Canadian policy responses to the global financial crisis and economic recession
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Canadian Policy Responses to the Global Financial Crisis and Economic Recession. Lawrence Schembri International Department May 7 2009 For presentation at the Canada Day conference, Rimini Centre for Economic Analysis, Rimini, Italy

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Canadian policy responses to the global financial crisis and economic recession

Canadian Policy Responses to the Global Financial Crisis and Economic Recession

Lawrence Schembri

International Department

May 7 2009

For presentation at the Canada Day conference, Rimini Centre for Economic Analysis, Rimini, Italy

The views expressed in this presentation reflect those of the author and not the Bank of Canada


Why is the canadian experience interesting worthy of attention

Why is the Canadian experience interesting & worthy of attention?

  • Canada entered the crisis in much better shape

  • Canada adopted the right policies at the right time.

  • Canada will recover faster, despite being in a not-so-good neighbourhood

    Bottom line:

  • Important lessons can be learned from Canada

  • The crisis will instigate useful reforms to domestic and international policy


2007 going into the crisis

2007: Going into the Crisis


Government debt to gdp ratio was falling

Government debt to GDP ratio was falling


Taxes were declining

Taxes were declining


Inflation was stable inflation expectations were well anchored

Inflation was stable & inflation expectations were well anchored


Commodity prices were rising and the loonie was strong

Commodity prices were rising and the loonie was strong


Consumer debt levels were also rising but not too fast

Consumer debt levels were also rising, but not too fast


House prices were rising but not bubbling

House prices were rising, but not bubbling


Bank leverage ratios stayed calm

Bank leverage ratios stayed calm


Crisis chronology

Crisis Chronology

  • Financial Crisis began: August 2007

  • U.S. Recession began: December 2007

  • Lehman Bros Collapse: September 2008

  • Synchronized Global Recession: 2008Q4 and 2009Q1


Global banks lost money

Global banks lost money


Deleveraging took hold and economies contracted

Deleveraging took hold and economies contracted


Canadian policy responses

Canadian Policy Responses

  • Financial Sector

  • Fiscal Policy

  • Monetary Policy


Financial sector policy

Financial Sector Policy

  • Liquidity provision (Bank of Canada)

  • Bank liability guarantees (Government of Canada) – “Lenders Assurance Facility”

  • Support for credit markets (Government of Canada)

  • NOT NEEDED - Removal of toxic assets / bank capital injections


Liquidity facilities

Liquidity Facilities

  • The Bank of Canada has introduced several new facilities to provide liquidity to capital market participants:

  • Swaps of high quality, but less liquid assets for short-term government bonds

  • Collateralised loans

  • Key innovations: Wider sets of participants and acceptable collateral


Credit market support

Credit Market Support

  • CDN $125B Insured Mortgage Purchase Program

  • Additional CDN $13B for Export Development Canada, Business Development Bank of Canada, and several other Crown corporations to facilitate trade and business credit

  • CDN $12B Canadian Secured Credit Facility, to support vehicle leasing through purchases of Asset Backed Securities


Canadian fiscal stimulus

Canadian Fiscal Stimulus

  • Approximately CDN $40B or 2.5% of GDP

  • 60% will be infrastructure spending

  • 55% will be spend in 2009 and 2010

  • CDN $8.0B in permanent personal and corporate tax cuts

  • Leverage infrastructure/community spending with the provinces to reach CDN $50B


Monetary policy actions

Monetary Policy Actions

  • Aggressive interest rate cuts: 425 basis points in 16 months to a target overnight rate of 0.25%

  • Unconventional policy measures

    • Conditional statement: hold rates at this level until 2010Q2 conditional on inflation outlook

    • Term Purchase and Resale Agreements (6-12 months in duration)

    • Framework for credit and quantitative easing


Aside credit and quantitative easing

Aside: Credit and Quantitative Easing

  • Quantitative easing -- outright purchase of government or private sector assets with central bank reserves

  • Credit easing -- outright purchase of private sector assets with the sale of other central bank assets (sterilized purchases) or in conjunction with quantitative easing and the creation of central bank reserves (unsterilized purchases)


Annex on framework for conducting monetary policy at low interest rates

Annex on “Framework for Conducting Monetary Policy at Low Interest Rates”

Figure 1: Financing and Type of Asset Purchases


Outlook

Outlook


Canadian policy responses to the global financial crisis and economic recession

Quarterly Canadian GDP Growth Forecast

%


U s demand composition should be more favourable to canadian exports

U.S. demand composition should be more favourable to Canadian exports

Annualized Quarterly Growth

%


Canadian policy responses to the global financial crisis and economic recession

Projection for Total CPI Inflation


Lessons for domestic policy

Lessons for Domestic Policy

  • Macroprudential oversight of financial system

  • Mitigate procyclicality in banking regulation

  • National securities regulator

  • Monetary policy at low interest rates

  • Monetary policy should not ignore financial stability concerns


Lessons for international policy

Lessons for International Policy

  • Financial Stability Board - Bigger and Tougher

    • Common standards/rules for financial sector

    • College of supervisors of global financial institutions (peer review process)

    • Crisis resolution procedures for ``too big to fail``

  • IMF – More resources and More Candid

    • + US$500B; New instruments: Flexible Credit Line

    • Better external and internal governance

    • Address financial stability; early warning system


Extra slides

Extra Slides


Commodity prices were rising and the loonie was strong1

Commodity prices were rising and the loonie was strong


Canadian policy responses to the global financial crisis and economic recession

Projection for Global Economic Growth


Canadian policy responses to the global financial crisis and economic recession

Bank of Canada Liquidity Facilities Introduced Since 2007Q4


Canadian fiscal stimulus1

Canadian Fiscal Stimulus


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