Bank of Canada Annual Report 2006 · policy interest rate (the target for the overnight interest...

2006A n n u A l R e p o R t

As a public institution

and a workplace, we

take our bearings from

our commitment to

Canadians, to excellence,

and to one another.

THE BANK’S COMPASS

Our commitment to CanadiansTo promote the economic and financial welfare of Canada, we

conduct monetary policy in a way that fosters confidence in the value of moneysupply quality bank notes that are readily accepted and secure against counterfeitingpromote the safety and efficiency of Canada’s financial systemprovide efficient and effective funds-management servicescommunicate our objectives openly and effectively and stand accountable for our actions

Our commitment to excellenceBuilding on our strengths, we aim to meet our commitment to Canadians through performance that is second to none among the central banks of the world.

We strive for excellence through leading-edge research and analysis, through partnerships within the Bank and with outside organizations, and through

innovation in all aspects of our workleadership that spurs us on to new successintegrity in our business and in our actionsdiversity of people and ideas

Our commitment to one anotherWe aim to achieve our best in a workplace where we

communicate clearly and openlyshare knowledge and experiencedevelop our talents and careersrecognize those who live up to our commitmentsrespect one another and our lives outside work

Bank of Canada234 Wellington StreetOttawa, Ontario K1A 0G9

FB1-2006 978-0-662-49716-5

B a n k o f C a n a d a A n n u A l R e p o Rt 2 0 0 6

27February2007

TheHonourableJamesMichaelFlaherty,PC,MPMinisterofFinance140O’ConnorStreet21stFloorOttawa,OntarioK1A0G5

DearMinister,

InaccordancewiththeprovisionsoftheBankofCanadaAct,IamsubmittingtheBankofCanada’sAnnualReportfortheyear2006andtheBank’sauditedfinancialstatementsasat31December2006.

Yourssincerely,

David A. DodgeGovernor – Gouverneur

t A b l e o f c o n t e n t s

4 MessagefromtheGovernor

10 Governance

18 MonetaryPolicy

24 Currency

30 FinancialSystem

36 FundsManagement

40 LookingAhead

46 FinancialDiscussion

51 FinancialStatements

74 SeniorOfficers

M e s s A G e f R o M t H e G o V e R n o R

The year 2006 marked a turning point for the Bank of Canada. We successfully

completed our medium-term plan, TheWayForward, and began writing

a fresh chapter in the Bank’s history based on a new three-year plan. In this

annual report, we do more than give an accounting of past achievements. We also provide forward-looking

information on the plans and priorities in our new medium-term

plan. And as we advance, we are always mindful of the Bank’s original mandate, set out more than 70 years

ago, to “promote the economic and financial welfare of Canada.”

David Dodge, Governor

PolicyDevelopments:2006

Maintaininglow,stable,andpredictableinflationremainscentraltohowtheBankmeetsitscoreresponsibilityofpromotingtheeconomicandfinancialwelfareofCanadians.Ourcommitmenttothisgoalwasreaffirmedthroughtherenewaloftheinflation-targetingagreement,whichwasannouncedjointlywiththefederalgovernmentinNovember.

Overthepastyear,globaleconomicforcescontinuedtonecessitateconsiderableadjust-mentacrossregionsandsectorsoftheCanadianeconomy.Atthesametime,varia-bilityinenergypricesmeantsomesizableswingsintheconsumerpriceindex.Inflationmovedfromahighof2.8percentinJanuarytoalowofonly0.7percentinSeptember.Thecorerateofinflationopened2006some-whatbelow2percent,butbytheautumn,hadmovedjustabove2percent.Thisriseincoreinflationwasconsistentwithanoveralleconomythatwasoperatingslightlyabovethelimitsofitscapacity.Againstabackgroundofincreasingpressuresoncapacitythroughthefirsthalfoftheyear,theBankraiseditspolicyinterestrate(thetargetfortheovernightinterestrate)onfouroccasions.Thatbroughtthetargetrateto4.25percentbyJuly,whereit

remainedthroughthebalanceoftheyear.Inthesecondhalfoftheyear,wejudgedthattheprincipalupsideriskstoouroutlookforinflationwererelatedtothemomentuminhouseholdspendingandhousingprices,whilethemaindownsideriskwasasharperslowdownintheU.S.economythanwaspreviouslyexpected.Theseriskswereseentoberoughlybalanced.

In2006,wealsocompletedtherolloutofthenewCanadian Journeyseriesofbanknotes,whichcarrysuchup-to-datesecurityfeaturesasametallicholographicstripe,awatermarkportrait,awindowedcolour-shiftingthreadwovenintothepaper,andasee-throughnumber.Withthisnewseriesofnotesandthebenefitsofthepartnershipsdescribedbelow,wesawrealprogressinthefightagainstcounterfeiting,asthevalueandnumberofcounterfeitnotesdroppedforthesecondyearinarow.

Giventheimportanceofwell-functioningCanadianandinternationalfinancialsystemsintoday’sglobaleconomy,theBankputagreatdealofeffortthispastyearintoresearchingandpromotingfinancialsystemefficiencyandinadvocatingforastrongerandmoreeffectiveInternationalMonetaryFund.

“TheWayForward”2003–06

As2006cametoaclose,so,too,didworkun-derthemedium-termplanlaunchedin2002:The Way Forward.Overthepastfouryears,wehaveachievedthesignificantobjectivessetoutunderthisprogram.TheseobjectivesweredesignedtohelpusbetterfulfillourcommitmentstoCanadians,whilestrivingtobeattheforefrontoftheworld’scentralbanks.Ourobjectiveswereorganizedintothreebroadthemes–research,partnerships,andcommunications–thatcutacrossalltheBank’sfunctions.

OurcommitmenttoresearchwasapparentinoureffortstobolstertheBank’sanalyticalcapacity.Withouremphasisonattractingandretainingthebestpersonnel,wehavebeenabletodeliverhigh-qualityresearchandcurrentanalysisoftherapidlychangingglobalandCanadianeconomies.Thishasbeeninvaluableinsupportingourconductofmonetarypolicy.Ourenhancedresearcheffortshavealsoincludedfinancialsectorpoliciesandhowbesttopromotethestabilityandefficiencyofourfinancialsystem.

Thislong-standingcommitmenttoresearchalsoappliestolonger-termprojects.Researchandanalysiswerecrucialintherenewaloftheinflation-controlagreement.Intherenewal,theBankclarifiedseveralaspectsoftheinflation-targetingsystemandsetoutaresearchprogramtodeterminewhetherandhowitmightbepossibletofurtherimprove

ourinflation-controlframeworkforthedecadesahead.

Ouremphasisonresearchcanbeseenthroughthebreadthofotherresearchthemesdiscussedlaterinthisreport.HereIwouldliketoparticu-larlynotethedevelopmentandimplementationofanewmodelforeconomicprojectionsandpolicyanalysis,knownastheTerms-of-TradeEconomicModel(ToTEM).ThismodelbuildsonthestrengthoftheBank’searliermodelfortheCanadianeconomy.ButToTEM,bytakingadvantageoftheleapsintechnologicalprogressineconomicsandcomputingpowermadeoverthepastdecade,providesaricherdescriptionoftheCanadianeconomy.

Thethemeofpartnershipswasillustratedbyourachievementsinthecurrencyfunction.Wedevelopedacomprehensiveeducationandawarenessprogramtohelpretailersandthepublictodistinguishgenuinenotesfromcounterfeits.TheBankhasalsocollaboratedcloselywithlaw-enforcementagenciesandothercentralbankstocombatcomputer-basedcounterfeiting.Aninformationnetworkhasbeencreatedtoenhancefederal,provincial,andterritorialprosecutors’awarenessofcounterfeitingandtopromotethetoolsavailableforsuccessfulprosecutionofcounterfeitingcrimes.

TheBank’semphasisonpartnershipsalsosupportedourfunds-managementfunction.Asfiscalagenttothefederalgovernment,weworkedwithboththegovernmentand

financialmarketparticipantstoimprovethefunctioningofmarketsforgovernmentdebt.Wealsoimprovedtheefficiencyoftheauctionprocessforgovernmentbondsandtreasurybills.

PartnershipswiththeacademicworldwerealsobolsteredbytheestablishmentoftheBankofCanadaFellowshipProgram,aprogramthataimstorecognizeandencourageresearchinareasofparticularimportancetothefunctionsoftheBank.

Wehaveworkedhardtomakeourworkmoretransparent,recognizingthatpoliciesaremosteffectivewhentheyarewellcommunicatedandwidelyunderstood.Themedium-termplan’sthemeoffosteringclear communicationemphasizedthatcommitment.OurMonetary Policy Reportandpressreleasesissuedatthetimeofourinterestrateannouncementshaveprovidedmoredetailsaboutourassumptions,analyses,andeconomicprojections.MembersofourGoverningCouncilhavecontinuedtospeakonmonetarypolicyissuesgenerally,tobetterexplainsuchtopicsaschangesintheglobaleconomy,theimpactofemergingmarketsinAsia,andexchangeratemovements,tocitejustafewexamples.

Ourcommitmenttocommunicationhasalsounderpinnedourachievementsinthefinancialsystemfunction,wherewehaveprovidedmorein-depthanalysisoffinancialstabilityandefficiencyissuesthroughourFinancial System Review.Overthepastfouryears,wehave

expandedourknowledgeoffinancialsystemissues,andhavecommunicatedthistoCanadians.Wehavealsoenhancedtrans-parencybyimprovingourwebsitetomakeawidevarietyofinformationmorereadilyavailabletoallCanadians.

Ourmedium-termplan,The Way Forward,wasextendedtofouryearsfromtheoriginalthreetodealwithanumberofissuesthatarose.Forexample,weidentifiedaneedtostrengthenourplanningforcontinuityofoperationsandtorenewseveralaspectsofourinfrastructure.Wecontinuetoworkontheseissues,andtheyformpartofthefoundationofournewmedium-termplan.

“MovingForward”:TheNewMedium-TermPlan2007–09

Overthenextthreeyears,wewillcontinuetoconductmonetarypolicywiththegoalofkeepinginflationat2percent.Atthesametime,wewillembarkonaresearchprogramtoseewhetherourverysuccessfulinflation-controlframeworkcanbemadeevenbetter.Wewillbeaskingresearcherstofocusontwomainquestions.First,whatwouldbethecostsandbenefitsofaninflationtargetlowerthan2percent?Second,whatwouldbethecostsandbenefitsofreplacingthecurrentinflationtargetwithalonger-term,price-leveltarget?Wehopeotherswilljoinusinthiseffortwiththegoalofcompletingthisresearchwellbeforethecurrentagreementexpiresin2011.Wewill

trytoimproveourunderstandingoftheimpactofglobalizationontheCanadianeconomy,examinetheeffectsofdemographicchangesonproductivityandtheeconomy,andlookforwaystoimprovetheeffectivenessoftheBank’smonetarypolicy.

WewillworktobolsterpublicconfidenceinCanada’sbanknotesthroughfurtherreductionsincounterfeiting.TheBankhassetasagoalreducingthenumberofcounterfeitsbyover50percentby2009.Researchwillbeconductedonnewsecurityfeatures,themes,anddesignsforthenextgenerationofbanknotes.Wewillcontinuetostrengthenourrelationshipswithmerchants,police,andprosecutors.Andbecausecounterfeitingisaworldwideproblem,workonthesegoalswillcontinuewithothercentralbanksandsecurityspecialists.

Overthespanofthenextmedium-termplan,theBankintendstocontinueimprovingitscapacitytooverseemajorclearingandsettle-mentsystemsandimprovethecollectionanduseoffinancialdata.WewilldevelopbetterwaystoassessthestabilityofthefinancialsystemandtheefficiencyoftheCanadianfinancialsector.EffortstohelpreformtheInternationalMonetaryFundwillcontinue,tomakeitmorerelevantandimportantintoday’sglobaleconomy.

