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En mars et en avril derniers, nous avons vu des valeurs sans précédent passer par le STPGV. Au moment de la rédaction du présent article, la plus grande somme journalière, observée le 1 er mars 2020, était de 420 G$, soit environ 120 G$ de plus que le record précédent. Si plusieurs facteurs contribuent à la hausse des valeurs, celle-ci s’explique surtout par les opérations sur les marchés financiers effectuées par la Banque du Canada pour renflouer l’économie et le système financier, mesures qui visent à atténuer les contrecoups de la COVID19 par l’octroi de liquidités.
« Nous savons qu’au cours des semaines et des mois qui viennent, les marchés seront davantage sollicités en raison des besoins de trésorerie des gouvernements fédéral et provinciaux, a énoncé Stephen Poloz, gouverneur de la Banque du Canada, [le mercredi 15 avril]. Et quand on demande plus de liquidités qu’à la normale, c’est notre travail de fournir plus de liquidités qu’à la normale. »
La suite de cet article est en anglais seulement.
“Achieving our primary mandate of keeping inflation close to target requires us to stabilize the economy and employment first. In normal times, we can achieve our inflation objective by setting the policy interest rate at the appropriate level. However, during major disruptions to the economy and financial markets such as those we are experiencing with COVID-19, we need to take more comprehensive measures to ensure that the financial system continues to play its role of providing credit where it is needed.
For these reasons, the Bank of Canada is acting in several ways to support the economy and financial system and stands ready to take any and all actions that we can to protect the well-being of Canadians during this difficult time.”
LVTS numbers at a glance
In late March and the first half of April, the Bank of Canada announced several programs that will inject liquidity into the financial system. Details on each program can by following the links below:
Bank of Canada support to key financial markets
- Government of Canada Bond Purchase Program (GBPP)
- Canada Mortgage Bond Purchase Program (CMBP)
- Bankers’ Acceptance Purchase Facility (BAPF)
- Provincial Money Market Purchase Program (PMMP)
- Provincial Bond Purchase Program (PBPP)
- Corporate Bond Purchase Program (CBPP)
- Commercial Paper Purchase Program (CPPP)
- Contingent Term Repo Facility (CTRF)
- Balance sheet expansion
Liquidity for individual financial institutions
- Enhanced term repo operations and Standing Liquidity Facility (SLF)
- Standing Term Liquidity Facility (STLF)
These programs will take time to ramp up and are separate and distinct from the measures announced by Federal and Provincial governments. As the Bank implements these programs to purchase assets and advance funds, we will continue to see large value payments (in the billions) from the Bank of Canada to other participants in the LVTS.
Bank of Canada Monetary Policy
The LVTS is central to the Bank of Canada’s implementation of monetary policy. The Bank of Canada limits the amount that LVTS participants can leave on deposit overnight. This is known as the cash setting and is a key piece of monetary policy. The Bank of Canada’s monetary policy toolkit also includes setting the target interest rate on overnight deposits and overnight loans. The Policy Interest Rate was 1.75% prior to the onset of the COVID-19 crisis. The rate was dropped three times in March (by 50 basis points each time), and is now at 0.25%, the effective lower bound.
These rate decisions are intended to provide support to the Canadian financial system and economy by easing the cost of borrowing and supporting a return to normalcy.
Impacts on LVTS
When monetary policy includes the provision of extraordinary liquidity, these payments flow through the LVTS. For each payment cleared through the LVTS there is a payor and a payee participant. At all times during the day, there is an equal and offsetting amount of payments sent and payments received.
At the end of each day, each participant is either a net sender or a net receiver of payments, with the net amount of the non-Bank of Canada participants in the system equal to the cash setting.
Since March 2018, the Bank of Canada’s cash setting has been $250 million. This means that the Bank of Canada aimed to be a net sender of $250 million each day resulting in the sum of all other participants in the LVTS being a positive $250 million. Some participants’ net position each day could in fact be negative but all participants’ end of day positions aggregated together would net to a positive $250 million. The Bank of Canada has many tools that can be used to ensure they meet the target of $250 million.
