For the period ended June 30, 2024, 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 August 21, 2024.
This Quarterly Financial Report should be read in conjunction with the condensed interim financial statements for the second quarter of 2024 included in this publication and with the Bank’s Annual Report 2023. Disclosures and information in the Annual Report apply to the current quarter unless otherwise updated in this quarterly report.
Supporting the economy and the financial system
After the onset of the COVID‑19 pandemic, the Bank has used extraordinary measures to restore the proper functioning of financial markets and support the economic recovery. In response to high inflation following the reopening of the Canadian economy, the Bank rapidly raised its policy rate and undertook quantitative tightening, in which maturing bond holdings are not being replaced. Based on continued evidence that underlying inflation is easing, the Bank lowered the overnight rate in June and again in July and is continuing its policy of balance sheet normalization. Refer to the Bank’s website for more information on these measures, including the relevant press releases and market notices.
Managing the balance sheet
| Financial position (in millions of Canadian dollars) |
|||
|---|---|---|---|
| As at | June 30, 2024 | December 31, 2023 | June 30, 2023 |
| Assets | |||
| Loans and receivables | 13 | 6 | 4 |
| Investments | 247,309 | 292,341 | 327,560 |
| Derivatives—indemnity agreements with the Government of Canada | 24,604 | 23,406 | 28,834 |
| All other assets* | 1,095 | 1,023 | 1,108 |
| Total assets | 273,021 | 316,776 | 357,506 |
| Liabilities and deficiency | |||
| Bank notes in circulation | 117,925 | 119,430 | 117,712 |
| Deposits | 158,496 | 196,212 | 224,910 |
| Securities sold under repurchase agreements | 3,850 | 6,638 | 17,726 |
| Other liabilities | 307 | 342 | 296 |
| Deficiency | (7,557) | (5,846) | (3,138) |
| Total liabilities and deficiency | 273,021 | 316,776 | 357,506 |
* All other assets includes Cash and foreign deposits, Capital assets and Other assets.
The Bank’s holdings of financial assets stem from its unique role as the exclusive issuer of Canadian bank notes and its activities related to monetary policy and the financial system. The total value of assets on the Bank’s balance sheet has declined due to the Bank’s quantitative tightening measures, which were put in place after market conditions and economic performance improved. The Bank’s total assets decreased by 14% to $273,021 million as at June 30, 2024, compared with their value as at December 31, 2023. The main driver of this decline was the maturity of investments.
Investments decreased by 15% compared with December 31, 2023, to $247,309 million as at June 30, 2024. 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 $39,950 million during the first six months of the year. This decline is mainly due to the bonds maturing. This resulted in a decline of $28,562 million in Government of Canada bonds held at fair value and a decline of $11,388 million in Government of Canada bonds held at amortized cost.
- The Bank engages in repo operations, which provide market participants with a temporary source of Government of Canada securities and provincial bonds on an overnight basis. These operations also improve the availability of the Bank’s holdings of Government of Canada securities. The volume of securities repo operations declined during the first six months of 2024, resulting in a decrease of $2,904 million in securities lent or sold under repurchase agreements, compared with December 31, 2023.
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 $24,604 million balance represents the fair value of the derivatives associated with the net unrealized losses on these assets as at June 30, 2024. Derivatives increased by $1,198 million during the six-month period, due to a slight increase mainly in long-term bond yields. This is represented in the asset profile chart by All other assets.
Bank notes in circulation represents approximately 42% (37% as at December 31, 2023) of the Bank’s total liabilities. Bank notes in circulation decreased by 1% compared with December 31, 2023, to $117,925 million as at June 30, 2024. This decrease reflects seasonal variation in demand for bank notes.
Deposits consists of deposits made by the Government of Canada, members of Payments Canada and others. This balance declined by 19% to $158,496 million as at June 30, 2024, compared with December 31, 2023, reflecting continued balance sheet normalization.
Securities sold under repurchase agreements decreased by 42% to $3,850 million as at June 30, 2024, compared with December 31, 2023. 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 are conducted as needed and help to effectively implement monetary policy by withdrawing intraday liquidity, which complements the standing deposit and lending facilities.
Deficiency increased to $7,557 million as at June 30, 2024, as a result of comprehensive losses of $1,711 million for the first six months of the year. As at June 30, 2024, the accumulated deficit was $8,582 million. Deficiency also includes the following offsetting amounts: $5 million of authorized share capital, a special reserve of $100 million, an investment revaluation reserve of $495 million and an actuarial gains reserve of $425 million, each as at June 30, 2024. Refer to Note 10 in the condensed interim financial statements for more information about the Bank’s deficiency.
Results of operations
| Results of operations (in millions of Canadian dollars) |
||||
|---|---|---|---|---|
| For the three-month period ended June 30 |
For the six-month period ended June 30 |
|||
| 2024 | 2023 | 2024 | 2023 | |
| Interest revenue | 863 | 1,009 | 1,736 | 1,978 |
| Interest expense | (1,611) | (2,339) | (3,249) | (4,658) |
| Net interest expense | (748) | (1,330) | (1,513) | (2,680) |
| Other revenue | 10 | 7 | 12 | 9 |
| Total loss before operating expenses | (738) | (1,323) | (1,501) | (2,671) |
| Total operating expenses | (172) | (169) | (343) | (331) |
| Net loss | (910) | (1,492) | (1,844) | (3,002) |
| Other comprehensive income (loss) | 13 | (14) | 133 | (39) |
| Comprehensive loss | (897) | (1,506) | (1,711) | (3,041) |
The Bank incurred net losses of $910 million and $1,844 million for the three- and six-month periods ended June 30, 2024, respectively. These losses occurred primarily because the interest expense incurred on deposits was greater than the interest earned on investments. This net interest expense was a result of the Bank increasing its policy rate from 0.25% in the first quarter of 2022 to a peak of 5.00% in the third quarter of 2023 before reducing it to 4.75% in the second quarter of 2024. In time, the Bank will resume generating net income. The net losses do not affect the Bank’s ability to carry out its mandate.
Interest revenue depends on market conditions, the impact of those conditions on the interest-bearing assets held on the Bank’s balance sheet, and the volume and blend of these assets. The Bank earns interest on its investments in Government of Canada securities, on securities purchased under resale agreements (if any) and on assets acquired through large-scale asset purchase programs. In the second quarter and the first six months of 2024, interest revenue decreased by $146 million (or 14%) and $242 million (or 12%), respectively, compared with the same periods in 2023. This decline was driven by the Bank’s lower average holding of interest-yielding investments throughout the period, which was partially offset by a slight increase in the average yield on investments.
Interest expense consists mainly of interest incurred on deposits held by the Bank. During the second quarter and the first six months of 2024, the interest expense decreased by $728 million (or 31%) and $1,409 million (or 30%), respectively, compared with the same periods in 2023, resulting from a lower average volume of deposits during the period. The decrease was partially offset by the Bank’s policy interest rate, which was generally higher than during the same period in 2023.
Operating expenses for the second quarter and the first six months of 2024 increased by 2% and 4%, respectively, compared with the same periods in 2023. This primarily reflects an increase in costs for staff and for technology and telecommunications, although the increase was partially offset by a decrease in costs for bank note research, production and processing and in other operating expenses.
- Staff costs increased by $13 million (or 15%) and $28 million (or 16%) in the second quarter and the first six months of 2024, respectively, compared with the same periods in 2023, as a result of the following changes:
- Salary costs increased by $9 million (or 7%) for the first six months of 2024 as positions were filled to deliver the Bank’s core functions, including the new function of retail payments supervision. The annual compensation adjustment also contributed to the increase.
- Benefits and other staff costs increased by $19 million (or 41%) for the first six months of 2024, due in part to an increase in the expense associated with the Bank’s defined-benefit plans as a result of a decrease in the discount rates used for the calculation.1 This increase was also due to higher premiums for health benefits.