TocontinuetoeffectivelymanagetheGovernmentofCanada’sdebt,cash,andforeignexchangereserves,aswellastheBankofCanada’sownfinancialassets,wewillaim

inthecomingthreeyearstorenewourfunds-managementsystemsandtoenhanceouranalyticcapabilities.

Incarryingoutthisnewplan,therearethreebank-wideprioritiesinvolvinginvestmentsoverthethreeyearsoftheplan.Theprioritiesare:renewingourinfrastructure;creatingasuperiorworkenvironment;andstayingattheforefrontofgoodgovernancetopreservethetrustofCanadiansinourongoingstewardshipoftheBank.Toattractandretainqualifiedandtalentedstaff,theBank’shumanresourcestrategyencompassesofferingdistinctivechallengesanddevelopmentopportunities,competitivetotalcompensation,andadistinctiveworkenvironment.

Youcanfindthemedium-termplanonourwebsiteatAbout the BankunderManagement and Administration.

ConcludingComments

AsIsaidearlier,thisannualreportgoesbeyondarecountingofpastachievementsinourfourfunctions:monetarypolicy;currency;financialsystem;andfundsmanagement.Italsosetsoutourgoalsandprioritiesforthemediumterm.Furtherdetailsandstrategiesforachievingthesegoalscanbefoundwithinthisannualreport.

TheBankofCanada’sstrongreputationanditsabilitytocontinuetosucceedrelyontheskillsandprofessionalismofitsentirestaff.Iwant

topersonallythanktheemployeesoftheBankfortheirhardworkin2006andthroughoutThe Way Forward.Iamgratefulfortheireffortsandfortheircommitmenttoexcellence.IalsowishtothankthemembersoftheBoardofDirectorsfortheircontinuingsupport.IespeciallywishtoexpressmyappreciationtotheDirectorswhosetermsexpiredin2006fortheirdedicatedservicetotheBankandtoCanadians.TheyareRonaldKeefe,DanielGallivan,J.SpencerLanthier,KitChan,andJimHinds.Sadly,JimHindsofSudbury,

Ontario,passedawayshortlyafterleavingourBoard.WeallbenefitedgreatlyovertheyearsfromJim’swisecounsel.

IwelcomeournewBoardmembersandlookforwardtoworkingwiththem.Canada’scentralbankwillcontinuetobeaccountabletoallCanadiansandtofulfillitsmandatetopromotetheeconomicandfinancialwelfareofCanadaanditscitizens.

CorporateGovernanceFramework

TheBank’scorporategovernanceframeworkisfoundedonwell-definedrolesandrespon-sibilitiestofulfillitsmandateandreliesonkeyelementssuchasstrategicplanning,riskmanagement,transparency,andclearaccount-abilityfortheprioritiessetbytheBankandfortheresultsachieved.

CentraltotheBank’sapproachtocorporategovernanceisthedevelopmentofathree-yearmedium-termplan.TheBoardofDirectorshasoverallresponsibilityforapprovingthestrategicdirectionandtheplanitself,andmonitorsprogressoftheplan’simplementation.

TheplansetsouttheBank’sstrategicprioritiesandfinancialplans,includesanintegratedanalysisofrelatedrisks,andprovidesperfor-mancemeasuresalignedwiththeobjectivesoftheplan.TheBoardconductsanannualreviewoftheBank’sstewardshiptotakestockofprogressandoftheoverallachievementoftheplan’sobjectives.

Riskmanagementisafundamentalelementofgovernance.TheBankidentifieskeyareasofrisk,basedonitsresponsibilitiesandstrategicpriorities.Inanannualassessment,seniormanagersexaminebusiness,reputational,financial,operational,security,anddisaster-recoveryrisks.TheyidentifyandassessrisksthatcouldimpedethefulfillmentoftheBank’s

G o V e R n A n c e

TheMandateoftheBank

As Canada’s central bank, the Bank is mandated to contribute to the economic well-being of Canadians. It does this by aiming to

keep inflation low, stable, and predictable; supplying safe and secure bank notes; promoting a stable and efficient financial system; and by overseeing

key clearing and settlement systems. As the Government of Canada’s fiscal agent, the Bank manages foreign exchange reserves, the public debt,

and treasury activities.

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objectives.Cost-effectivemitigationstrategiesareputintoplace,monitoredbymanagement,andreviewedperiodicallyaspartoftheinternalAuditDepartment’sworkplan.TheBank’sAuditDepartmentreportstotheAuditCommitteeoftheBoardandmeetswiththeCommitteeprivatelytodiscusstheeffectivenessoftheinternalcontrolsputinplacetomitigaterisks.TheBoardofDirectorsoverseestheentirerisk-managementprocess.

TheBankhasaFinancialRiskOfficeindepen-dentofoperations.Itmonitorsandreportsonrisksandinvestmentperformancearisingfromthemanagementofthegovernment’sdebtandforeignreserves.TheDepartmentofFinanceandtheBankhaveoversightresponsibilitiesfortheresultsofthismonitoring.

TheBankalsohasadetailedbusiness-continuityplaninplace.Thisplanhastwomainobjectives:toprovidethepublicwithcontinuityofcriticalbankingoperationsandtoprovideforthesafetyofBankstaffandtheprotectionofotherassets.

TransparencythrougheffectiveandregularcommunicationisanothercriticalpartoftheBank’sgovernanceframework.Regularappear-ancesbytheGovernorandSeniorDeputyGovernorbeforecommitteesoftheHouseofCommonsandtheSenate,togetherwithspeechesbyseniorofficials,publications,researchmaterial,andreportsonthewebsite,servetodemonstratetheBank’saccountabilityinachievingitspublicpolicyobjectives.TheBank’swebsite<www.bankofcanada.ca>regularlyprovidesinformationofinteresttothepublicaboutBankactivities.

Highlightsin2006

Amajoraccomplishmentin2006wastheapprovalofthenewmedium-termplan.ThroughtheprocessleadinguptoapprovaloftheplanbytheBoard,managementpresentedpossiblestrategicprioritiesfortheBoard’sconsideration.Afterseveralstagesofrefine-mentthattookaccountoftheBoard’sguidanceonrisksandonthefinancialframeworkfortheplan,afinalversionwasapprovedforathree-yearterm.Keyelementsofthenewplanarediscussedlaterinthisreport.

Inlightofdevelopinglabourmarkettrends,considerationofissuesrelatedtotheBank’scompensationstrategywerethesubjectofdiscussionsattheBoardandwiththeExecutiveManagementCommittee.ThecontextforthesediscussionsistheBank’shumanresourceframework,whichaimstoprovidestaffwithcompetitivelevelsofpayrelatedtocomparablemarkets,alongwithdistinctivechallengesandopportunitiesandasuperiorworkenvironment.TheseissueswillcontinuetorequireBoardattentionin2007.Inresponsetoconcernsaboutworkloadmanagement,Boardrequirementsandothercorporateprocesseswerereviewedtoidentifyopportunitiesforstreamliningwiththeobjectiveofreducingtheoverallworkeffort,whilemaintainingalltheinformationneededforeffectivedecisionmaking.

Aspartofitsoversightresponsibilitytomonitortheeffectivenessoftheprocessforformulatingmonetarypolicy,theBoardmetinprivatesessionwithSpecialAdviserBruceLittle,oneofCanada’smostrespectedfinancial

journalists.Mr.Little’scommunicationsexperi-encewithmacroeconomicissuescontributedtodiscussionsoftransparencyandrelatedissueswiththeBank’smanagementduringaone-yearperiodendinginAugust2006.In2006,theBoardalsometwithrepresentativesoftheInternationalMonetaryFund,whoprovidedadditionalexternalviewsontheBank’scapacitytoaccomplishitsmonetarypolicyobjectives.

InkeepingwiththeBank’sobjectiveofmain-tainingbestpracticesincorporategovernance,monitoringofexternaltrends,particularlyastheyrelatetoCrowncorporationgovernance,hascontinued,andthestructureofthisyear’sannualreportreflectsenhancementsmodelledafterthebestpracticesofotherinstitutions.Finally,modificationstoaccountingpracticesinresponsetonewstandardsissuedbytheCanadianInstituteofCharteredAccountantswereapproved.

BoardofDirectors

TheBoardofDirectorscontributestothegovernanceoftheBankbyoverseeingalladministrativefunctions,aswellasthepro-cessbywhichtheBankensurestheeffectiveformulationofmonetarypolicy.

InadditiontotheGovernor,whobystatutechairstheBoard,andtheSeniorDeputyGovernor,theBoardiscomposedof12inde-pendentDirectorsandtheDeputyMinisterofFinance(whohasnovotebutisanimpor-tantlinktotheDepartmentofFinance).The12independentDirectorsareappointedbytheMinisterofFinance(withtheapprovaloftheGovernor-in-Council)forrenewablethree-yearterms.In2006,fivenewDirectorsjoinedtheBoard,andorientationmeetingswithBankstaffwereheldtofamiliarizeDirectorswiththefunctions,operations,andplansoftheBank.

Bank StaffThe Bank’s 1,200 staff are critical to its success as a knowledge-based organization. While most of the staff are located at the head office in Ottawa, about 100 work at operations centres in Toronto and Montréal. A small number of staff with expertise in economic, financial market, and currency issues are located at regional offices in Vancouver, Calgary, Toronto, Montréal, and Halifax.

In striving to create a work environment where ideas thrive and knowledge is shared, the Bank works hard to provide opportunities for career development and challenging work. Fundamental to this environment is the Bank’s support for bilingualism, employment equity, and a balance between work challenges and personal needs. As with many organizations, Bank staff represent a broad demographic of experience; human resource policies are being reviewed to ensure that the Bank can continue to respond to changing workforce needs and interests. For more information, see About the Bank at <www.bankofcanada.ca>.

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Asnotedearlier,theBoardisresponsibleforreviewingandapprovingtheBank’scorporateobjectives,plans,andbudget.TheindependentDirectorsarealsoresponsibleforappointingtheGovernorandtheSeniorDeputyGovernortoseven-yearterms(withtheapprovaloftheGovernor-in-Council)andforevaluatingtheirperformance.AninherentpartoftheBoard’soversightofmanagementeffectivenessisitsannualreviewoftheBank’ssuccessionplanstoensurecontinuityofknowledgefortheeffectiveongoingmanagementoftheBank.

In2006,theindependentDirectorselectedanewLeadDirector,Dr.DavidBarnard.AsChairpersonoftheBoard’sCorporateGovernanceandNominatingCommittee,heoverseesthecorporategovernancepracticesoftheBoardandtheBank.TheLeadDirectorchairsprivatemeetingsoftheindependentDirectorsateachBoardmeetingandleadstheannualBoardself-assessmentprocess,atoolthatfacilitatesafulldiscussionoftheBoard’spractices.Dr.BarnardreplacedSpencerLanthier,whocompletedtwotermsasaDirector,makingnotablecontributionstotheBank’sgovernancesincebecomingLeadDirectorin2003.

Tofulfillitsresponsibilitiesofgovernanceandoversight,theBoardhasseveralpermanentcommittees.InadditiontotheExecutiveCommittee,providedforintheBankofCanadaAct,therearecommitteesoncorporategover-nance,humanresourcesandcompensation,

audit,planningandbudget,andpension.Asrequired,AdvisoryGroupsofseveralDirectorsprovideaforumfordiscussingissuesofpartic-ularinterest.ThreeAdvisoryGroupscurrentlyexisttodiscusscurrency,informationtechnol-ogy,andpensionmatters.TheBoardformsaSpecialCommitteetodirecttherecruitmentprocesswhenanewGovernororSeniorDeputyGovernormustbechosen.

