ECON 206_OCT 24_CH16.docx - FALL 2018_ECON 206_OCT 29 CH 16...

This preview shows page 1 - 3 out of 10 pages.

FALL 2018_ECON 206_OCT 29 CH 16 Tools of Monetary Policies Overview of the Canadian Financial System Canadian financial services industry Payments system in Canada 1. Large Value Transfer System (LVTS) 2. Automated Clearing Settlement System (ACSS) The Large Value Transfer System (LVTS) Electronic, real-time bet settlement network Designed to provide immediate finality and settlement to time-critical transactions Transactions account for <1% of the total number of transactions but 94% of the value Uses multilateral netting where only the net credit or debit position of each participant vis-à-vis all other participants is calculated for settlement Systemic Risk and the LVTS The LVTS helps eliminate systemic risk o The risk to the entire payments system due to the inability of one financial institution to fulfill its payment obligations in a timely fashion LVTS participants can make a payment only if they: o Have positive settlement balances in their accounts with the Bank of Canada o Have posted collateral (such as Government of Canada treasury ills and bonds) o Have explicit lines of credit with other participants Non-LVTS (ACSS) Transactions These are non-LVTS (paper-based) payment items, such as cheques, money orders. These items are cleared through the Automated Clearing Settlement (ACSS), an electronic payments system also operated by the Canadian Payments Association (CPA) The ACSS aggregates interbank payments and calculates the net amounts to be transferred from and to each participant’s settlement account with the Bank of Canada The Bank of Canada’s Policy Rate Overnight interest rate, i or o The interest rate at which participants borrow and lend overnight funds to each other in the money market o It is also known as reference rate Policy rate o The target level for the overnight rate
FALL 2018_ECON 206_OCT 29 The operating Band for the Overnight Rate The Bank’s objective is to keep the overnight rate within a band of 50 basis points (i.e., ½ of 1%) The upper limit if the operating band defines the bank rate, i b o The bank rate is the interest rate to BOC charges LVTS participant that require an overdraft loan (advance) to cover negative settlement balances on the books of the Bank at the end of the banking day. The lower limit of the operating band is the rate the Bank pays to LVTS participants with positive settlement balances at the end of the day.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture