THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 478

446

PA R T V

Central Banking and the Conduct of Monetary Policy
(as shown in Figure 17-8) over, for example, the period from May 18, 2007 to
October 15, 2008.
However, in targeting the overnight interest rate at the mid-point of the operating band, the Bank of Canada usually neutralizes the impact on settlement balances of any open-market-buyback operations. For example, the Bank neutralizes
special PRA operations, so as not to leave the system in a surplus position at the
end of the day, in which case at least one LVTS participant would end up holding
positive settlement balances with the Bank of Canada earning the bank rate less
50 basis points, ib 0.50. Similarly, the Bank of Canada neutralizes SRA operations,
so as not to leave the system in a deficit position, in which case at least one LVTS
participant would end up holding negative settlement balances with the Bank paying the bank rate, ib.
Moreover, being the federal government s fiscal agent, the Bank of Canada usually neutralizes the net impact on settlement balances of certain federal government payment flows and Bank of Canada transactions.
The neutralization of the effects of open-market-buyback operations and of
public sector flows on the level of settlement balances, and the adjustment of the
level of settlement balances are effected through shifts (transfers) of government
deposits (balances) between the government s account at the Bank of Canada and
the government s accounts at the LVTS participants. In particular, the Bank of
Canada uses twice-daily auctions of federal government (Receiver General) balances, the first at 9:15 a.m. (which are collateralized) and the second at 4:15 p.m.
(which are uncollateralized), when all the flows affecting the Bank of Canada s
balance sheet are known. This neutralizes the effect of market buyback operations
and of public sector flows, and also adjusts the level of settlement balances.
To illustrate the process for neutralizing public sector flows using auctions of
Receiver General balances, suppose that there is a net government receipt of $100
(i.e., the government s receipts from the public exceed its payments to the public
by $100). Net receipts are drawn on the government s deposits at the LVTS participants, creating claims on the LVTS participants in favour of the Bank of Canada

800
700

600
500
400
300
200
100

F I G U R E 17- 8

Target Level of Settlement Balances (in millions)

Source: Bank of Canada website, www.bankofcanada.ca.

12/8/2008

9/9/2008
10/9/2008
11/8/2008

8/10/2008

7/11/2008

5/13/2008
6/11/2008

2/12/2008
3/13/2008
4/13/2008

12/14/2007
1/13/2008

8/16/2007
9/15/2007
10/15/2007
11/14/2007

7/17/2007

0
5/18/2007
6/17/2007

Receiver
General
Auctions