• ExecutiveCommittee:Chair,DavidDodge(Governor)

• CorporateGovernanceandNominatingCommittee:Chair,Dr.DavidBarnard(LeadDirector)

• HumanResourcesandCompensationCommittee:Chair,JocelynePelchat

• AuditCommittee:Chair,MichaelO’Brien

• PlanningandBudgetCommittee:Chair,Jean-GuyDesjardins

• PensionCommittee:Chair,PaulJenkins(SeniorDeputyGovernor)

Directorsarepaidaccordingtoafeestructurerecommendedbythegovernment,approvedbyGovernor-in-CouncilandpublishedintheCanada Gazette.For2006,theaggregateremunerationpaidtoallindependentDirectorswas$274,400.Thisremunerationincludespaymentofannualretainersandperdiems(sixBoardmeetingsandthoseofAdvisoryGroupsandCommitteesnotedabove)andparticipationinotherBank-relatedactivities.

b o A R d o f d i R e c t o R s

David DodgeGovernor

Appointed in 2001

Paul JenkinsSenior Deputy Governor

Appointed in 2003

Dr. David T. BarnardLead Director

President and CEO, iQmedXRegina, Saskatchewan

Appointed in February 2005

William BlackCorporate Director

Halifax, Nova ScotiaAppointed in October 2006

Philip DeckChairman and CEO, MKS Inc.

Toronto, OntarioAppointed in October 2006

Jean-Guy DesjardinsChairman and CEO, Centria Inc.

Montréal, QuebecAppointed in March 2003

Paul D. Dicks Partner, Benson Myles

St. John’s, Newfoundland and LabradorAppointed in December 2002

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Bonnie DuPontGroup Vice-President,

Corporate Resources, Enbridge Inc.Calgary, Alberta

Appointed in October 2006

Carol HansellSenior Partner

Davies Ward Phillips & Vineberg LLPToronto, Ontario

Appointed in October 2006

Barbara HislopExecutive Director

Variety—The Children’s Charity of British ColumbiaVancouver, British ColumbiaAppointed in March 1998

Gilles LepageCorporate Director

Caraquet, New BrunswickAppointed in May 2005

Michael O’BrienCorporate Director

Charlottetown, Prince Edward IslandAppointed in October 2006

Jocelyne Pelchat President and CEO, Entreprises Pelchat Moïse Inc.

Sutton, QuebecAppointed in February 2005

Thomas J. RiceChairman, Jovian Capital Corp.

Winnipeg, ManitobaAppointed in June 2005

Robert Wright Deputy Minister of Finance

Member ex officio

GoverningCouncil

UndertheBankofCanadaAct,theGovernoraloneisresponsibleforimplementingmonetarypolicy.Inpractice,however,theGovernorsharesthisresponsibilitywithfellowmembersoftheBank’sGoverningCouncil.TheCouncilworksbyconsensustoformulate,implement,andcommunicatemonetarypolicywiththesupportoftheBank’seconomicsandcommuni-cationsdepartments.AcentralelementoftheaccountabilityframeworkformonetarypolicyistheagreementbetweentheBankandthefederalgovernmentontheinflation-controltarget.Thisagreementwasrenewedon23November2006forafive-yearperiod

ending31December2011.Theinflationtargetremainsthe2percentmidpointofa1to3percentinflation-controlrange.Monetarypolicydecisionsontheappropriatesettingofthepolicyinterestrate,consistentwithdeliveringtheinflationtargetoverthemediumterm,arenormallytakenoneightpre-announcedfixeddates.ThedecisionsarecommunicatedinpressreleasesandintheMonetary Policy ReportandUpdate,whichdiscusscurrenteconomicandfinancialtrendsinthecontextofCanada’sinflation-controlstrategy.

TheGoverningCounciliscomposedoftheGovernor,SeniorDeputyGovernor,andthefourDeputyGovernors.

Governing Council (left to right): David Longworth, Deputy Governor; Tiff Macklem, Deputy Governor; David Dodge, Governor; Sheryl Kennedy, Deputy Governor; Paul Jenkins, Senior Deputy Governor; Pierre Duguay, Deputy Governor

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ExecutiveManagementCommittee

TheBank’sExecutiveManagementCommitteeprovidesthedirectionandguidancerequiredtocarryouttheBank’sresponsibilities,overseesalltheoperationsoftheBank,anddecidesonbroadorganizational,financial,andstrategicissuestoberecommendedtotheBoardofDirectorsforapproval.

FinancialSystemCommittee

TheFinancialSystemCommitteereviewsissuesrelatingtothedomesticandinternationalfinancialsystems,andformulatespolicyinareasspecifictotheBank’sresponsibilitiesonmattersofgeneralprinciple,oversightpolicy,andrisk/efficiencytrade-offs.

TheCommitteeiscomposedofallmembersoftheGoverningCouncil,alongwiththeGeneralCounsel/CorporateSecretary;theAdviser,RegulatoryPolicy;andtheChiefofCommunications.

Executive Management Committee (left to right): Sheila Vokey, Chief of the Financial Services Department; David Longworth, Deputy Governor; Tiff Macklem, Deputy Governor; Janet Cosier, Adviser on Strategic Planning and Risk Management; David Dodge, Governor; Mark Jewett, General Counsel/Corporate Secretary; Sheryl Kennedy, Deputy Governor; Paul Jenkins, Senior Deputy Governor; Pierre Duguay, Deputy Governor; Sheila Niven, Chief of the Corporate Services Department

ExperienceinCanadaandelsewherehasshownthatthebestcontributionmonetarypolicycanmaketotheeconomicwell-beingofhouseholdsandbusinessesistofollowastrategyaimedatdeliveringlow,stable,andpredictableinflation.Thisobjectiveispursuednotasanendinitself,butasameansofpromotingsustainableeconomicgrowthandstability.Theinflation-targetingframeworkintroducedin1991isdesignedtofacilitatetheachievementofthisobjective,andtoimprovetheBankofCanada’saccountability,byspecifyinganexplicittargetfortheannualrateofincreaseintheconsumerpriceindex(CPI).InNovember2006,theGovernmentofCanadaandtheBankofCanadarenewedCanada’sinflation-controlframeworkforafurtherfive-yearperiod,maintainingtheinflationtargetatthe2percentmidpointofa1to3percentcontrolrange.

MonetarypolicyinCanadawasquitesuccess-fulin2006,butwasnotwithoutsignificantchallenges.AlthoughCPIinflationremainedwithintheinflation-controlrangeformostoftheyear,andaveraged2percent,themacroeconomicenvironmentrequiredsomeadjustmentoftheBank’sprimarymonetarypolicyinstrument:theovernightinterestrate.

In2006,asthroughoutthe2003–06medium-termplan,theBankanalyzedeconomicandfinancialdevelopments,undertookhigh-qualityresearch,andcommunicatedclearlyandopenly.Prioritiesoverthedurationoftheplanandfor2006includeddeepeningtheanalysisofsectoraldevelopments,enhancingtheBank’sprojectionmodels,improvingitsunderstandingofexternaldevelopmentsandtheirimplicationsfortheCanadianeconomy,andassessingCanada’sexperiencewithtargetinginflation.

It has been 15 years since Canada adopted an inflation-targeting framework to guide its monetary policy. During this time, consumer price index (CPI)

inflation has been reduced to a low, stable, and predictable level of close to 2 per cent, real output has expanded at an average rate of 3 per cent

per year, and the unemployment rate has fallen to 30-year lows.

Joint Statement of the Government of Canada and the Bank of Canada on the Renewal of the Inflation-Control Target

23 November 2006

M o n e t A R Y p o l i c Y

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MeetingtheInflationTarget

Themajorchallengeformonetarypolicyduring2006wastokeepthemacroeconomyinbalanceandCPIinflationclosetothe2percenttarget,whilefacilitatingtheadjustmentthatwasunderwayacrossmanyeconomicregionsandsectorsofthecountry.Astheyearbegan,theCanadianeconomywasjudgedtobeoperatingclosetoitsproductioncapacity,andunemploymentwashoveringnear30-yearlows.Duringthefirstfivemonthsof2006,theovernightinterestratewasraisedonfoursuccessiveoccasions,withdrawingsomeofthemonetarystimulusthathadbeenintroducedearliertohelptheeconomyrespondtoexternalshocks.

Althoughtheeconomywasjudgedtobeoperatingwithslightexcessdemandbymid-year,theBankdecidedtoleavethetargetovernightinterestrateunchangedat4.25percentatitsJulyfixedannouncementdateandthroughtherestoftheyear.TheBank’sbaselineprojections,incorporatingabalancedviewoftherisks,suggestedthatthisleveloftheovernightinterestratewasconsistentwithachievingthe2percentinflationtargetoverthemediumterm.InitsannualexaminationoftheCanadianeconomy,theIMFcommentedthat“TheBankofCanadahasadroitlybalanced…competingrisks,andhasappropriatelyleftratesonholdsinceMay.”1

Inflation,asmeasuredbythe12-monthgrowthrateoftheCPI,wasquitevolatileover2006,movingfromahighof2.8percentinJanuarytoalowofonly0.7percentinSeptember,andthenreboundingtoanaveragerateof1.5percentthroughthefinalmonthsofthe

year(seechart).Mostofthevariabilitythroughthisperiodwasrelatedtodramaticmovementsinoilandnaturalgasprices.Butthesharpdeclineininflationrecordedinthesecondhalfoftheyearreflectedthecombinedinfluenceofaone-percentage-pointreductionintheGoodsandServicesTaxthatbecameeffectiveinJulyandthespikeinenergypricesayearearlierinthewakeofHurricaneKatrina.

Consumer Price Index

Year-over-year percentage change

2006200520042003200220012000199919981997

Core CPI*

Total CPI

Target midpoint

Inflation-control range

* CPI excluding eight of the most volatile components and the effect of changes in indirect taxes on the remaining components

Coreinflation,whichexcludeseightofthemostvolatilecomponentsoftheCPI,aswellastheeffectsofchangesinindirecttaxes,followedaverydifferenttrack.Itremainedwithinanarrowrangeof1.6to2.0percentduringthefirsthalfof2006,andthenrosetoahighof2.2percentinthefinalquarter,inresponsetoastrongeconomyandrisinghousingprices.

1. Preliminary Conclusions of the IMF Mission,2007ArticleIVConsultationwithCanada,7December2006

AchievingtheBank’sobjectivesforthetargetovernightinterestrateposedchallengesinthespring,whentherewasstrongdownwardpressureontherateonovernightloanssecuredbygovernmentcollateral.Toreinforceitsobjectivesfortheovernightinterestrate,theBankundertooknumeroussaleandrepurchaseagreements(SRAs)andannouncedthatitwouldtypicallyleavethelevelofbalancesatzeroandwouldnotcommittoneutralizingtheeffectoftheSRAs.Asthedownwardpressureoncollateralizedloanratescontinued,theBankoccasionallyleftthelevelofsettlementbalancesinthesystemindeficitafterunder-takingSRAs.Thesecostincentivesencouragedmarketparticipantstotradeovernightfundsatlevelsclosertothetargetrate.

RenewingtheInflation-ControlTarget

On23November,theBankofCanadaandtheGovernmentofCanadarenewedCanada’sinflation-targetingframeworkforanotherfiveyears.Whilethemainelementsoftheinflation-targetingframeworkremainunchanged,researchwasundertakenonseveralrelatedissuesinanticipationoftherenewal,withaviewtostrengtheningandclarifyingthemannerinwhichtheframeworkisapplied.Threeissuesreceivedspecialattention:theroleofcoreinflationmeasures;thetimehorizonoverwhichpolicy-makersshouldaimtoreturninflationtotargetfollowingashock;andtherecognitionthatshouldbegiventoassetpricesinthecontextofinflationtargeting.