- Bank note research, production and processing expenses decreased by $10 million (or 91%) and $12 million (or 86%) in the second quarter and the first six months of 2024, respectively, compared with the same periods in 2023. This decrease was driven by a decline in the volume of bank notes being printed, which varies from one year to the next based on the annual production plan and market demand.
- Technology and telecommunications costs increased by $5 million (or 20%) and $6 million (or 11%) in the second quarter and the first six months of 2024, respectively, compared with the same periods in 2023. This increase was driven by the Bank’s continued focus on strengthening the resilience of its information technology systems and by technology costs to build the Bank's new retail payment supervision system.
- Other operating expenses decreased by $4 million (or 21%) and $8 million (or 22%) in the second quarter and the first six months of 2024, respectively, compared with the same periods in 2023. This decline was driven primarily by the completion in 2023 of the Bank’s outsourced operational contract for the Unclaimed Properties Office and the Bank’s shift to internal solutions for 2024.
Other comprehensive income for the six-month period ended June 30, 2024, was $133 million. It includes a remeasurement gain of $101 million on the Bank’s defined-benefit plans, which is primarily due to increases in discount rates.2 It also includes a $32 million increase in the fair value of the Bank’s investment in the Bank for International Settlements.
Comprehensive loss for the six-month period ended June 30, 2024, was $1,711 million, due primarily to the net loss of $1,844 million incurred during that period.
Looking ahead through 2024
| The Bank’s 2024 Plan (in millions of Canadian dollars) |
||
|---|---|---|
| 2024 budget | ||
| For the year ended December 31 | $ | % |
| Staff costs | 379 | 54 |
| Bank note research, production and processing | 13 | 2 |
| Premises costs | 34 | 5 |
| Technology and telecommunications | 122 | 17 |
| Depreciation and amortization | 74 | 10 |
| Other operating expenses | 85 | 12 |
| Total expenditures | 707 | 100 |
The year 2024 represents the last year of the Bank’s 2022–24 strategic plan, Delivering on Our Promise. The Bank’s financial management framework enables decisions about allocating resources to achieve the Bank’s objectives and mitigate risks in a prudent fiscal manner.3
Staff costs continues to represent the largest portion of the Bank’s expenditures, while production costs for bank notes are expected to decrease due to existing reserves. Other expenditures include the cost of enhancing systems and tools to support operations, sustain the Bank’s resilience posture and prepare for the future. These costs also contribute to fulfilling the Bank’s new core functions, advancing its digital transformation and mitigating risks.
Operational highlights and changes
Changes in personnel, operations and programs have occurred since March 31, 2024.
Governing Council and Board of Directors
Debora Bielecki resigned from the Board of Directors effective June 13, 2024.
Operations and programs
The Bank announced a decrease of 25 basis points in the policy interest rate on June 5, 2024. On July 24, 2024, it announced a further 25-basis-point decrease in the policy interest rate.
Risk analysis
The Bank’s risk management framework and risk profile are discussed in the Annual Report 2023. This section 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, 2023, which are included in the Annual Report. Note 4 of the condensed interim financial statements for June 30, 2024, also provides an update on these financial risks. Although the pandemic triggered more financial risks and volatility than usual involving some of the assets the Bank holds, the risks identified in the Annual Report remain the key ones for the Bank.
In May 2024, the Bank released its second annual Disclosure of Climate-Related Risks 2023, outlining the risks that climate change poses to its mandate and operations. This is a stand-alone report, prepared in accordance with recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure.
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, 2023, was used to calculate the benefit expenses for 2024). 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 5.0% to 5.1% for 2023 and are at 4.6% for the first six months of 2024. This decrease will result in increased benefit costs for 2024, 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 June 30, 2024, was a range of 4.9% to 5.0% (4.6% as at December 31, 2023). 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.[←]