Bank of Canada pushes reforms to help absorb shocks

Thu Jun 14, 2012 4:14pm EDT
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By Rita Devlin Marier

MONTREAL (Reuters) - Canada's financial system is solid but could be hit by a worsening of the European debt crisis, a senior Bank of Canada official said on Thursday, adding that increased use of central clearinghouses would help the country absorb any such shock.

"Canadian markets have remained relatively stable, and our banks continue to have good access to wholesale funding markets," Agathe Cote, deputy governor of the central bank, said in the prepared text of a speech she was delivering in Montreal. "Nonetheless, a deterioration in the situation could have a considerable effect on Canada through trade, confidence and financial channels."

She said Canada took a step toward stronger markets with the creation in February 2012 of central counterparty clearinghouse services for the repo market - in which government securities are sold with an agreement to repurchase them at a later date.

The move was part of a broader global drive to strengthen banks and financial markets to reduce the risk of another crippling financial crisis. Regulators say this kind of improved market infrastructure, the plumbing of the trading system, will make markets more transparent and reduce risk.

The bank argues that having a trusted intermediary between buyers and sellers reduces anxiety about counterparty credit risk and prevents funding markets from seizing up as they did in late 2008.

"We will never have a risk-free financial system. That's why we need to take measures to render it more resilient to shocks that may occur, either from abroad or domestically."

The repo market is key to ensuring liquidity for banks and money markets overall.

Repo positions represent about 5 percent of Canadian-dollar denominated assets on the books of Canadian banks, at about C$90 billion ($87.4 billion), Cote said.   Continued...