ThebackgrounddocumentpublishedbytheBankofCanadaatthetimeoftherenewalalsoindicatedtheneedforfurtherresearch

onthetypeofpolicyframeworkthatwouldbestcontributetotheeconomicwell-beingofCanadiansinthedecadesahead.Twoissueswerehighlighted.Thefirstwas,whatarethecostsandbenefitsofaninflationtargetlowerthan2percent?Thesecondwas,whatarethecostsandbenefitsofreplacingthecurrentinflationtargetwithalonger-term,price-leveltarget?Overthenextthreeyears,theBankplanstoleadaconcertedresearcheffortfocusedonthesebroadquestions.Otherresearchersareinvitedtojoininthiseffort.Thegoalistocompletethisresearchbefore2011toensureenoughtimefordiscussionoftheresultsandtheirimplications.

AssessingInternationalandDomesticDevelopments

Theformulationandimplementationofmonetarypolicyrequirescomprehensiveanddetailedmonitoringofinternationalanddomesticdevelopments,aswellaslonger-termresearch.InformationisdrawnfromStatisticsCanadaandfrommanyinternationalsources,aswellasfromoutreachprogramsandfrequentmeetingswithrepresentativesofCanadianindustryandlabour.ThisiscombinedwiththeBank’sownwork,includingsurveysconductedbythefiveregionaloffices,togetaclearerviewofcurrenteconomicconditionsinCanadaandtheworldandoftheirlikelyfuturepaths.

StaffprojectionsandtheBank’sshort-termmonitoringoftheCanadianeconomyalsorelyoneconometricmodels.ThemostimportantoftheseisToTEM(Terms-of-TradeEconomicModel),theBank’snewdynamicstochasticgeneral-equilibriummodel,whichcameinto

fulluseatthestartof2006.2ToTEMisusedforforecasting,riskassessments,andpolicysimulationsoftheCanadianeconomy.Twootherlargemodels,MUSEandGEM,provideinformationontheevolutionoftheU.S.andglobaleconomies.3

Issuesthatreceivedparticularattentionin2006includethemacroeconomicrisks

associatedwithchangingdistributionsofhouseholddebt;thedeterminantsofpotentialoutputandproductivitygrowth;thelinkagesbetweenthefinancialandrealsectorsoftheeconomy;theresponsivenessofexportsandimportstoexchangeratemovementsandincomegrowth;andthedeterminantsandconsequencesofsectoralandregionaladjustmentinCanada.

2. Seethearticle“ToTEM:TheBankofCanada’sNewProjectionandPolicy-AnalysisModel,”intheautumn2006issueoftheBank of Canada Review,formoreinformation.

3. MUSEstandsforModeloftheU.S.Economy,andGEMstandsforGlobalEconomyModel.

Regional outreach: Peter Kinley (left), President of Lunenburg Industrial Foundry & Engineering, shows Deputy Governor Tiff Macklem (centre) and Senior Regional Representative David Amirault around the company’s shipyard in Lunenburg, Nova Scotia, June 2006.

Overtheperiodofthe2003–06medium-termplan,theseresearchactivitieshavefocusedonsuchimportanttopicsasdeterminantsofpriceandwagebehaviourinCanada;theeffectsofproductivitygrowthandshiftingdemographictrendsonpotentialoutput;andsectoraladjustmentstoexternalshocks.Muchoftheresearcheffortthrough2005and2006,however,wasdirectedtowardsidentifyingpossible

CarryingOutLonger-TermResearch

NotalloftheBank’sanalyticresourcesaredevotedtomonitoringandforecastingactivi-ties.Longer-termresearchisequallyimportant.Itimprovesourunderstandingofhowecono-miesoperateandhowtheyarelikelytorespondtovariouspolicyinitiatives.

Bank of Canada Fellowship ProgramLaunched in 2002, the Bank’s Fellowship Program is designed to recognize and encourage leading- edge research in areas critical to the Bank’s mandate: macroeconomics, monetary economics, international finance, and the economics of financial markets and institutions (including issues related to financial stability). Successful candidates receive an annual stipend for a renewable five-year period, together with

additional funds for research assistance and related expenses.

The 2006 Fellowship was awarded to Professor Gregor Smith, who is recognized internationally for his work in empirical macroeconomics, open-economy macroeconomics, and economic history. With this appointment, there are now five Fellows participating in the program.

Fellowship award for 2006 (left to right): Senior Deputy Governor Paul Jenkins, Governor David Dodge, Professor Gregor Smith of Queen’s University (Fellowship recipient), and Dr. David Barnard, Director and Chair of the Nominating Committee

generates,havebeenaidedbyanambitiousprogramofexternalpublicationsandtheactiveparticipationofBankstaffinnumerousconfer-ences,seminars,andworkshops.SomeofthesehavebeenorganizedbytheBank,otherswerehostedbyuniversities,researchinstitutes,andotheroutsidebodies.During2006,Bankstaffpublished21papersinrefereedjournalsandbooks,49workingpapers,made167externalpresentations,andhosted11conferencesandworkshopsattheBankofCanada.

improvementstotheBank’sinflation-targetingframeworkandrelatedissues,inanticipationofthetargetrenewal.TheseandotherareasofinterestaredescribedingreaterdetailontheBank’swebsiteat<www.bankofcanada.ca/en/fellowship/highlights_res_06.html>.

TheBank’sresearcheffortsbenefitfromoutsidecommentaryandinsights,andfrompartner-shipswithexternalauthors.Thisinfusionofideasandtheactivedebatethatitsometimes

The Bank of Canada is responsible for supplying Canadians with bank notes they can use with confidence. The past year was the last of the Bank’s

2003–06 medium-term plan, which focused on increasing the intrinsic security of bank notes, building awareness of new security features, and promoting

counterfeiting deterrence by law-enforcement agencies and the justice system.

TheBankhasmadesignificantprogressonthesethreefronts:itlaunchedthenewCanadian Journeyseriesnoteswithstate-of-the-artsecurityfeatures,builtpartnershipswiththeretailindustry,andraisedawarenessinthelaw-enforcementandjudicialcommuni-tiesoftheseriousnessofcounterfeitingasacrime.Asaresultoftheseefforts,counterfeitinghasfallensignificantlyinthepasttwoyears.Aspartofitsnew2007–09medium-termplan,theBankistargetingafurtherreductionincounterfeiting.Itwilldevelopanewseriesofbanknotesthatwillbeevenmoredifficulttoreplicate.Itwillalsoworktoincreasenoteverificationbyretailers,furthercounterfeitdeterrence,andimprovetheefficiencyandeffectivenessofthenote-distributionsystem.

GettingResults:IncidenceofCounterfeiting

Forthesecondyearinarow,thevalueandnumberofcounterfeitnotesdetectedincirculationfellsignificantly,to$6.7million(287,088notes)in2006,from$9.4million(402,568notes)in2005and$12.9million(552,700notes)in2004.Thedeclineincounter-feitingprimarilyreflectstheissuanceofthemoresecureCanadian Journeyseriesnotesandthesuccessoflaw-enforcementagenciesindismantlinganumberofcounterfeitingoperations.Aswell,thecourtshavebecomelesslenientoncounterfeitingasacrime,andsubstantialprogresshasbeenmadeinimprov-ingretailers’verificationpractices.Initsnew

c u R R e n c Y

medium-termplan,theBankaimstoreducecounterfeitingtofewerthan100detectedcounterfeitspermillionnotesincirculationby2009,from221in2006and326in2005.

Number of Counterfeit Bank Notes Found in Circulation

Value of Counterfeit Bank Notes Found in Circulation

2006200520042003200220012000

$ millions

$5 $20 $100

$10 $50

EnhancingBankNoteSecurity

AspartofitsstrategytosupplyCanadianswithsecurebanknotes,theBankissuedanupgradedCanadian Journeyseries$5noteon15November2006.Withthisnew$5note,allCanadian Journeyseriesnotesnowcarrythesecurityfeaturesintroducedin2004,includingametallicholographicstripe,awatermarkportrait,awindowedcolour-shiftingthreadwovenintothepaper,andasee-throughnumber.TheBankcontinuestorecommendcheckingmorethanonesecurityfeature.

In2006,theBankapplieditsresearchanddevelopmenteffortstothenextgenerationofbanknotesandmappedoutanambitiousplantobeginissuinganewnoteserieswithsignificantlyimprovedsecurityfeaturesby2011atthelatest.Workhasbegunondevelopingandtestinggenericbanknotedesignsandonsimulatingtheperformanceofbanknotesincirculation.

Counterfeitingisathreattocurrenciesaroundtheworld,anditdemandsacoordinatedinternationalresponse.TheBankisactivelyinvolvedinanumberofinitiativeswithothercentralbanks,thesecurityindustry,andequipmentmanufacturers.TheBankisalsoamemberoftheCentralBankCounterfeitingDeterrenceGroup.Thisgroupof27centralbanksisdeployingcounterfeit-deterrencesystemsandidentifyingfutureinternationalthreatsandpossibleresponses.

2006200520042003200220012000

$5 $20 $100

$10 $50

Thousands of notes

counterfeiting.Onlinematerialsandatrainingmoduleareavailableat<www.bankofcanada.ca/en/banknotes/education>.

TheBankconductssurveysofbanknoteusage,includingretailers’verificationpractices.ResultsfromthesesurveysarepostedontheBank’swebsiteat<www.bankofcanada.ca/en/banknotes/survey>andareusedtohelpformulatestrategiesfortrainingandcommuni-cation.TheBankhasalsostartedtoconductresearchontheeasewithwhichsecurityfeaturescanbeusedtoauthenticatebanknotes.

BuildingAwarenessofSecurityFeatures

Securityfeaturesareeffectiveonlywhenpeopleusethemtoauthenticatenotes.Throughitsregionaloffices,theBankdeliverstrainingandinformationsessionstoretailersacrossthecountryandworkswiththemediatoincreaseawarenessofthesecurityfeaturesusedonbanknotes.TheBankworkscloselywiththeRCMPandotherCanadianlaw-enforcementagenciesindevelopinganddeliveringeducationandawarenessprogramstohelpdeterandprevent

The Art and Design of Canadian Bank Notes Bank notes are the most tangible connection between the central bank and the public it serves. A bank note is a medium of exchange, a cultural artifact, a national symbol, and a communication vehicle, and it must be secure against counterfeiting. When all these elements are considered, the design and production of a bank note is a formidable challenge.

The Art and Design of Canadian Bank Notes is the second in a series of books about the Bank of Canada. This journey behind the scenes explores the demanding world of bank note design, highlighting the beauty of Canada’s bank notes and celebrating the engraver’s art.

This book can be purchased through the Bank’s website at <www.bankofcanada.ca> or at the Currency Museum in the Bank of Canada’s head office building in Ottawa.

Duringtheyear,theBank’sCurrencyMuseuminOttawacontinuedtoplayanimportantroleineducatingthepublicaboutbanknotesandcounterfeitdetection,inadditionto maintainingtheNationalCurrencyCollectionandpromotinganunderstandingoftheBank’sroleinCanada’seconomy.Approximately37,000peoplevisitedtheMuseum’sexhibitionsortookpartinschoolprogramsinOttawa,andanimpressive182,500peopleparticipatedinoutreachprogramsoutsideOttawa.

Foritsnewmedium-termplan,theBankdevelopedanewbanknotecommunicationstrategy,whichwillbedirectedtowardsbothpartiesinvolvedinacashtransaction:theretailerandthecustomer.Itwillencourageretailerstocheckbanknotesasanintegral

partoftheirdailyroutineandwillpromotepublicawarenessofthatbehaviourasaprudentpracticethatbenefitseveryone.

