Canada Mortgage Bond Purchase Program

Given falling oil prices, government-imposed lockdowns, and global economic uncertainty due to the COVID-19 pandemic, the BoC established the CMBP to “support the functioning of the CMB market and the ability of financial institutions to finance mortgage lending to Canadian homeowners” (BoC 2020c). The CMBP specifically allowed the BoC to purchase CMBs in the secondary market, as opposed to the bank’s regular operations, which allow the BoC to purchase CMBs in the primary market (BoC 2020c).

Alongside the CMBP, the BoC established several other measures to calm markets and lay the groundwork for a prospective economic recovery. The BoC enacted other large-scale asset purchase programs, such as the purchase of corporate bonds and provincial and federal government debt. Furthermore, through several liquidity programs, such as the Commercial Paper Purchase Program (CPPP), the BoC attempted to reduce the stress on short-term funding markets and to enhance market liquidity (BoC 2020a; BoC 2020f; Solovieva and Hostland 2020). These interventions by the central bank accompanied a suite of fiscal policies, which policymakers created to stabilize markets (Department of Finance Canada 2020).

Paragraph 18(g) of the Bank of Canada Act gives the Bank of Canada broad discretion to buy and sell securities in normal times (18[g][i])^FPrior to the Global Financial Crisis, the Bank of Canada Act limited the securities that the bank could buy and sell in normal times to short-term (less than 180-day) credit endorsed, accepted, or issued by a bank (Bank of Canada Act 1985). In 2008, Parliament broadened the scope of 18(g)(i) to allow the purchase or sale of any security issued by any person, other than equity interests. The 2008 revision also clarified that the Bank of Canada had this authority either “for the purposes of conducting monetary policy or promoting the stability of the Canadian financial system.” and in crisis times (18[g][ii]) (Bank of Canada Act 1985).^FSubparagraph 18(g)(ii) allows the bank to purchase any security in a crisis “if the Governor is of the opinion that there is a severe and unusual stress on a financial market or the financial system” (Bank of Canada Act 1985). This power has been in the act since 2001. During the COVID-19 crisis, the BoC gave itself the authority under 18(g)(i) to buy securities outright for CMBP and its other large-scale asset purchase and liquidity programs.

Since 2008, the act has allowed the bank to trade in virtually any security except equity interests in normal times; the crisis authority also extends to equities. The act requires the central bank to establish and publish a policy statement describing how it will administer 18(g)(i) during normal times (Canada Gazette 2008).

To date, the bank has never taken action under the crisis authority in 18(g)(ii). As such, the bank justified all emergency measures during the pandemic crisis by revising its policy statement under 18(g)(i).

The BoC first published that policy in July 2008. At the time, the bank’s policy allowed it to buy and sell securities only through purchase and resale transactions, or “buybacks.” For purposes of implementing monetary policy, the bank could buy and sell government of Canada bonds and Treasury bills, typically for a duration of just one day. However, the policy allowed the bank to buy and sell a much broader range of securities for purposes of managing financial system stress—for example, government securities issued by the US and other developed countries, Canadian corporate and municipal bonds, Canadian commercial paper, and Canadian asset-backed securities. The policy originally limited these “exceptional transactions” to terms of 180 days or less. The bank revised the policy in 2009 to allow terms up to 380 days, among other revisions (Canada Gazette 2009).

During the pandemic crisis, the bank made two small changes in language to the policy statement, with broad implications. First, on March 13, it gave itself the ability to “engage in outright purchase or sale transactions,” rather than buybacks only (Canada Gazette 2020a). Second, on March 18, it removed the 380-day limit on the terms of its transactions (Canada Gazette 2020b).

A board of directors oversaw the BoC. The board of directors comprised the BoC’s governor, deputy governor, and 12 directors. The board of directors approved the selection of the governor and deputy governor. The Bank of Canada Act required the governor and deputy governor to have financial experience, with each serving seven-year terms. The governor was charged with directing and conducting the BoC. The minister of finance, with approval from the governor-in-council, appointed directors, who served three-year terms. The BoC also had an Executive Committee, which comprised the governor, deputy governor, deputy minister of Finance, and two to four directors. The Executive Committee dealt with matters concerning the board of directors, keeping minutes that were later submitted to the board of directors (Bank of Canada Act 1985).

The minister of finance and the governor of the BoC consulted regularly on monetary and economic policy. The minister of finance could submit to the BoC a directive concerning monetary policy, in cases when the minister of finance and the governor disagreed. In such cases, the BoC was required to comply with the minister of finance’s directive, which would be published in the Canada Gazette and presented to Parliament (Bank of Canada Act 1985).

Pursuant to Paragraph 18.1(1-2) of the Bank of Canada Act, when the governor took action under Paragraph 18(g), as was the case with the CMBP, the BoC was required to publish its policy in the Canada Gazette.

The BoC was subject to internal audit, with the governor responsible for appointing two auditors, with recommendation from the minister of finance. These auditors would conduct annual audits of the BoC. The minister of finance could require audits of the BoC and enlarge the scope of the audit beyond that of the yearly audit. All audits were submitted to the minister of finance and the BoC (Bank of Canada Act 1985).

Within two months of the fiscal year’s end, the BoC was required to send the minister of finance its audited financial statements. These financial statements were published in the Canada Gazette. A report that the governor considered desirable or that was required by the minister of finance also accompanied these financial statements. The minister of finance would then present this report to Parliament.

