For the period ended September 30, 2022, unaudited
Context of the Quarterly Financial Report
The Bank of Canada is the nation’s central bank. The Bank’s mandate under the Bank of Canada Act is to promote the economic and financial welfare of Canada. Its activities and operations are undertaken in support of this mandate and not with the objective of generating revenue or profit. The Bank is committed to keeping Canadians informed about its policies, activities and operations.
This report has been prepared in accordance with section 131.1 of the Financial Administration Act and follows the guidance outlined in the Treasury Board of Canada’s Directive on Accounting Standards: GC 5200 Crown Corporations Quarterly Financial Report.
Bank management is responsible for the preparation of the report, which was approved by the Audit and Finance Committee of the Board of Directors on November 16, 2022.
This Quarterly Financial Report should be read in conjunction with the condensed interim financial statements for the third quarter of 2022 included in this publication and with the Bank’s Annual Report for the year ended December 31, 2021. Disclosures and information in the 2021 Annual Report apply to the current quarter unless otherwise updated in this quarterly report.
Supporting the economy and the financial system
Since the beginning of the COVID‑19 pandemic, the Bank has acted in several ways to support the Canadian economy and financial system. When key financial markets became strained in March 2020, the Bank responded by introducing several programs to provide liquidity and maintain market functioning. As market functioning gradually recovered, some of these facilities and operations were either suspended, discontinued or scaled back. This led to ending quantitative easing, moving into a reinvestment phase and then beginning quantitative tightening. During the third quarter of 2022, the Bank continued quantitative tightening, which complements increases in the policy rate. Refer to the Bank’s website for the relevant press releases and market notices and more information on these measures.
Managing the balance sheet
| Financial position (in millions of Canadian dollars) |
|||
|---|---|---|---|
| As at | September 30, 2022 | December 31, 2021 | September 30, 2021 |
| Assets | |||
| Loans and receivables | 438 | 23,424 | 29,610 |
| Investments | 398,774 | 468,656 | 458,196 |
| Derivatives—indemnity agreements with the Government of Canada | 31,535 | 6,394 | 8,019 |
| All other assets* | 1,116 | 891 | 866 |
| Total assets | 431,863 | 499,365 | 496,691 |
| Liabilities and equity | |||
| Bank notes in circulation | 116,652 | 115,155 | 111,851 |
| Deposits | 288,878 | 347,034 | 355,738 |
| Securities sold under repurchase agreements | 24,885 | 35,560 | 27,503 |
| Other liabilities | 494 | 1,008 | 1,009 |
| Equity | 954 | 608 | 590 |
| Total liabilities and equity | 431,863 | 499,365 | 496,691 |
* All other assets includes Cash and foreign deposits, Capital assets and Other assets.
The Bank’s holdings of financial assets are typically related to its role as the exclusive issuer of Canadian bank notes. However, the higher levels of financial assets in recent years result largely from activities undertaken as part of the Bank’s monetary policy and financial system functions. The amount of assets on the Bank’s balance sheet peaked in the first quarter of 2021 but has decreased as market conditions have improved. During the third quarter of 2022, the Bank continued its policy of quantitative tightening. As a result, maturing Government of Canada bonds are no longer replaced, and the size of the balance sheet will continue to decline over time. The Bank’s total assets decreased by approximately 14% to $431,863 million as at September 30, 2022, compared with December 31, 2021. The main drivers of the decline were the maturity of investments and loans and receivables, as well as the decline in the fair value of Government of Canada bonds. This decline was partially offset by an increase in the value of the indemnity agreements with the Government of Canada.
Loans and receivables is composed primarily of securities purchased under resale agreements (SPRAs). SPRAs are high-quality assets acquired through the repo market, in line with the Bank’s framework for market operations and liquidity provision. SPRAs decreased to a value of $427 million as at September 30, 2022, following the suspension of the program and natural maturing of the securities.
Investments decreased by 15% to $398,774 million as at September 30, 2022. This decrease was driven mainly by the following movements within the Bank’s holdings:
- Government of Canada securities, which include nominal bonds and real return bonds, decreased by $54,246 million during the first nine months of the year. This decrease was driven mainly by a decline of $41,699 million in Government of Canada bonds held at fair value. The balance of these bonds dropped because of maturities and an increase in long-term bond yields. During the same period, Government of Canada bonds held at amortized cost decreased by $11,216 million, mainly due to maturities. The Bank’s remaining treasury bills also matured during the period, resulting in a decrease of $1,331 million.
- Other bonds decreased by $4,045 million during the period due to the maturing of provincial and corporate bonds. The provincial and corporate programs were discontinued in 2021.
Derivatives—indemnity agreements with the Government of Canada refers to the agreements that were put in place to indemnify the Bank and allow it to support Government of Canada, provincial and corporate bond markets. Losses resulting from the sale of assets within the Government of Canada Bond Purchase Program, the Provincial Bond Purchase Program and the Corporate Bond Purchase Program are indemnified by the Government of Canada, whereas gains on disposal are remitted to the government. The $31,535 million balance represents the fair value of the derivatives associated with the net unrealized losses on these assets as at September 30, 2022. This is represented in the asset profile chart by “All other assets.” Derivatives increased by $25,141 million during the nine-month period due to long-term bond yields rising.
Bank notes in circulation represents approximately 27% (23% as at December 31, 2021) of the Bank’s total liabilities. The value of bank notes in circulation increased by 1% compared with December 31, 2021, to $116,652 million as at September 30, 2022, reflecting seasonal variations.
Deposits consists of Government of Canada deposits, deposits by members of Payments Canada and other deposits. While deposits are normally maintained at a lower level, they now represent the largest liability on the Bank’s balance sheet. This change stems from the purchase programs the Bank implemented in 2020 to support the Canadian economy and financial system. The balance declined by 17% to $288,878 million as at September 30, 2022, reflecting the tapering in previous quarters of the Bank’s extraordinary market operations as well as the start of quantitative tightening during the second quarter of 2022.
Securities sold under repurchase agreements decreased to $24,885 million as at September 30, 2022, a 30% decrease compared with December 31, 2021. This liability represents the repurchase price for securities repo operations and overnight reverse repo operations. The Securities Repo Operations program supports core funding markets and the proper functioning of the Government of Canada securities market. Overnight reverse repos help to effectively implement monetary policy by withdrawing intraday liquidity, complementing the standing deposit and lending facilities.
Equity includes $5 million of authorized share capital and a $25 million statutory reserve. The Bank also holds a special reserve of $100 million to offset potential unrealized valuation losses due to changes in the fair value of the Bank’s investments that are not covered by an indemnity agreement. Equity also includes an actuarial gains reserve of $397 million as at September 30, 2022. This reserve accumulates the net actuarial gains and losses on the Bank’s post-employment defined-benefit plans that the Bank recognizes following the transition to International Financial Reporting Standards in 2010. The largest reserve held by the Bank is the investment revaluation reserve, which sits at $427 million as at September 30, 2022. It represents the net gains in the Bank’s investment in the Bank for International Settlements (BIS).
Results of operations
| Results of operations (in millions of Canadian dollars) |
||||
|---|---|---|---|---|
| For the three-month period ended September 30 |
For the nine-month period ended September 30 |
|||
| 2022 | 2021 | 2022 | 2021 | |
| Interest revenue | 1,117 | 1,034 | 3,347 | 2,991 |
| Interest expense | (1,467) | (220) | (2,689) | (683) |
| Net interest revenue (expense) | (350) | 814 | 658 | 2,308 |
| Dividend revenue | - | - | 4 | 9 |
| Other revenue | 1 | 2 | 6 | 5 |
| Total income (loss) before operating expenses | (349) | 816 | 668 | 2,322 |
| Total operating expenses | (162) | (177) | (515) | (522) |
| Net income (loss) | (511) | 639 | 153 | 1,800 |
| Other comprehensive income (loss) | (11) | 58 | 346 | 392 |
| Comprehensive income (loss) | (522) | 697 | 499 | 2,192 |
Interest revenue depends on market conditions, their impact on the interest-bearing assets held on the Bank’s balance sheet, and the volume and blend of these assets. The Bank’s sources of interest revenue are interest earned on its investments in Government of Canada securities, on SPRAs and on assets resulting from the large-scale asset purchase programs. In the third quarter and the first nine months of 2022, interest revenue increased by $83 million (or 8%) and $356 million (or 12%), respectively, over the comparable three- and nine-month periods in 2021. This increase is driven by higher yields and a higher average holding of interest-yielding investments by the Bank.
Interest expense consists mainly of interest incurred on deposits held by the Bank. During the third quarter and the first nine months of 2022, interest expense increased by $1,247 million and $2,006 million, respectively, over the comparable three- and nine-month periods in 2021. The increase was the result of rises in the Bank’s policy interest rate in 2022. However, the increase was offset by a lower average volume of deposits during the period and by a decrease to 0% in the interest rate paid on Government of Canada deposits.
Operating expenses for the third quarter and first nine months of 2022 decreased by 8% and 1%, respectively, compared with the same periods in 2021. This primarily reflects a decrease in bank note research, production and processing costs, offset by increases in staff costs and in technology and telecommunications costs.
- Bank note research, production and processing expenses decreased by $20 million (or 95%) and $27 million (or 47%) for the three- and nine-month periods, respectively, compared with the same periods in 2021. This decrease was driven by lower volumes of bank notes being printed. The timing of bank note production varies from one year to the next based on the annual production plan and market demand.
- Staff costs increased by $7 million (or 3%) for the nine-month period compared with the same period in 2021, as a result of the following changes:
- Salary costs increased by $15 million (or 9%) as a result of new positions being filled for strategic initiatives as well as the annual compensation adjustment.
- Benefits and other staff costs decreased by $8 million (or 7%), mainly due to the expense associated with the Bank’s defined-benefit plans, which decreased by $14 million (or 17%) as a result of a rise in the discount rates used for their calculation.1
- Technology and telecommunications costs increased by $5 million (or 24%) and $9 million (or 13%) for the three- and nine-month periods, respectively, compared with the same periods in 2021. This increase was driven by the Bank’s focus on its digital transformation and on strengthening its information technology systems.
Other comprehensive income for the first nine months of 2022 was $346 million. It consists of remeasurement gains of $354 million on the Bank’s defined benefit plans as a result of increases in discount rates,2 net of a reduction in the fair value of the plans’ assets. It also consists of an $8 million decrease in the fair value of the Bank’s investment in the BIS.
Comprehensive income for the first nine months of 2022 was $499 million. This is a decrease of $1,693 million (or 77%) when compared with the same period in 2021. For the third quarter, the Bank experienced a comprehensive loss of $522 million. The main driver of the decline in comprehensive income is the interest expense paid on deposits held by the Bank (at variable interest rates in a rising interest rate environment), which is increasing at a higher pace than the revenues on the Bank’s investments (at fixed rates).
Looking ahead through 2022
| The Bank’s 2022 Plan (in millions of Canadian dollars) |
||||
|---|---|---|---|---|
| 2022 budget | 2022 forecast | |||
| For the year ended December 31 | $ | % | $ | % |
| Staff costs | 407 | 53 | 377 | 52 |
| Bank note research, production and processing | 55 | 7 | 55 | 8 |
| Premises costs | 35 | 5 | 32 | 4 |
| Technology and telecommunications | 101 | 13 | 108 | 15 |
| Depreciation and amortization | 71 | 9 | 73 | 10 |
| Other operating expenses | 97 | 13 | 76 | 11 |
| Total expenditures | 766 | 100 | 721 | 100 |
The year 2022 represents the first year of the Bank’s 2022–24 strategic plan, Delivering on Our Promise. The Bank’s financial management framework supports strategic planning and allows for decisions on allocating resources to achieve the Bank’s objectives, mitigate risks and invest in the Bank’s people and tools in a fiscally prudent manner.3
Outside of staff costs, which represent the largest portion of the Bank’s expenditures, expenditures include the cost of enhancing systems and tools. These expenditures support operations to sustain the Bank’s resilience posture and prepare for the future. They also support the Bank’s new mandate and its digital transformation, and they reduce the Bank’s risk.
The impact of the pandemic on the Bank’s expenditures is expected to continue throughout the remainder of 2022. The Bank is monitoring the resulting effects on work plans and shifts in expenditures.
Operational highlights and changes
Significant changes in personnel, operations and programs have occurred since June 30, 2022.
Governing Council and Board of Directors
Deputy Governor Timothy Lane retired on September 16, 2022. Mr. Lane joined the Bank in August 2008 as an Advisor to the Governor and was appointed Deputy Governor in February 2009.
Operations and programs
The Bank announced an increase of 100 basis points in the policy interest rate on July 13, 2022. On September 7, 2022, it announced a 75-basis-point increase, and on October 26, 2022, it announced a further 50-basis-point increase.
Risk analysis
The “Risk management” section of the Annual Report for the year ended December 31, 2021, outlines the Bank’s risk management framework and risk profile. It also reviews the key areas of risk—financial, operational, strategic, and environmental and climate-related. The financial risks are discussed further in the notes to the financial statements of December 31, 2021, which are included in the Annual Report. Note 4 of the condensed interim financial statements for September 30, 2022, also provides an update on these financial risks. Although the pandemic has triggered more financial risks and volatility than usual involving some of the assets the Bank holds, those identified in the Annual Report remain the key risks for the Bank.
Condensed interim financial statements
- 1. Benefit costs for a given period are based on the discount rate as at December 31 of the preceding year (e.g., the rate at December 31, 2021, was used to calculate the benefit expenses for 2022). Discount rates and related benefit costs share an inverse relationship: as rates decrease, benefit expenses increase (and vice versa). The discount rates used to calculate the pension benefit plans and other benefit plan expenses ranged from 1.9% to 2.7% for 2021 and from 2.6% to 3.1% for 2022. This increase will result in decreased benefit costs for 2022, all else being equal.[←]
- 2. The net defined-benefit liabilities are measured using the discount rate in effect as at the period-end. The rate applicable to the net defined-benefit liabilities as at September 30, 2022, was 5.0% (range of 2.6% to 3.1% as at December 31, 2021). See Note 9 to the condensed interim financial statements for more information.[←]
- 3. The Bank’s forecasts for its operations do not include projections of net income and financial position. Such projections would require assumptions about interest rates, which could be interpreted as a signal of future monetary policy.[←]