Bank of Canada Announces Updates to Emergency Lending Policies

The Bank of Canada (the "Bank") issued on May 5, 2015 "Bank of Canada Emergency Lending Policies", a consultation paper setting forth proposed updates to the Bank's emergency lending policies. The proposed changes consist of the following:

  • Changes to the conditions for Emergency Lending Assistance ("ELA") – The Bank proposes to eliminate the requirement for a solvency opinion as a condition to the provision of ELA. This requirement would instead be replaced with a requirement to have established a credible recovery and resolution framework. This proposed change is due to the fact that the Bank views solvency opinions as only informative, since they are limited to a point in time and it can be difficult in practice to differentiate between solvency and liquidity. Recovery and resolution plans are more meaningful in the context of ELA, particularly since the objective of providing ELA is to assist with the recovery or resolution of the institution.
  • Expansion of federal ELA to provincially regulated deposit-taking institutions (such as provincially regulated credit unions, caisses populaires or centrals) – The Bank proposes to consider making ELA available to provincially regulated deposit-taking institutions. ELA would only be available where the following criteria are met: (i) the institution must be a member of the Canadian Payments Association, (ii) the applicable province must indemnify the Bank for any losses as a result of the institution defaulting on its ELA loan, (iii) the Bank must in its own judgment deem the ELA to be important to maintain the stability of the Canadian financial system, and (iv) at the time of the ELA request, the institution must have in place a credible and appropriate resolution or recovery (as applicable) framework, in the opinion of the Bank.
  • Acceptance of mortgages as eligible collateral for ELA – The Bank proposes at its discretion to accept mortgages as eligible collateral for ELA. These would only be accepted as a last resort after all other sources of collateral have been exhausted. The Bank also indicates that it would first look to private-label residential mortgage-backed securities as collateral prior to choosing to take direct assignments of mortgages, given the legal and operational costs and complexities involved in taking security against individual mortgages.
  • Framework for provision of ELA to financial market infrastructures ("FMIs") – The Bank proposes a framework for the provision of ELA to FMIs. Canadian domiciled designated FMIs are eligible for ELA in the Bank's discretion, while foreign-domiciled designated FMIs are only eligible for more limited support from the Bank for Canadian-dollar liquidity where the central bank of the foreign jurisdiction has engaged in its own ELA.[1] The Bank would charge at a minimum the Bank Rate (and could charge a higher rate of interest at its discretion) for ELA to FMIs, and would be willing to accept a broad range of collateral at its discretion. The Bank would also take into account potential systemic risk to the Canadian financial system in determining whether to provide ELA.

The Bank also announced that it intends to create a new Contingent Term Repo Facility that could be used at the Bank's discretion to address severe market-wide liquidity problems. This facility would be available to primary dealers and, if necessary, other types of institutions, and would offer liquidity for terms of up to one month.

Comments on the Consultation Paper are due July 4, 2015.

[1] The Consultation Paper states that “Eligibility for ELA will remain limited to designated systems, with ELA being available to Canadian-domiciled FMIs at the Bank’s discretion. Lead central banks overseeing foreign-domiciled FMIs are responsible for ensuring that emergency liquidity is available for those systems. However, the Bank of Canada could facilitate the lead central bank’s provision of Canadian-dollar liquidity should the lead central bank choose to do so.” The current Canadian-domiciled designated FMIs are the Large Value Transfer System (LVTS), CDSX and the Canadian Derivatives Clearing Service (CDCS), while the current foreign-domiciled designated FMIs are the Continuous Linked Settlement Bank (CLS Bank) (overseen by the Federal Reserve Board) and LCH.Clearnet Limited’s SwapClear Service (overseen by the Bank of England).