PromotingCompliance

TheBankassistsinthedeterrenceandappre-hensionofcounterfeitersthroughitscomplianceprogram.Thisprogramfocuseson

• increasingrecognitionofcounterfeitingasaseriouscrimebyraisingawarenessofitssocialandeconomicconsequences

• providingpoliceofficersandCrownpros-ecutorswithinformationandmaterialtofacilitatetheinvestigationandprosecutionofcounterfeitingoffences

RCMP officer demonstrates security features at Vancouver’s Agribition.

In2006,theBankincreasedthereachandeffectivenessofitscomplianceprogram.

AnimportantelementofthisprograminvolvesworkingwiththefederalDepartmentofJusticeandtheprovincialAttorneysGeneraltosupportprosecutioneffortsbyprovidingbackgroundmaterialontrialsandsentencingprecedents.Increasingly,anaffidavitontheprevalenceandimpactofcounterfeitingisbeingusedsuccess-fullyinthesentencingofpersonsconvictedofcounterfeiting.TheseresourcesarepostedontheBank’swebsiteat<www.bankofcanada.ca/en/banknotes/legal_resources.html>.

MaintainingtheQualityofBankNotesinCirculation

Thebanknotedistributionsystem,developedinpartnershipwithfinancialinstitutions,providesforthejointmanagementoftheflowofnotesamongtheseinstitutions.ItenablestheBanktoremovewornandcounterfeitnotesfromcirculationandtoprovideanadequatesupplyofqualitybanknotes.Branchesoffinancialinstitutionsshiptheirunfitandsurplusnotestotheirregionaldistributioncentres,whichholdfitnotesonbehalfoftheBankandsendunfitnotestotheBank’s

Deputy Governor Pierre Duguay presented the Law Enforcement Award of Excellence for Counterfeit Deterrence to Sergeant Mary Kostashuk from RCMP “E” Division Commercial Crime Section in British Columbia and Constable Kurtis Bosnell from the Upper Fraser Valley Regional Detachment of the RCMP. Their efforts resulted in the shutdown of a major operation and the conviction of its leader. From left to right: Deputy Governor Pierre Duguay, Sergeant Mary Kostashuk, RCMP Commissioner Giuliano Zaccardelli, and Constable Kurtis Bosnell.

operationscentresforprocessing.LiaisonwithstaffofthefinancialinstitutionsatregionaldistributionpointsismaintainedbytheBank’sregionalrepresentatives.During2006,theBankexaminedwaysofenhancingthedistri-butionsystemtoimprovetheconditionofnotesincirculation.

WithhelpfromCanadianfinancialinstitutions,theBankconductedanaggressiveprogramtoreplacebanknotesfromearlierserieswiththenewCanadian Journeyseries.Itisestimatedthatattheendof2006,87percentofallnotesinactivecirculation(excludingthenewlyupgraded$5denomination)werefromthenewseries.

InconjunctionwiththeRCMPandthefinan-cialinstitutionsparticipatinginthebanknote

distributionsystem,theBankimplementedanewprocesstospeedthecollectionandprocessingofcounterfeitbanknotesremovedfromcirculation.ThisprocessprovidestheBankwithmoretimelyinformationontheincidenceofcounterfeitingandletslaw-enforcementagenciesfocusoninvestigativeworkratherthantheadministrativemattersinvolvedinhandlingcounterfeitnotes.Thishasprovenveryvaluabletoallparticipants.

TheBankhasbegunaprogramtoupgradeitsnote-processinginfrastructure.Thiswillprovideadditionalcapabilityandflexibilityinprocessingnotes,whileensuringefficiencyandreducingrisks.Importantworkwasalsocarriedouttostrengthencontractualrelationshipswithsuppliers.

f i n A n c i A l s Y s t e M

The Bank of Canada promotes the safety and efficiency of the financial system by providing unique banking services, including

a lender-of-last-resort facility, by overseeing key domestic clearing and settlement systems, by conducting and publishing research, and by providing

advice to various domestic and international policy-making bodies.

TheactivitiesofthefinancialsystemfunctionoverthepastfouryearshavebeenguidedbytheBank’smedium-termplanthatendedin2006.TheBankhasimproveditscapacitytocarryouttheoversightofmajorclearingandsettlementsystems.Ithasconductedresearchontheoperationsofclearingandsettlementsystems,therisksassociatedwithincreasedcross-borderlinkagesinsecuritiesmarketsandsecurities-settlementsystems,macrofinancialstresstesting,themonitoringofsystemicrisk,forecastingfinancialstress,andtheworkingsofabroadrangeoffinancialmarkets.ThisworkhassupportedtheBank’spolicyadviceonlegislation,regulations,andpracticesaffectingfinancialinstitutions,financialmarkets,andfinancialinfrastructurearrangements.TheBankhasledimprovementsinthecontinuity

ofoperationsincriticalpartsofthedomesticfinancialsystemandhasreduceditsoperationalriskintheprovisionofpaymentservicesandotherrelatedbankingactivities.Ithasalsoplayedaleadershiproleinbringingforwardandpromotingproposalstoimprovethesafetyandefficiencyoftheinternationalfinancialsystem.

In2006,theBank’sanalysisandresearchfocusedontheriskandefficiencyissuesfacingthedomesticfinancialsystem.TheBankalsoparticipatedinmulti-countrygroupstoaddressissuesrelatedtothesafetyandefficiencyoftheinternationalfinancialsystem,includingthereformoftheInternationalMonetaryFundtoreflectglobaleconomicrealities.

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PromotingSafetyandEfficiencyintheFinancialSystem

TheBanksupportsfinancialsystemefficiencybyconductingandpublishingresearchandbyprovidingadvicetodomesticandinternationalpolicy-makingbodies.Itworkswithotherregulatoryandpublicsectoragencies,financialsectorparticipantsandtheirassociations,andacademics.During2006,researchwasconcen-tratedonthetransparencyoffixed-income,derivative,equity,andforeignexchangemarkets;onconductingresearchonmacro-financialstresstestingandtheassessmentofpotentialrisksposedbycross-borderlinkagesamongclearingandsettlementsystems;andonexaminingtheproductivityandefficiencyoftheCanadianbankingsystem.

In2006,theBankcontinuedtoactivelysupportworkthatpromotesinternationalfinancialstability.Itplayedaleadershiproleintheinternationaldebateonthereformofinterna-tionalfinancialinstitutions,particularlytheInternationalMonetaryFund.TheBank’sworkreflectsadesirefortheIMFtoremainakeyplayerininternationalfinancialmattersandaneedtorealignIMFoperationswithchangingglobaleconomicrealities.TheBankhascarriedoutresearchandanalysisonthegovernanceoftheIMF,aswellasitssurveillanceandlendingactivities.ThishasinvolvedjointstudieswiththeDepartmentofFinanceandothercentralbanks.ThisworkhasbeenunderpinnedbycollaborativeresearchwiththeBankofEnglandandhasbeencommunicatedininternationalforumsandinarticlesaimedatthepolicy-makingcommunity.Inaddition,theGovernor

oftheBankofCanadaaddressedtheExecutiveDirectorsoftheIMFonitspotentialreform.

TheBankalsoparticipatesininternationalgroups,suchastheG-7andG-20,theFinancialStabilityForum,andseveralcommitteesandworkinggroupsoftheBankforInternationalSettlements.Thesegroupsaddressawiderangeoftopics,includingassessmentsofpotentialriskstothefinancialsystem;theoversightanddevelopmentofpaymentssystems;arrange-mentsforcontinuityofoperationsforkeypartsoffinancialsystemsinacross-bordercontext;issuesassociatedwithchangesinassetalloca-tionbypensionfundsandinsurancecompanies;housingfinance;andtheconsequencesofChina’semergenceasamajoreconomicpoweranditsintegrationintoworldtradeandothercross-borderarrangements.TheBankalsocontinuestoprovidetechnicalassistancetoothercountriesbyparticipatinginvariousIMFactivities.

Inresponsetointernationaldevelopments,changingperceptionsofbestpractices,anddomesticimperatives,theBankcontinuestoworkwiththeoperatorsandparticipantsofsystemicallyimportantCanadianclearingandsettlementsystemsintheireffortstoenhancearrangementsforcontinuityofoperations.ThesesystemsareatthecentreofCanada’sfinancialsystem,andseriouseconomy-widerepercussionscouldariseiftheiroperationswerenotextremelyreliable.In2006,theoperatorsofthesesystemstookfurtherstepstomaketheircontinuityofoperationsmorerobustbylocatingbusinessstaffatseparatesitesandbyimprovingtheirabilitytorecoverfrom

tomodernizeboththebusinessapplicationandthesupportinginfrastructureforprovidingbankingservicestofinancialinstitutions.Whilecompletionofthisprojectwasexpectedin2006,theneedforadditionaltestingofthebusinessapplicationandthechallengesexperi-encedinsettinguptherequiredinfrastructurehavepostponedtheplannedimplementation.TheBankalsocontinuedtoexamineitsownarrangementsforcontinuityofoperations.In2005,theBankcompleteditsthree-yearefforttoimprovetheabilityofitsbackupsitetorespondeffectivelytoseriousoperationaldisruptions.Testingduring2006revealedsomeshortcomingsthatarebeingaddressedasahighpriority.

Inaddition,theBankhascontinuedtocommunicateitsviewsonthecrucialroleofsystemicallyimportantclearingandsettle-mentsystemstoprovincialorganizationsresponsiblefordeterminingthepriorityofthesesystemstoaccessessentialinputssuchashydro,dieselfuel,ormunicipalservicesduringaseriouslydisruptiveevent.Italsoworkedwiththeseorganizationsonthisissueby,forexample,participatinginexercisestosimulatethemanagementofshortagesofcriticalinputs.

UnderthePayment,ClearingandSettlementAct(PCSA),theBankisresponsiblefortheoversightofsystemicallyimportantclearingandsettlementsystems.Thesesystemsenablethedailytransfersoffundsandotherfinancialassetsworthhundredsofbillionsofdollars,suchasforeignexchangeorsecurities,amongtheirparticipantsoramongthecustomersofsystemparticipants.TheBank’sobjectiveistobesatisfiedthattherisk-controlmechanismsinthesesystemsvirtuallyeliminatethepossibility

Canada’s Systemically Important Clearing and Settlement Systems All systemically important clearing and settle-ment systems processed record daily volumes and/or values during 2006.

Large Value Transfer System (LVTS): Operated by the Canadian Payments Associa-tion. Handles large-value or time-sensitive Canadian-dollar payments. Average daily number of transactions: 19,000. Average daily value of transactions: $166 billion. Records for daily volume and value were registered in 2006: 31,000 transactions and $253 billion in value.

CDSX: Operated by the CDS Clearing and Depository Services Inc. Settles virtually all debt and equity trades in Canada. Average daily number of trades settled: 391,000. Average daily gross value of trades settled: $232 billion. A record daily volume was registered in 2006: 684,000 transactions.

CLS Bank: Operated by CLS Bank. Settles foreign exchange transactions in 15 currencies. Average daily number of instructions settled: 252,000. Average daily value settled: US$2.7 trillion. Records for daily volume and value were registered in 2006: 502,000 instruc-tions and US$5.5 trillion in settled instructions.

severeoperationaldisruptionsmorequicklythanthecurrenttargetoftwohours.

