Getting to a new normal
Deputy Governor Toni Gravelle speaks about how the Bank of Canada will manage its balance sheet once quantitative tightening ends.
Watch Deputy Governor Gravelle speak to CFA Society Toronto in Toronto Read the full speech.
Balance sheet 101
A balance sheet is a financial statement that shows what an organization owns (its assets) and what it owes (its liabilities).
At the Bank, we have financial assets on our balance sheet to support our core policy functions—not to make a profit. For every liability on our balance sheet, we need a corresponding asset.
The Bank’s balance sheet has three main types of liabilities:
- Cash: the bank notes in wallets and cash registers across the country
- Government deposits: the funds that the Government of Canada (GoC) deposits with us to meet its day-to-day banking needs
- Settlement balances: the reserves used to settle wholesale payments in the financial system
Before the COVID-19 pandemic, the Bank regularly bought government bonds as assets to manage our balance sheet. But during the pandemic, we bought a lot more of them—first to stabilize the financial system and then to support the economic recovery. Our balance sheet grew by a lot and this growth was reflected in higher settlement balances.
Since April 2022, we’ve been shrinking our balance sheet by using quantitative tightening (QT). This means that we have been letting our GoC bonds “roll off” the balance sheet as they mature, and we don’t buy new ones to replace them. Our goal is to get our balance sheet back to normal, where our assets simply offset our liabilities.
Normalizing our balance sheet
Since we started the normalization process, the size of our balance sheet has shrunk by nearly 40%. So how will we know when the normalization is done?
Right now, we have around $100 billion worth of settlement balances, which are one of our three main types of liabilities. As we’ve said before, we expect to be at our new normal when settlement balances are in the range of $20 billion to $60 billion, though some uncertainty remains. We think this is the right level to keep Canada’s payment system running smoothly and to ensure we can effectively implement monetary policy.
As we get close to those levels, we will start buying assets again to offset our liabilities. Just like before the pandemic, we will buy a mix of GoC bonds, GoC treasury bills—or t-bills—and term repurchase agreements—or repos, which are a form of short-term borrowing for dealers that sell government securities.
As QT ends, we will start buying GoC bonds and other assets again as part of our normal balance sheet management. Those purchases will not be quantitative easing (QE), just as our asset purchases before the pandemic were not QE.”
Keeping an eye on markets
Late last year and into 2024, there was a lot of activity in the market for overnight repos. This led to some market speculation that the Bank’s balance sheet normalization process was causing pressure and might need to end before settlement balances get to the $20 billion to $60 billion range.
After careful analysis, the Bank determined that our balance sheet normalization process was not a main cause of the surge in demand for repo funding. To offset the pressure, we stepped in with overnight repo operations, our routine tool for responding to temporary funding stresses in those markets.
The recent repo pressures did not change our view of where settlement balances should end up. If we think our normalization process needs to change, we will be clear and announce changes ahead of time.
The bottom line is the balance sheet normalization process is continuing as we laid out last year and we have tools to manage any temporary funding pressures that might come up along the way.”
