Class Notes (1,000,000)
CA (610,000)
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BUSI (200)
Lecture 2

BUSI 3410U Lecture Notes - Lecture 2: Payments Canada, Seigniorage, Landing Vehicle Tracked


School
UOIT
Department
Business
Course Code
BUSI 3410U
Professor
Bin Chang
Lecture
2

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Lecture 2: Bank of Canada and Monetary Policy
Financial Institutions
Bank of Canada
- Caadas etal ak
o Founded in 1934 as a private company in 1938 it became a Crown Corporation
o 12 directors appointed by the government for three- year terms, and they appoint a
governor and senior deputy governor for seven-year terms
o Deputy Minister of Finance sits on the committee but does not vote
o Governing council of the bank determines policy
o 1967, ultimate monetary authority was given to the government
But disagreement with the Bank, and the Minister of Finance has to issue a
public letter of direction which has ever been done
- Futios → To promote the economic and financial welfare of Canada, we
o Conduct monetary policy in a way that fosters confidence in the value of money
o Supply quality bank notes that are readily accepted and secure against counterfeiting
o Poote the safet ad effiie of Caadas fiaial sste
o Provide efficient and effective funds-management services
Fud aageet→ the ak is the fisal Aget fo the Got.
Role of the fiscal agent encompasses several responsibilities relating to the
aageet of puli fuds: Got Bake ad Teasu Maage, Foeig
Exchange Reserves, Debt Management( T-bills and marketable bonds) and Retail
Debt (Canadian Saving bonds and Canadian Premium Bonds)
o Communicate our objectives openly and effectively and stand accountable for our
actions
- Major Activities
1. Note Issue and Seignorage (function 2)
o Buy government securities by issuing bank notes
Pays the royal mint $0.12 for a $1 coin
Prints $20 notes at a cost of $0.06, each one lasts on average two years.
If $20 is invested at 5% then over two years the notes generate $2 revenue at a
cost of 6 cents for $1.94 profit
o Money is anything widely accepted as a mean of payment
Caadia ue is legal tede i Caada fiat
Pio to  otes said I poise to pa the eae $ o dead
o Government monopoly (counterfeit) prior to 1935 50% of notes in circulation were
issued by chartered banks
o “eigoage→ soethig laied  a soeeig o supeio as a prerogative
o Fiat → a authoitatie deee, satio, o ode
2. Payments Systems (function 2 )
o Bate→ tade  ehage of oodities athe tha  the use of oe
o Caadia Paets AssoiatioCPA →piatel u  the aks
Cheques are cleared when banks exchange cheques between each other
Cheques are settles when banks pay for what they owe by writing a cheque on
their Bank of Canada deposit accounts
o Large Value Transfer System (LVTS, launched in 1999)
Wire transfer of large items that occurs throughout the day; ($150 billion a day)
Major payments of securities for example go through LVTS
o Automated Clearing Settlement Systems (ACSS)
Debit, automatic bank payments 20% paper, 80% electronic ($20 billion a day)
o Bak of Caadas Role in CPA
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Lecture 2: Bank of Canada and Monetary Policy
Financial Institutions
Bak of Caada is a akes ak; etal ak ad the goeet of
Caadas ak o fisal aget
CPA Members maintain settlement balances at the Bank to settle up their CPA
obligations
CpA members borrow from the Bank if they are short of cash to make
thei paets→ liuidit poisios
Otherwise they ear interest on their deposits at the Bank
There are NO reserve requirements in Canada
Bank guarantees settlement
Bak ats as Caadas representative on international issues
3. Monetary Policy (function 1)
o Money is valuable as
Meas of ehage→ aoids ate ad doule oiidee of ats
Uits of easueet→ asis of easueet ad aoutig
Store of value
o Monetary policy is designed to:
Ensure low and stable inflation (reduction in the value of money)
Aoid iflatioa oo ad ust les to keep the eoo o a stale
growth track
Maintain purchasing power
o Monetary policy: built on a framework consisting of two key components
Flexible exchange rate permits us to pursue an independent monetary policy
suited to the eeds of ou o eoo ad ats as a shok asoe
Inflation- otol taget → poides a peise goal agaist hih to easue the
conduct of monetary poli, ieasig the Baks puli aoutailit
Total change of total CPI target range is in 1-3% with midpoint target of 2%
4. Security and Efficiency of the System ( function 3)
o Bank controls the money supply and can buy anything simply by printing more B of C
bills: it is the ultimate lender of last resort
o The bank engages in Purchase and Resale Agreements(PRA) to provide support when
needed
It buys securities at one price say $100 and then sells them back at say $105 for
a borrowing cost of 5%, this is the bank rate
The institution has then exchanged securities for cash at the Bank of Canada,
which it can use to meet its commitments
Under the Bank of Canada Act the Bank can only make loans with eligible
securities as collateral ~ REPO
http://www.bankofcanada.ca/2010/08/publications/research/working-paper-
2010-20/
o CDOR-OIC spreads and Term PRA Outstanding Details
Funds from the term PRA operations are allocated by a competitive auction
process in which the counterparties submit the yield they are willing to pay on
the borrowed cash
Funds are allocated in descending order of submitted yields
The highest bid will receive its full allocation(each firm is subject to a maximum
of 25% of the funds to be auctioned
Thereafter, the next highest bid will be allocated, and so on until the cut-off
yield is reached
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