Bank of Canada may retain crisis tools for future

Wed Feb 17, 2010 3:24pm EST
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By Claire Sibonney

TORONTO (Reuters) - The Bank of Canada says it may retain in its toolbox some of the emergency liquidity facilities it introduced during the financial crisis, but markets should not expect it to use them in normal times.

The central bank designed a variety of instruments to support money markets at the height of the financial crisis and while it has been gradually withdrawing its support, some of those instruments could prove valuable in future crises, Deputy Governor David Longworth said in a speech on Wednesday.

"For the bank, the primary facilities used during the crisis, the term PRA and the term loan facility, should continue to be a part of the bank's tool kit, as is our emergency lending assistance," Longworth said in Toronto.

The term PRA, or purchase and resale agreement, is a program under which the central bank buys securities in the market with an agreement to resell them at a later date.

Longworth said the central bank would also consider using a term securities lending facility in the case of a crisis where market participants do not have good quality collateral, but that further study was required to determine the right tools to use in the future if necessary.

As credit markets improve and economic recovery appears to be under way, the bank is hailing its intervention as a resounding success.

In fact, Credit Suisse economist Jonathan Basile said Longworth's view that financial conditions have "improved significantly" was more upbeat than the bank's previous language. A better financial outlook could mean a better economic outlook, he said.

"An upgrade to its GDP forecast could be next," Basile said'   Continued...

<p>The Bank of Canada building is pictured in Ottawa July 30, 2009. REUTERS/Chris Wattie</p>