Will Canada be affected by the collapse of U.S. banks?
The Central Bank is ready to intervene if there are "side effects"
The Bank of Canada is ready to protect Canadian private banks from a global financial meltdown if the U.S. banking crisis spills over into Canada. But such measures are unlikely to be necessary.
Bank of Canada deputy governor Toni Gravelle declared that the bank was "ready to act in the event of severe market-wide stress and provide liquidity support to the financial system." Gravelle also said the central bank had learned from the crisis caused by the COVID-19 pandemic, and would act more effectively if a similar threat arose and markets began to perform worse.
In that light, the bank released a fresh discussion paper about how the Bank of Canada responded to "an unparalleled level of financial market disruption" when the pandemic virtually halted the entire Canadian economy.
Gravelle also mentioned the near collapse of the British pension system in September 2022 under then-Prime Minister Liz Truss and said the Bank of Canada would be better prepared for any crisis by offering liquidity not only to banks but also to pension funds.
After the pandemic, many critics complained that the central bank had acted too aggressively, cutting interest rates and promising that they would stay low. But analysis by central banks around the world showed how close the economic system was to collapse.
In addition to lowering interest rates, the central bank injected money into the economy by buying not only Canadian government bonds, but also other assets to prevent the collapse of the financial system.
Gravelle also said that any buying of assets to protect financial institutions would be formulated to avoid moral hazard, "when investors or market players feel they can take unusual risks without bearing the consequences if things go wrong."
To mitigate the effects of moral hazard, the central bank will limit its action to the most extreme cases, meaning that investors could suffer significant losses before the bank steps in. It will also make the bailed-out investors buy back the securities from the Bank of Canada as soon as the crisis is over.
