What Is the Central Bank in Canada and What Functions Does It Perform?

A central bank is a financial institution tasked with the responsibility of managing the production and distribution of currency. It also provides a facility for government and commercial banks to access the financial services they need to run their operations. In essence, a central bank is a bank that governments and commercial institutions take their business to.

The Central bank of Canada sometimes referred to as the CBC, is known officially as the Bank of Canada. Its role is defined in the Bank of Canada Act as codified in 1985. The bank is led by a Governing Council consisting of the Governor, Senior Deputy Governor, and four Deputy Governors. Each Deputy Governor has specific responsibilities and reports to the Senior Deputy Governor and Governor.

There is also an Executive Council consisting of the bank’s CEO and the members of its Governing Council. This particular council is responsible for charting the central bank’s overall direction, whereas the Governing Council is tasked with overseeing day-to-day operations.

Monetary Policy

The Bank of Canada’s biggest role is to manage Canada’s economy and finances. They have four responsibilities through which they do so. The first is to take responsibility for monetary policy. In any government, monetary policy consists of those individual policies that determine the money supply. Setting and managing said policies is all about determining how much cash is in circulation at any given time.

Like most other central banks, the Bank of Canada can control the money supply through a number of different strategies. One strategy is to increase or decrease interest rates accordingly. When the bank’s leaders decide the economy needs more spending, they reduce interest rates. The idea is to encourage businesses and individuals to borrow and spend. Increasing interest rates can slow down spending and rein in inflation.

Currency Management

The Bank of Canada also has the responsibility of managing currency. As such, the bank is fully responsible for all issues relating to Canadian banknotes. They design new notes, issue those notes and distribute them through commercial and retail banks. The CBC ultimately decides how much cash is made available at any point in time.

A little education reveals just how important currency management is. The value of the Canadian dollar is influenced primarily by three things: the state of our economy, the value of our imports and exports, and the amount of actual cash in circulation. Too much cash in the system leads to a decrease in value. The opposite is also true. As such, the Central Bank of Canada must walk a fine line in hopes of keeping currency levels perfectly balanced with the rest of the economy.

Managing Government Funds

As the government’s bank, the Bank of Canada is responsible for managing all government funds. It is responsible for managing government debt, making international payments, insuring foreign exchange reserves and the like. Anything the federal government must do with its finances is run through the Bank of Canada.

Financial System Monitoring

This final area of responsibility is a bit vaguer. The Bank of Canada is responsible for monitoring the nation’s financial system, both domestically and as it relates to other financial systems around the world. Monitoring is expressly for the purpose of intervening to make sure Canada’s system remains safe and stable.

The bank’s monitoring responsibilities include conducting both domestic and foreign transactions for the purposes of maintaining stability. The bank essentially supports its other three goals through its monitoring and intervening transactions.

In Summary

All of the technical information about the Bank of Canada might be confusing to people who do not possess a lot of knowledge about Canada’s banking system. The best way to understand the CBC is to know that it is the government’s bank. The Bank of Canada is the financial institution that supports Canada’s federal government in all things financial. It provides financial services to the nation’s commercial banks as well. That’s really it in a nutshell.