Monday, October 01, 2007

Bank of Canada Intervention

OTTAWA, Oct 1 (Reuters) - The Bank of Canada has now injected a total of C$890 million ($899 million) in overnight money into the markets on Monday to lower the overnight interest rate toward the central bank's target and improve liquidity.

Earlier on Monday, the bank injected C$530 million and has now increased that total. The bank intervened regularly in August during a credit crunch, but stayed out of the market from mid-August until late September.

It operates through Special Purchase and Resale Agreements, buying securities with the agreement to sell them back the next business day.

What are "Special purchase and resale agreements (SPRAs)"
Repo-type operations in which the Bank of Canada offers to purchase short-term Government of Canada securities from jobbers (investment dealers) with an agreement to sell them back the next business day. They are initiated by the Bank to prevent the overnight rate from moving above the upper limit of the operating band or to signal a change in the band.

For more information on how the Bank of Canada implements this policy check out these links:

http://www.bankofcanada.ca/en/review/1998/r981b.pdf
http://www.bankofcanada.ca/en/lvts/lvtsmp3.pdf
http://www.bankofcanada.ca/en/financial/lvts_neville.pdf

UPDATE: Reader /Dev/Null sent me a link to this article, which, upon reading made me want to go out and buy canned goods, gold, and ammo.

15 comments:

RentingSucks said...

I found it strange if everything is hunky dory in our credit market that the BoC needs to do this. Is it just Canadian banks exposure to subprime causing this or is it the global nature of credit?

Will this mean anything for interest rates or credit standards going forward?

It looks like the BoC is having trouble keeping its rates as low as they are.

Is this the canary in the coal mine or to be expected?

mohican said...

It is highly unusual for such a large intervention to take place. It is most certainly a signal of bigger things to come in my view. October is going to be a make it or break it kind of month to see if the central banks worldwide can contain this little credit cruch thing.

Paul said...

ya very scary article. There are hardly any bright spots in the US economey these days. I am surprised we in Canada have been hardly effected....thus far anyways. 2 huge cash injections today and it does not even make the main page of reuters.ca . It will be interesting to see how the markets react here tomorrow.

I do not understand the huge rally on the Dow today after terrible news from citygroup and UBS.

What's gonna happen here Mohican? Will the commercial paper fiasco truly crunch our credit?

Our RE market sure seems to have slowing sales. Although we have had few month lulls before....things rally again.

mohican said...

These cash infusions can happen for very normal reasons and that may be the case today - or it may not.

My personal take on the current situation is that as the credit crisis continues to unfold, central banks will just create more money to handle the illiquidity issues.

This newly created money will cause another bigger problem - inflation - big time inflation. Look for a post on that tomorrow.

casual observer said...

All this is going on, and yet stock markets keep hitting new highs. Is it wishful thinking, or just ignorance?

BTW, I posted a couple of links about the banking systems in the U.S. and Canada on a thread over at REtalks. They are about how changes made to reserve requirements in the mid 1990's have influenced our economy and money supply growth. Seems like the seeds of our current credit bubble/crunch were planted some time ago.

patriotz said...

What are "Special purchase and resale agreements (SPRAs)

Sounds like the financial world's version of the payday loan.

sutluc said...

Interesting article. I like the date on it, Oct.8/07, very futuristic.
I keep wondering if it would be a good idea to convert some cash into a US funds account. I keep getting the uneasy feeling that the BOC is going to deflate our currency to well below par.
Probably not. I am a contrarian indicator, people could get rich by following me around and not doing what I do.

solipsist said...

It is highly unusual...October is going to be...big time inflation.

What's going on period is highly unusual.Most of the world has gone mad. They never did throw away what was learned in the MK-ULTRA programs.
...October is often a month of upheaval - 1929 Crash, the October Crisis, FLQ, etc. It's a nihilism-inducing time, what with everything withering before our eyes.
...Real inflation is already big-time in my view. Sure, computers and electronics and such are cheaper, and cars and houses are better constructed and safer, but at what cost? The prices of the things that we really need are up.

The CBs might as well go back to sleep and let this thing run it's nasty course. It's building virulence with every feel-good cash infusion. The first thing one learns in life-saving, first aid, etc., is to check for hazards before stepping in. The CBs are not doing so, and are continuing with their wanton recklessness.