TheBankisthesoleproviderofuniqueservicestothesesystemsandcontinuedtomoveontwofrontstostrengthenitsabilitytosupplytheseservicesonanextremelyreliablebasis.Thefirstinvolvesthemulti-yearredevelopmentproject

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4. See“TheBankofCanada’sRoleinClearingandSettlementSystems,”Financial System Review(June2006)

thatadisruptionintheiroperation,causedbyaparticipantfailureorotherwise,couldhavesevererepercussionsacrossthefinancialsystemandtheeconomyasawhole.4

ThefocusoftheBank’soversightactivitiesduring2006wason:(i)implementationofamemorandumofunderstandingwiththeCanadianPaymentsAssociationthatdescribeshowthetwoorganizationsintendtoworktogethertowardsthecommongoalofasafe

andefficientlarge-valuepaymentsystem;(ii)analysisoftheimpactofthecorporaterestructuringofTheCanadianDepositoryforSecuritiesLimitedontherisksandrisk-containmentmechanismsinCDSX;and(iii)continuingjointworkwiththesupervisorofCanadianbankstobringaboutgreateruseoftheCLSBankbythesebanksforthesettle-mentofforeignexchangetransactions,whichisnowconsideredbestpracticeformitigatingforeignexchangesettlementrisk.

Deputy Governor Pierre Duguay (left) and Guy Legault, President and CEO of the Canadian Payments Association, sign memorandum of understanding, November 2006.

ConductingandCommunicatingResearch

PromotinganactivedebateandapublicpolicyfocusonissuesaffectingthefinancialsystemisakeycomponentoftheBank’swork.Itpublishesitssemi-annualFinancial System Reviewandhostsconferencesandworkshopstoraiseawarenessandpromotediscussionoffinancialsystemissues.TheFinancial System ReviewhasevolvedsinceitwasfirstpublishedinDecember2002.Asurveyofreadersconductedin2006suggeststhat,overall,theyaresatisfiedwiththepublication.Nevertheless,theBankintendstosharpentheReview’s focusoverthe

nextfewyears.BeginninginJune2006,theBankdecidedtousetheFinancial System Review astheprimaryvehicleforreportingonitsoversightactivitiesrelatedtothedesignandoperationofsystemicallyimportantclearingandsettlementsystems.

In2006,theBankheldworkshopsontopicsrelatedtothefunctioningoffinancialmarkets,includingajointworkshopwiththeNorgesBankonthemicrostructureofforeignexchangeandequitymarkets.Aconferenceonfixed-incomemarketswasheldinMay2006.AjointworkshopwiththeDepartmentofFinanceexaminedIMF-relatedissues,and

Meeting of the Financial System Review Steering Committee

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theBankactivelypursuedthesetopicswithothercentralbanksandatavarietyofconfer-ences.TheGovernoralsocontinuedtohostquarterlymeetingsofheadsofregulatoryauthoritiesinsecuritiesmarkets.TheBankmadesubmissionstotheInvestmentDealersAssociation’sTaskForcetoModernizeSecuritiesRegulationinCanadaandtotheCanadianSecuritiesAdministratorsonissuesrelatedtosecuritiesmarkets.

TheBank’sresearchaddressedsuchtopicsas

• modellingLVTSpaymentactivitytoassesstrade-offsbetweenliquidityandcollateral

costsandtoassesstheimpactofapartici-pantdefaultinthissystem

• thedevelopmentoftoolstoassessrisksinthefinancialsystemandfurtherworkonapproachestomacrofinancialstresstesting

• continuedanalysisofhowCanadianbanksmanageforeignexchangesettlementrisk

• themarketmicrostructureinfixed-incomeandforeignexchangemarkets

• theefficiencyoftheCanadianbankingsystem

Muchofthisworkwaspublishedasworkingpapersorineconomicjournals.

The Bank’s funds-management activities are related to its role as fiscal agent for the federal government and to the banking activities that it undertakes on its own account

and on behalf of other central banks and international financial organizations.

Overthe2003–06medium-termplan,theBankimprovedthecost-effectivenessandefficiencyofitsoperations.Severalinitiativeshavebeenimplementedtomaintaintheliquid-ityandefficiencyofthemarketforGovernmentofCanadabondsinthefaceofdeclininggov-ernmentdebt.Overall,thedebt-managementprogramhasbeenstrengthenedtoensurethatitkeepspacewithinnovationandtheevolvingrolesofintermediariesandinvestors.Thegovernanceandoversightstructureforallfunds-managementactivitiesweresignificantlyenhanced.Systemsformonitoringandmeasur-ingriskandperformancehavebeensteadilyupgradedinthemanagementofofficialinterna-tionalreserves.Partnershipswithreserveandriskmanagersatothercentralbanks,sovereigndebtagencies,andprivatesectorinstitutionshavebeenexpanded.Operationalcostsforretaildebtcontinuedtobedrivendownovermuchoftheperiod,andasignificantrestructuringofthebusinessfunctionsthatsupporttheretaildebtprogramwasbegun.WithregardtotheBank’sownaccount,theinvestmentactivitiesofitspensionfundwerereviewedinthecontextofacomprehensiveasset-liabilityframework,

andseveralimprovementsweremadetoitsinvestmentpolicy.

ActingasFiscalAgent

TheBank’sroleasfiscalagenttothefederalgovernmentcoversarangeofactivities:wholesalegovernmentdebtmanagement,governmentliquiditymanagement,investmentoffinancialassets,providingrelatedbankingservices,monitoringrisksarisingfromitsfiscal-agentactivities,andprovidingvariousservicestothegovernment’sretaildebtprogram.

Theobjectiveofthefederalgovernment’swholesaledomesticdebtandcash-managementistoraisestableandlow-costfundingtomeetoperationalneeds.Thisisfacilitatedbymaintain-ingawell-functioningmarketinGovernmentofCanadasecurities.In2006,bondbuybackswerehigherthanforecast,withbuybacksandswitchoperationstotalling$10.9billionsupportinggrossbondissuance.Increasedrecognitionofthedegreeofsubstitutabilitybetweenthenewlyissued2-yearbenchmarkbondsandexistingbondissuescarryingthesamematuritydateallowedtheissuanceofmorebondswith

f u n d s M A n A G e M e n t

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longer-datedmaturities.Forbondswith5-yearmaturities,changeswereintroducedtotheissuancecyclethatwillfurtherincreasethesubstitutabilitybetweenexistingbondsandnewlyissuedbenchmarks.Onanumberofoccasionsin2006,theBanklentsecuritiesoffofitsbalancesheetonafullycollateralizedbasisunderthesecurities-lendingprogram.Underthisprogram,whichwasestablishedin2002,theBanksupportstheliquidityofthemarketforGovernmentofCanadasecuritiesbyprovidingasecondaryandtemporarysourceofsecuritiesforaspecificmaturitywhenthereisastrongdemandforthesesecurities.

Theplantomeetthegovernment’sobjectiveofreducingtheshareoffixed-ratedebtto60percentin2007–08isontrack,andthestockofbondsdeclinedin2006by$2.3billionto$252.4billion.Thestockoftreasurybillsdecreasedby$2.4billionto$124.7billion.Furtherefficiencygainsinauctionswerealsorealizedasturnaroundtimeswerereducedfromanaverageof1.99minutesin2005to1.89minutesin2006forregularauctions,andfrom3.95minutesto3.07minutesoverthesameperiodforbuybacksandswitches.

TheBank’streasury-managementoperationsaredirectedtoensuringthatfundsareavailabletomeetthedailyoperatingrequirementsofthefederalgovernmentandtominimizethecostofholdingunusedcashbalances.Improvementsincash-managementtechniquesresultedintheaveragebalancesoftheReceiverGeneraldecliningfrom$7.6billionin2005to$6.6billionin2006.

Canada’sofficialinternationalreserves,heldmainlyintheExchangeFundAccount(EFA),aremaintainedtoprovideforeigncurrencyliquidityandtoprovidefunds,ifrequired,

tohelppromoteorderlyconditionsfortheCanadiandollarinforeignexchangemarkets.Atyear-end,officialinternationalreservestotalledUS$35.1billion,anincreaseofUS$2.0billionoverthepreviousyear-end.TheassetsoftheEFAarefundedprincipallythroughanongoingprogramofcross-currencyswapsofdomesticobligations.Securitiesdenominatedinforeigncurrenciesarealsoissuedtofundreserves.In2006,thenominalvalueofthegrossissuanceofcross-currencyswapswasUS$4.8billion.Thiswaspartiallyoffsetbymaturingdebtandmaturingcross-currencyswapsofUS$2.9billion.ThereturnfortheEFAnetofitsassociatedliabilitiesduringthecalendaryear,takingintoaccountallvalua-tiongainsorlosseswhetherrealizedornot,was52basispoints,reflectingmovementsininterestratespreadsforbothassetsandliabilities.

TheBank’srisk-managementactivitiesinvolvemonitoringandreportingrisksthatarisefromtheoperationsitundertakesasfiscalagenttothegovernment.TheBankusesmarket-based,risk-measurementtoolsthatareconsistentwithbestpracticesinthecentralbankingcommu-nityandthefinancialsector.In2006,theBankenhanceditsrisk-managementtoolsbyimple-mentinganewsystemtotrackthefrequencyandseverityofoperationalriskeventsandbyintroducingsomenewliquidity-riskstresstests.Thegovernancestructure,whichdelineatesaccountabilityanddecision-makingstructure,wasalsostrengthenedfurther.

Through2006,theBankcontinueditsmedium-termobjectiveofincreasingresearchandanalysisinsupportofitsfiscal-agentresponsi-bilities.Researchincludedadebt-modellingproject.PolicyadvicewasprimarilydirectedatsupportingtheCrownCorporationFunding

��

Consolidationstudyandaddressingissuesofbondmarketliquidity.

TheBankwasalsoinvolvedintwoTreasuryEvaluationProgramreviews,whichpertainedtotheEFAandthemanagementofReceiverGeneralcashbalances.Bothprogramswerefoundtobeeffectiveinmeetingtheirstatedobjectives.

Provisionofservicestothegovernment’sretaildebtprogramwasdirectedtowardspromotingcostreduction.Inthisrespect,themajordevelopmentin2006wasthedecisionbythegovernmenttowinddownCanadaInvestmentandSavingsAgency(CI&S)by31March2007andtoconsolidateadditionalretaildebtfunctionsrelatingtosales,distribution,andmarketingwithintheBank’sfiscal-agentresponsibilities.Thischangeisexpectedtoreducetotalgovernmentexpendituresfortheretaildebtprogram.Inaddition,theBankcontinuedtoworkwiththeCanadianPaymentsAssociationanditsmembersontheinclusionofretaildebtcertificatesinthecheque-imaginginitiativelaunchedbytheCanadianPaymentsAssociation.

OtherFunds-ManagementActivities

ThegovernancestructureformanagingtheBank’sbalancesheetwasstrengthenedthroughtheformalizationofaninvestmentpolicycoveringtheassetsoftheBank(see<www.bankofcanada.ca/en/about/corp.html>).

TheassetsoftheBankareinvestedprimarilyinarangeofGovernmentofCanadatreasurybillsandbondswitharangeofmaturitiesthatcloselymatchesthematurityprofileofthegovernment’sdebt.

TheinvestmentframeworkoftheBank’sPensionTrustFundcontinuedtobeadjustedtoreflectabettermatchofpensionassetstopensionliabilities,aprocessthathasbeenunderwayforthepastthreeyears.Moreusehasbeenmadeofexternalmanagerswhodirecttheirtradingactivitiestoexceedingthetotalreturnofanindexonarisk-adjustedbasis.Thishasbeenassociatedwithamorerigorousreviewandselectionprocessforexternalmanagers.

Bankingservicestoothercentralbanksandtointernationalorganizationsincreasedby3percentin2006.TheBankalsounder-takestransactionswithcharteredbanksandfederallycharteredtrustandloancompaniesarisingfromtherequirementthattheseinstitutionsmusttransfertotheBankallunclaimedbalancesmaintainedinCanadainCanadiancurrencythathavebeeninactiveforaperiodof10years.TheownersoftheseaccountscanhavetheirmoneyreturnedoncetheyprovidetheBankwithproofofownership.In2006,financialinstitu-tionstransferred$38millioninunclaimedbalancestotheBank.Therewereapproximately33,000generalenquiries,andtheBankpaidoutorreturnedatotalof$10.7milliontosatisfy7,000claims.

