Toni Gravelle: Market stress relief - the role of the Bank of Canada's balance sheet

Remarks (delivered virtually) by Mr Toni Gravelle, Deputy Governor of the Bank of Canada, to the CFA Society Toronto, Toronto, Ontario, 23 March 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

Good afternoon. I always enjoy engaging with CFA charterholders, even virtually.

It's hard to believe we've been dealing with COVID-19 for as long as we have. The past year has had a profound impact on people's lives, both in terms of their health and their economic and financial well-being.

Canadians count on the Bank of Canada to make sure that the financial system works smoothly, especially in tough times when they depend on credit more than usual. So, a year ago, the Bank took unprecedented actions to ensure that the financial system could keep functioning normally and the economy could recover.

Those goals are intertwined. Markets have to work for the economy to work-not just for bankers and investment managers, but for Canadians of all walks of life.

An essential part of markets working well is liquidity: the ability to buy, sell, lend or borrow with relative ease. Think of it as the grease that keeps markets lubricated.

When COVID-19 struck last year, it caused enormous uncertainty about how the next weeks and months would play out. And whenever the economic outlook becomes extremely uncertain, market participants seek to hold cash. Suddenly, investors large and small were scrambling to sell their financial assets-even those normally considered risk-free, such as Government of Canada bonds-so they could meet their margin calls and build up their cash buffers. With this dash for cash so widespread, everyone was looking to sell assets and few were willing to buy. Markets came under extreme stress and seized completely. Households and businesses also became extra cautious: companies were drawing down their lines of credit at an unusually fast pace, and households were building up their savings or deferring loan payments.