In times of crisis, the cash setting will change as the Bank of Canada injects liquidity into the system through the purchase of assets from LVTS participants. In March and April to date, the Bank of Canada’s end of day net position moved from $250 million to in excess of $190 billion on April 23rd. Figure 1 illustrates the magnitude of the increase in the Bank of Canada settlement balance resulting from the provision of liquidity to the financial system.
Bank of Canada End of Day Positions in LVTS, March 1 – April 24, 2020
The impact of the Bank of Canada’s activities can be seen in the daily values flowing through LVTS since March 2. In 2020, we have seen record values, with new highs set on March 16 ($347B), March 31 ($348B), April 2 ($357B), April 3 ($363B), April 9 ($394B), April 15 ($412B), April 20 ($414B), and April 23 ($420). Although values are more than double historical average daily amounts, volumes are up insignificantly.
We are processing about the same number of transactions, but the value of these transactions is much higher. The LVTS is more liquid than it has ever been. The Bank of Canada activities have had no adverse impacts on Payments Canada systems, which have operated at 100% availability throughout March and April.
Figure 2 demonstrates the impact of the recent injection of additional liquidity by the Bank of Canada on LVTS values and volumes.
LVTS Values and Volumes – March 2 to April 20, 2020
Impacts of Bank of Canada activities on the LVTS risk model
Tranche 2 Payments
Tranche 2 payments are cleared against Bilateral Credit Limits that participants extend to one another. The use of credit supports the efficient management of liquidity, but also creates credit risk between participants.
Bilateral Credit Limits have been very stable historically. No notable changes in Tranche 2 credit extension have been observed which indicates that participants do not have concerns regarding each other’s credit worthiness as it relates to LVTS payments.
Tranche 1 Payments
Tranche 1 payments must be fully collateralized in LVTS. In order to send a payment, a participant must have sufficient collateral available at the Bank of Canada to cover the full value of the payment. Tranche 1 collateral
levels tend to vary depending on when participants need to send large payments on a fully collateralized basis. In the current situation, participants are receiving large payments from the Bank of Canada early in the morning making the LVTS extremely liquid. Participants can use these Bank of Canada payments for Tranche 1 payments rather than pledging additional collateral. Figure 3 shows a slight decrease in the amount that participants are pledging to support Tranche 1 payments, indicating that some participants may be relying on Bank of Canada payments to fund their outgoing Tranche 1 payments rather than posting collateral. We may see a further decrease in Tranche 1 collateral as LVTS participants opt to leverage the additional liquidity in LVTS.
How does the current situation compare to the global financial crisis (GFC) of 2008/2009?
The GFC had different causes than the pandemic situation we are currently experiencing, and required much less intervention by the Bank of Canada. The Canadian economy and our financial institutions were not as exposed to the sub-prime crisis experienced in the United States. The Bank of Canada’s response to the crisis was commensurate with the level of impact to the Canadian financial system.
In 2008, the cash setting was $25 million, much lower than the $250 million level that was in place until recently. Figure 4 demonstrates that the Bank of Canada’s approach was much different, with targeted interventions not exceeding $3 billion, and fairly rapid returns to the $25 million cash setting. The current pandemic situation affects all facets of the economy and the Bank of Canada’s response to COVID-19 has been more proactive and persistent with values in the hundreds of billions. It is likely that the return to the $250 million cash setting will occur gradually over several months.
Bank of Canada End of Day Positions, July – December 2008
As the Lead, Financial Market Risk, David is responsible for monitoring the financial risks in the systems operated by Payments Canada and ensuring the risk models are effective in mitigating these risks. David works closely with industry and regulatory stakeholders with a focus on LVTS and Lynx. David holds his CPA, CA designation and prior to joining Payments Canada, worked in corporate insolvency, offshore banking, large bank resolution planning.
As a Director, Financial Market Risk at Payments Canada, Lise is responsible for ensuring our payments systems comply with the Bank of Canada's Risk-Management Standards for Designated Financial Market Infrastructures and for developing the Financial Risk Frameworks for our modernized systems. Lise has a DBA in finance from the Universite de Sherbrooke specializing in the financial market risk and prior to joining Payments Canada, Lise worked in the banking sector.