��

The Retail Debt ProgramThe federal government’s two retail debt instru-ments are Canada Savings Bonds (CSBs), which are redeemable at any time, and Canada Premium Bonds (CPBs), which are typically issued at a higher interest rate but are redeemable only annually. There are several ways to buy these bonds: through a network of sales agents; through organizations sponsoring the Payroll Savings Program; and through direct sales by telephone or via the Internet.

The 60th anniversary of the Canada Savings Bond program was celebrated in October 2006 at the Museum of Civilization in Gatineau. New designs for the bond certificates were launched to commemorate the anniversary.

Left to right: Finance Minister James Flaherty; Mrs. Jean Spear, Canadian war bride; and Governor Dodge

Medium-TermPlan2007–09

The Bank’s vision for fulfilling its responsibilities is to be second to none among the world’s central banks. The year 2007 is the first year of the Bank’s

new medium-term plan. The plan builds on the accomplishments of the previous plan, which focused on innovative research and the integration of

that research into analysis to support the Bank’s policy decisions; strengthening our partnerships; and enhancing the effectiveness of our communication.

TheBank’snewplanhasthreeBank-wideprioritiesinvolvinginvestmentsoverthethreeyearsoftheplan:

• renewingourinfrastructure

• creatingasuperiorworkenvironment

• stayingattheforefrontofgoodgovernancetopreservethetrustofCanadiansinourongoingstewardshipoftheBank

Toattractandretainqualifiedandtalentedstaff,theBank’shumanresourcestrategyoffersdistinctivechallengesanddevelopmentoppor-tunities,competitivetotalcompensation,andadistinctiveworkenvironment.

ThissectionoutlinestheBank’sdesiredout-comesandthestrategiestoachievethemoverthemediumterm,aswellastheprioritiesfor2007.Thecompletemedium-termplan,

approvedbytheBank’sBoardofDirectors,isavailableontheBank’sexternalwebsiteat<www.bankofcanada.ca/en/pdf/mtp_2007-09e.pdf>.

MonetaryPolicy

DesiredOutcome:ContributetoCanada’ssolideconomicperformanceandtorisinglivingstandardsforCanadians

StrategytoAchieveDesiredOutcome:Keepinflationlow,stable,andpredictablebytheuseofaclearlydefinedinflationtarget

OutcomeGoals:Achievea2percenttargetfortotalconsumerpriceinflationandrecom-mendamonetarypolicyframeworkthatwilldeliverthegreatestcontributiontoeconomicperformanceinthefuture

l o o k i n G A H e A d

Prioritywillbegiventothefollowingtopicsin2007andovermostofthemedium-termplan:

• researchthecostsandbenefitsofalowerinflationtargetandthecostsandbenefitsofaprice-leveltarget

• improveourunderstandingoftheprocessandimplicationsofglobalization

• carryoutamoreextensiveinvestigationofrealandfinanciallinkagesinthemonetarypolicytransmissionmechanism

• analyzesectoralandregionaladjustmentstolargerelativepriceshocksandothermajordisturbances

• reassesspotentialoutputgrowthinthecontextofchangingdemographicsandshiftingproductivitytrends

• exploretheboundsoftransparencyandenhancetheBank’scommunications

Currency

DesiredOutcome:Canadiansusebanknoteswithconfidence

StrategytoAchieveDesiredOutcome:Reducecounterfeitingbelowaclearlydefinedthreshold

OutcomeGoal:Reducecounterfeitingtobelow100detectedcounterfeitsannuallyforeachmilliongenuinenotesincirculationby2009

Toachievethedesiredoutcome,fourpriorityareaswillbepursuedoverthenextthreeyears:

• developasignificantlymoresecurenextgenerationofbanknotes,andbeginissuingnewseriesin2011

• increaseverificationbyretailers

• fullyengageprosecutors,law-enforcementofficers,andotherparticipantsinthejudicialsystemtoimprovecounterfeitdeterrence

• replacenotesfromolderseries,andimprovetheefficiencyandeffectivenessofnoteoperations

In2007,theBankwill:

• conductresearchonsecurityfeatures,theme,anddesignofnextgenerationofbanknotes,whilecontinuingtoevaluatevarioussubstrates

• furtheritsunderstandingofbanknoteusage,counterfeitingbehaviour,andalternativepaymentmethodsandtechnologies

• redirecteducationeffortstoengageretailersinauthenticatingbanknotes

• continuetosupportandpromotecounterfeitdeterrence

• replacenotesfromolderseries,andenhancethebanknotedistributionsystem

• refurbishagingnote-processingequipment

FinancialSystem

DesiredOutcome:ContributetomaintainingastableandefficientfinancialsysteminCanada

StrategytoAchieveDesiredOutcome:Provideessentialbankingservicesandinflu-encepublicsectoragenciesandprivatesectorbehaviourtoimprovethesafetyandefficiencyofthefinancialsystem

OutcomeGoals:Containsystemicrisk;produceinfluentialresearch,analysis,andpolicyadvice;andprovidereliablebankingservices

Theprioritiesoverthemediumtermare:

• implementastrategytoimprovethecollectionanduseoffinancialdata

• enhanceemergencypreparednessatasecondsite

• developaframeworktoassessfinancialsystemstability

• examinetheefficiencyoftheCanadianfinancialsector

In2007,theBankintendsto:

• worktowardscompletionofthenewbusinessapplicationforbankingservicesandstrengthentheresiliencyofthesystemsthatsupportbankingoperations

• carryoutfurtherresearchonthecross-borderlinkagesamongclearingandsettle-mentsystemsforpaymentsandsecurites

• analyzetheoperationsoflarge,complexfinancialinstitutionswithaviewtotheirimplicationsforthefinancialsystem

• pursueitseffortstoreformtheIMFbyenhancingtheIMF’sroleinsurveillance

FundsManagement

DesiredOutcome:Stableandeffectiveman-agementofGovernmentofCanadaandBankofCanadafinancialassets,investmentperformance,andrisks

StrategytoAchieveDesiredOutcome:Maintaineffectivepartnerships;leveragenew

Questions on the new medium-term plan

analyticaltools;reviewservices,processes,andsystems;enhancerisk-managementframework;andensureclearandeffectivegovernancearrangements

OutcomeGoal:Providecost-effectiveserviceswithinastrongrisk-managementframework,includingsoundpolicyadviceandeffectiveimplementation

Theprioritiesoverthemediumtermareto:

• enhanceanalyticcapabilities

• renewsystemsandimproveprocesses

• enhanceriskmanagement

• strengthenbusiness-continuityplanning

In2007,theBankintendstotakethefollowingkeyinitiatives:

• continuetosupportliquidityinthemarketforGovernmentofCanadasecurities

• improvethemeasurementandreportingofperformanceandrisksoftheExchangeFundAccount

• completethetransitionofsalesandmarket-ingforretaildebtfromCanadaInvestmentandSavingsintotheBank

CorporateAdministration

DesiredOutcome:EfficientandeffectivesupportofcorporateadministrationfunctionsforachievingBankobjectives

StrategiestoAchieveDesiredOutcome:FurtherdeveloptheBank’spolicyandaccount-abilityframeworktoenhanceeffectivenessandefficiencyintheareasofhumanresourcemanagement,infrastructure,andinternalcommunications

OutcomeGoal:Providecost-effectiveservicesandsoundpolicyadviceonthemanagementofBankresources

Governor Dodge addresses staff at “town hall” meeting on new medium-term plan.

Overthemediumterm,theBankwillbefacingmanyofthesamechallengesasotherorganizations.Intheareaofhumanresourcemanagement,thelabourmarketstheBankdrawsonaretightening,specializedknowledgeisinshortsupply,andincreasingretirementswillrequiremoreproactiveknowledge-retentionstrategies,successionplanning,andpossiblyretentionincentives.Tohelpmeetthesechallenges,investmentswillbemadeinanumberofareastostrengthentheworkenvironment.In2007andoverthemediumterm,theBankwillfocusonthefollowingkeyinitiatives:

• developrecruitmentandcompensationstrategiesthataddresschangingbusinessneeds,demographics,andlabourmarketconditions

• expandtheleadership-developmentprogramformanagement

• improveitscapacitytoaccessandretainknowledge

Renewingourinfrastructureisanothercorporatepriority,withtheBankinvestinginitsinformationtechnologytodeliveradvancedtechnologiesthatsupportkeybusinessobjec-tives,aswellasinitsfacilitiesandsecurity.ClearandopeninternalcommunicationwillcontinuetobeapriorityattheBank,andmanagerialeffortatalllevelswillbedevotedtoexplainingtostafftheBank’sdesiredoutcomesandpriorities,andlinkingthestaff ’sownworktothepriorityareas.Finally,accountabilityfortheBank’suseofpublicfundsincarryingoutitsresponsibilitiesiscentraltothisplan.

f i n A n c i A l R e V i e w

46 FinancialDiscussion

51 FinancialStatements

f i n A n c i A l d i s c u s s i o n

TheBank’sBalanceSheet

Tounderstandthefinancesofacentralbank,itishelpfultoknowhowitoperatesinsupportofitspublicpolicymandate.TheBank’sbalancesheetisfairlystraightforward,comparedwiththoseofmajorCanadianfinancialinstitutions,withitsassetsandliabilitiessupportingoneormoreofitsfunctions.

ThemostsignificantsingleitemontheBank’sbalancesheetistheliabilitythatiscreatedthroughtheissuanceofCanadianbanknotesundertheBank’scurrencyfunction.ThefacevalueofthebanknotesissuedisanassetinthehandsoftheCanadianpublicbutrepresentsafinancialliabilitytotheBankofCanada.Thisliabilitytendstoincreaseovertimewiththegrowthindemandforbanknotes,whichisdirectlyrelatedtothegrowthintheCanadianeconomy.ThebanknoteliabilityissupportedbytheBank’sfinancialassetsintheformofGovernmentofCanadabondsandtreasurybills.Seasonalfluctuationsinthedemandforbanknotesaremanagedbyacquiringtreasurybillsandothershort-termassets,suchasterm

repurchaseagreements,thatmaturewhentheseasonaldemandforbanknotesisexpectedtoabate.

TheBankofCanada’sfinancialassetssupportitsoperationalindependencetoconductmonetarypolicybyprovidinganindependentrevenuestreamoutsideofthegovernment’sbudgetprocess.AportionofthisrevenueisusedtofundtheBank’soperations;theremainingnetrevenueisremittedtothefederalgovernmentperiodicallythroughouttheyear.

Canada’sapproachtoimplementingmonetarypolicyrequiresthatasmallportionoftheBank’sassetsbeavailableascollateralforsaleandrepurchaseoperations.Implementingmonetarypolicybasedonaninflationtargetandflexibleexchangeratefocusesoninfluenc-ingshort-terminterestratesthroughthesettingoftheovernightrate.Oneachfixedannounce-mentdate,theBankofCanadaannouncesthetargetovernightrate,whichistheinterestratethatfinancialinstitutionschargeeachotherforovernightloans.Theoperatingrangeforthis

This section of the annual report presents management’s discussion of the financial aspects of our operations, including financial operating

highlights, financial risk management, and future accounting changes.

GovernmentofCanadatreasurybillsorbondsareinshortsupplyinthesecondarymarketandaretradingbelowapredeterminedthresholdinterestrateintherepomarket,theBankwilllendupto50percentofitsholdingsinthesesecuritiesonanovernightbasisinexchangeforothersecurities.