I keep getting the uneasy feeling that the BOC is going to deflate our currency to well below par.
Probably not.


That would be complete foolishness. It's time to stop comparing the CAN$ to the US$, and start looking at the Euro, Yen, etc. It's not up to the BoC to prop up the US$. We need to un-hitch that dead horse.

Gabriel said...

I don't think this situation is that bad, but then I don't understand the credit markets very well. What I do know is according to CIBC that it isn't about not enough buyers, but the fact that institutions who are holding CDO's and other debt instruments refuse to sell at a significantly lower price. I think most people were asking 45 cents on the dollar back in July/Aug. Now, they've improved to around 70 - 75 cents.

Either way, At the moment, I'm not too fearful.

After reading that article. I have some things I'd like to point out. All from the Economist.

1. US Debt percentage to GDP is relatively the same as Canadas. 65% Thou starting this year it'll start diverging.

2. According to the Economist, Bank of England only insures the first 10,000 in a bank %100, then the next 30,000 at %90. With that said it also takes almost 6 months for people to get the insured funds from the BOE. They've recently changed the rules to make it 100% after 10,000. So, that might calm some nerves, if they fix the speed to receives funds if a bank fails they'd be golden.

3. America doesn't consider itself in a REAL recession unless it has 2 straight quarters of negative growth. It did have several major drops followed by a very mild recovery just above the recession line.

4. I'd really like to understand the rational reasoning people keep pointing to huge USD reserves in China/Japan. Wouldn't it be suicide for China to weaken the USD even more, especially trade wise? Japan is in the same boat, but to a lesser extent.

In the end despite all this, This isn't going to spell disaster. It maybe a stale year to slightly negative for global economy.

patriotz said...

Wouldn't it be suicide for China to weaken the USD even more, especially trade wise?

The problem is that by tying the yuan to the USD they are creating severe inflation in China. When the Chinese can't afford to eat, they start rioting.

The Chinese have painted themselves into a corner with their policy of propping up the USD by buying mountains of US debt. If they let the yuan rise, they will not only lose exports to the US, but their USD holdings will lose value. But if they don't do anything about yuan inflation they will lose competetiveness anyway.

What you are seeing already is a move by the Chinese away from USD debt to US hard assets (e.g. the Unocal takeover, which the USG blocked). This props up the USD without propping up the bond market. Note that US long term interest rates are rising despite the Fed cut. The Chinese are not going to let Bernanke leave them holding the bag.

It's a Mexican standoff really and such a standoff rarely ends well for both parties.

beta said...

institutions who are holding CDO's and other debt instruments refuse to sell at a significantly lower price.

Not because they're stubborn, but because repricing them will cause huge financial losses.

In the end despite all this, This isn't going to spell disaster. It maybe a stale year to slightly negative for global economy.

As you said, you don't really understand credit markets, so your conclusion is no more than a hopeful guess. The credit crisis is not over, it's barely begun. The necessary repricing of debt will eventually take place, and mortgage defaults will continue at a higher rate for the rest of '07 and throughout '08.

There's too much leveraged debt for a soft landing. Won't happen.

Paul said...

The BOC just injected another 855 million today. Hmmm so this is now a daily occurance.

mohican said...

More numbers:
Thursday Intervention - 985
Friday Intervention - 1087
Monday Intervention - 890
Tuesday Intervention - 855

That is a 4 day total of $3.8 Billion of newly minted loonies to buy debt nobody else is willing to buy.

No problems here eh!

Gabriel said...

It's true, it is a hopeful guess. I don't have enough experience to have a good perspective. Thou, buyouts and takeovers are still happening... TD and RBC just bought two banks today.

M&A is still happening here. I wonder who is taking all the money injections. I tend to think it's probably National Bank which has the most percentage wise tied up to Subprime.

Thou, if I'm going to believe a major crash in the world economy... I might as well buy a lot of gold...

HADENOUGH said...

http://news.bbc.co.uk/2/hi/business/7022117.stm


I have posted this on other sites but it is an interview with Greenspan. He is saying don't expect the glory days to continue in housing and the economy. The is a global problem.