The BoC purchased CMBs on a twice-weekly basis, targeting purchases of CAD 500 million per week. The BoC purchased CMBs directly from banks and other primary dealers through a competitive tender process (BoC 2020c).

Given the COVID-19-related economic downturn, the BoC enacted various policies to ensure that financial institutions could extend credit to Canadian households and businesses. Purchasing CMBs was the BoC’s primary tool to support the CMB market and facilitate mortgage lending (BoC 2020c).

All in all, the BoC officials deemed the intervention successful (BoC 2021d). As a result, the CMBP was discontinued on October 26, 2020. Nevertheless, the BoC communicated that it remained committed to ensuring market liquidity and that, if necessary, it could restart the CMBP (BoC 2020b).

During the CMBP’s operation, the BoC reported the results of individual transactions and its aggregate holdings of CMBs weekly on its balance sheet. The BoC disclosed the details of its purchases online, after each operation (BoC 2020c). The BoC also released more specific data about individual holdings, including CMBs, their maturities, and their coupon rates (BoC 2021b).

Pursuant to the Bank of Canada Act, these disclosures exceeded the BoC’s legal obligation. Pursuant to Paragraph 29(1-2) of the Bank of Canada Act, the BoC must weekly report its aggregate assets and liabilities and monthly report its holdings of government securities, including CMBs.

The sources consulted suggest that the CMBP did not use a special-purpose vehicle (SPV).

Originally, the BoC aimed to purchase up to CAD 500 million of CMBs per week. The bank conducted the purchases with primary dealers twice a week. However, the BoC remained open to the possibility of increasing both the total amount of CMBs purchased and the rate at which it purchased CMBs. The BoC did not establish an overall size limit for the CMBP. Purchases neared the CAD 500 million target early in the COVID-19 pandemic; however, after August 2020, the CMBP was only used to purchase between CAD 70 million and CAD 190 million of the BoC’s weekly capacity. In its six months of operation, the BoC purchased CAD 8 billion of CMBs through the CMBP, expanding the BoC’s balance sheet (BoC 2020c; BoC 2021c).

The CMBP, in addition to other COVID-19-related policies, was launched by the BoC and funded by its balance sheet (BoC 2020g; Gravelle 2020). The BoC’s total holdings of CMBs rose from just more than CAD 1 billion to more than 9 billion through CMBP operations (see Figure 1).

The BoC dealt directly with primary dealers to purchase CMBs, as part of the CMBP. These purchases occurred in the secondary market. According to its policy for buying and selling securities, established in 2008, the BoC has a separate policy for transactions in the normal course of business and in exceptional circumstances (Canada Gazette 2008). This differs from the BoC’s traditional procedure, which requires the BoC to purchase CMBs in the primary market “on a non-competitive basis, directly with the Canada Mortgage and Housing Corporation (CMHC)” (BoC 2020c).

The BoC established the CMBP as a standing facility that would purchase CMBs at twice-weekly intervals on the secondary market with a target of up to CAD 500 million worth of purchases per week (BoC 2020c).

The CMBP was an outright purchase program in which the BoC purchased CMBs on the secondary market (BoC 2020c; BoC 2020i).

CMBs are assets backed by the CMHC, which helps stabilize access to mortgage funding. CMBs pool eligible insured mortgages into securities, which are sold to investors, the funds of which are used to finance residential mortgages (CMHC 2019). The Canadian government guarantees CMBs, with the timely payment of principal and interest (CMHC 2022).

According to its policy for buying and selling securities, established in 2008, the BoC has a separate policy for transactions in the normal course of business and in exceptional circumstances (Canada Gazette 2008). In the normal course of business, the BoC purchases CMBs as a means of managing its balance sheet. These normal operations are conducted in the primary market for CMBs with the CMHC. These transactions occur on a “non-competitive basis.” In exceptional circumstances, as under the CMBP, the BoC conducts operations “to support the functioning of the CMB market and the ability of financial institutions to finance mortgage lending to Canadian homeowners” (BoC 2020c). These operations occurred in the secondary market for CMBs, directly with primary dealers. The CMBs purchased by the BoC range in their maturities. Data released by the BoC indicate that the earliest CMBs fully mature in 2021, while others fully mature in 2030 (BoC 2020c).

The BoC purchased CMBs from primary dealers through a competitive tender process (BoC 2020c). No data are available regarding the specific purchase prices for CMBs, though data are available about the BoC’s specific holdings of CMBs (BoC 2021d).

There were no haircuts associated with the CMBP.

There were no interest rates associated with the CMBP.

The BoC did not charge fees to primary dealers, from whom the BoC was purchasing CMBs (BoC 2020c).

As an asset purchase program, there was no term associated with the CMBP.

To implement the CMBP, the BoC worked specifically with primary dealers, as opposed to the CMHC (BoC 2020c).

The sources consulted do not signal that any regulatory relief accompanied the CMBP.

According to the sources consulted, the CMBP did not entail any international cooperation.

On October 15, 2020, the BoC announced that it would be discontinuing its operations through the CMBP on October 26, 2020. The BoC explained its decision to discontinue the CMBP, writing that “usage in several of the Bank of Canada’s programs that support the functioning of key financial markets has declined significantly” (BoC 2020b). Notably, after August 2020, purchases through the CMBP were below the BoC’s stated weekly target of CAD 500 million of CMBs. Operations through the CMBP were ended, as scheduled, on October 26, 2020 (BoC 2020b; BoC 2020c). However, the BoC asserted that “discontinued facilities [like the CMBP] can be restarted if necessary” (BoC 2020b).