S. = $.63Cdn PE3
D
QE1
QE3
Q
S , Q, P
Functions of the Bank of Canada
• 4. Controls the money supply
– tries to regulate the supply of money to achieve
full employment, stable prices, economic
growth and viable balance of payments.