Unlikemostcentralbanks,theBankdoesnotholdforeignexchangereservesonitsbalancesheet.Instead,Canada’sofficialinternationalreservesarelargelyheldinaseparateentity,calledtheExchangeFundAccount,whichtheBankmanagesonbehalfofthefederalgovernment.

FinancialOperatingHighlights

Foracentralbank,profitmaximizationisnotanobjective.ThefinancesoftheBankofCanadaareshapedbytheactivitiesitundertakesinsupportofitspublicpolicyresponsibilities,asoutlinedinprevioussectionsofthisreport.

BalancesheethighlightsAt31December2006,themajorityoftheBank’s$51.6billioninassetswereheldininvestmentstotalling$48.3billion.TheBank’smainliabilityisthebanknotesincirculation,valuedat$48.8billion,whichrose6percentduringtheyear,reflectingtheincreaseddemandfornotesbytheCanadianpublic.

RevenuefrominvestmentsTotalrevenuefrominvestmentsin2006was$2.2billion,anincreaseof9percentover2005,primarilybecauseofalargerinvestmentport-folioandhigherinterestrates.Themainsourceofrevenuesisinterestearnedonholdingsoffederalgovernmentsecurities.Afterexpenses,

rateissetbypolicy,allowingdirect-clearingmembersoftheCanadianPaymentsAssociation(CPA)toholddepositswiththeBankatthetargetrateminus25basispoints,ortotakecollateralizedadvancesatthetargetrateplus25basispoints.Whenrequired,theBankwillalsoofferpurchaseandresaleagreementsandsaleandrepurchaseagreementstomaintaintheovernightratenearthetarget.

TheBank’sfinancialassetsalsosupportthefinancialsystemfunction.Everyday,relativelysmalladvancesareroutinelymadeundertheBank’sstandingliquidityfacility.FinancialintermediariesareusuallyabletoallocateliquidityamongthemselveswithouthavingtomakesignificantuseoftheBank’scollateral-izedadvanceanddepositfacilities.However,inexceptionalcircumstances,advancescouldbecomesignificantiftheBankisrequiredtoprovideemergencylendingassistancetoaliquidity-challengedfinancialinstitution.Thelastsucheventwasin1986.AdvancesfromtheBankcanbefundedbytheoutrightsalesoftreasurybills,governmentsecuritiesrepurchaseagreements(repos),ortheissuanceofinterest-bearingsecurities.

TheBank’sinvestments,managedthroughthefunds-managementfunction,consistprimarilyofgovernmentsecuritiesinaproportionthatbroadlymirrorsthestructureofthefederalgovernment’sdomesticmarketabledebt.ThismakestheBank’sbalancesheetaneutralfactorinthegovernment’sdebt-managementandfiscal-planningactivities.TheBankalsooper-atesasecurities-lendingprogramtosupporttheefficiencyofthemarketforGovernmentofCanadasecuritiesbyprovidingatemporarysecondarysourceofsecurities.Whenspecific

thenetrevenuepaidtotheGovernmentofCanadain2006was$1.9billion,approximately$160millionmorethantheamountpaidin2005.

NetrevenueisnotagoodindicatoroftheBank’smanagementperformance.Asnotedabove,theBankdealsinfinancialmarketstoachievepolicygoals,nottomaximizeitsrevenues.Forthisreason,thelevelofoperatingexpensesisabetterindicatoroftheBank’sstewardshipofpublicresources.

OperatingexpensesOperatingexpensessupporttheBank’sactivitiesinitsfourmainfunctions:monetarypolicy,currency,financialsystem,andfundsmanage-ment.Theexpensesforthesefunctionsin2006were$264million,anincreaseof$18million

from2005.Compensationandcurrency-relatedcostsrepresenttwoofthelargestexpensesbyclassofexpenditure(seenote3,page62)andalsoaccountedforasignificantportionoftheyear-over-yearincreasein2006.Expensesforretaildebtoperations,whicharenowreportedaspartoffundsmanagement,arefullyrecoveredfromtheGovernmentofCanada.

Compensation For2006,theBank’stotalcompensationexpense,madeupofsalaries,benefits,andotherstaffexpenses,increasedby$13million.Themostsignificantcostdrivercontinuestobeemployeefuturebenefitcosts,whichincreasedby$9millionin2006,representingmorethanone-halfoftheincreaseintotaloperatingexpenses.Mostofthischangewasduetothelowerdiscountrateusedtocalculatethepresentvalueoffutureobligations.Salariesincreasedbyapproximately$3million,whichwasmainlyattributabletogeneralmarketadjustments.

Currency costsBanknotes,whichareincludedincurrencycosts,increasedbyslightlymorethan$3millionin2006,reflectingtheincreasedvolumeofnotesproducedduringtheyearandthehigherunitcostoftheupgraded$5noteintroducedinNovember.Thelaunchofthe$5notecompletedtheissuanceoftheCanadian Journeyseries.

FinancialPlanfor2007

Theyear2007isthefirstoftheBank’snewmedium-termplan,whichcoverstheperiod2007–09.Thenewplanfocusesonthreestrategicpriorities:theBank’soperationalinfrastructure,workenvironment,and

Employee future benefits

Bank notes

Other operating expenses

20062005200420032002

$ millions

Operating Expenses

Net of retail debt recovery

astheseresponsibilitiesaretransferredtotheBank.Theseoperationswillcontinuetobepartofthefunds-managementfunction.

FinancialRiskManagement

Financialriskisthe riskassociatedwiththeBank’smanagementofitsassetsandliabilities,includingthosethatappearonandoffthebalancesheet.TheBankisexposedtotwounderlyingfinancialrisks–interestrateriskandcreditrisk–bothofwhichareinherentlylowrisksandaredescribedhere.

governance.Operationalexpensesfor2007(excludingbanknotecostsandnon-currentdeferredemployeebenefits)areexpectedtoincreasebynomorethan5percentrelativetothe2006budgetedspendinglevels.Overthethreeyears,theplanincludesanaverageannualgrowthinexpensesof4percent.

WiththerecentgovernmentdecisiontoconsolidatetheadministrationoftheretaildebtprogramandwinduptheCanadaInvestmentandSavingsAgency,thecoststotheBank,alongwiththeassociatedrecoveriesforthisprogram,areexpectedtogrowin2007,

Financial Profile Over the Period of the 2003–06 Medium-Term PlanThe medium-term plan that ended in 2006 estab-lished a number of strategic priorities involving investments in the Bank’s research and analytic capabilities, bank note security, and clear communi-cation within the Bank and with Canadians. As we look at the expense profile over the period, the costs were predominately driven by two factors that accounted for two-thirds of the increase: employee future benefit costs and the costs of printing bank notes.

Employee future benefits rose significantly over the four years, increasing by $34 million, which represents 36 per cent of the expense growth during the period. This increase follows updates to demographic, economic, and actuarial assumptions, as well as a period of low discount rates used to calculate the present value of future obligations.

The second significant component of expense growth is attributable to the cost of printing bank notes, which accounts for 29 per cent,

or $26 million, of the increase over the period. Bank note costs are the single largest component of operating expenses in the currency function. The medium-term plan focused on launching a new series of bank notes to protect the integrity of Canada’s currency. In 2004, the Bank issued the high-denomination notes ($20, $50, $100) in its new series with enhanced security features. The upgraded $10 and $5 notes were issued in 2005 and 2006, respectively.

The average annual increase in the remaining operating expenses was 5 per cent over the period of the plan. The focus here has been on strengthen-ing the Bank’s analytic capability and, as a result, a significant investment has been made in attracting and retaining qualified staff. Another major focus during this period, in terms of both financial and human resources, has been the redevelopment of technology systems, in particular the Bank’s analytic tools and its systems for essential banking services.

CreditriskTheBank’sportfolioisessentiallyfreeofcreditrisksincethesecuritiesheldaredirectobliga-tionsoftheGovernmentofCanada.AdvancestomembersoftheCanadianPaymentsAssociationandsecuritiespurchasedunderresaleagreementsdonotposematerialcreditriskfortheBankbecausetheyarefullycollater-alizedtransactionsbackedbyhigh-qualityCanadian-dollar-denominatedsecurities.

InterestrateriskTheBankisexposedtointerestrateriskfromfluctuationsininterestratesontreasurybillsandbondsissuedbytheGovernmentofCanada.SincetheBank’sinterestrevenuesgreatlyexceeditsexpenses,changesinunder-lyinginterestrateswouldnotaffecttheabilityoftheBanktofulfillitsfinancialobligations.

FutureAccountingChanges

TheCanadianInstituteofCharteredAccountants’newaccountingstandardswillaffecttheBankofCanada:Section 3855: Financial Instruments—Recognition and Measurement and Section 1530:Comprehensive Incomeestablishstandardsfortherecognition,measurement,andpresentationoffinancialinstruments.

Thenewstandards,describedinnote2(m)onpage62,willapplytotheBankstartingin2007.Undersection3855,theBankwilldesignateitstreasurybillportfolioasavailableforsaleand

willthereforemeasuretheseassetsatfairvalue,withanyunrealizedgainsorlossesbeingrecordedinother comprehensive income.Thebondportfoliowillbedesignatedasheldtomaturityandwillcontinuetobevaluedatamortizedcost.Thisdesignationwillstillallowbondstobelentorrepoed.

Section1530introducesanewcomponentofthebalancesheetentitled“ComprehensiveIncome.”Thisnewcomponentispartofshareholder’sequityandincludestheBank’snetrevenueandothercomprehensiveincome.Othercomprehensiveincomeincludesanygainsandlossesresultingfromthechangeinthemarketvalueofassetsthatareclassifiedasavailableforsale.Uponsettlementoftheseassets,anyassociatedgainsorlossesareremovedfromothercomprehensiveincomeandbroughtintothecurrentperiod’sincome.

ThecurrentwordingoftheBankofCanadaActrequiresthattheBankremitallofitsnetrevenuestotheGovernmentofCanada.ThegovernmenthasintroducedlegislationtoamendthecapitalclausesoftheAct,whichuponroyalassentwouldenabletheBanktoretainamaximumof$400millionofitsnetrevenuethroughtheestablishmentofaspecialreservefund.ThisreservefundwillensurethattheBankhastheabilitytomaintainacapitalbasesufficienttomanageunrealizedinvestmentgainsandlossesresultingfromthefairvaluevaluationofthetreasurybillportfolio.

f i n A n c i A l s t A t e M e n t s

(Year Ended 31 December 2006)

BANKOFCANADA

FINANCIAL REPORTING RESPONSIBILITY

TheaccompanyingfinancialstatementsoftheBankofCanadahavebeenpreparedbymanagementinaccordancewithCanadiangenerallyacceptedaccountingprinciplesandcontaincertainitemsthatreflectbestestimatesandjudgmentofmanagement.Theintegrityandreliabilityofthedatainthesefinancialstatementsaremanagement’sresponsibility.ManagementisresponsibleforensuringthatallinformationintheAnnual Reportisconsistentwiththefinancialstatements.

Insupportofitsresponsibilityfortheintegrityandreliabilityofthesefinancialstatementsandfortheaccountingsystemfromwhichtheyarederived,managementhasdevelopedandmaintainsasystemofinternalcontrolstoprovidereasonableassurancethattransactionsareproperlyauthorizedandrecorded,thatfinancialinformationisreliable,thattheassetsaresafeguardedandliabilitiesrecognized,andthattheoperationsarecarriedouteffectively.TheBankhasaninternalAuditDepartment,whosefunctionsincludereviewinginternalcontrols,includingaccountingandfinancialcontrolsandtheirapplication,onanongoingbasis.

TheBoardofDirectorsisresponsibleforensuringthatmanagementfulfillsitsresponsibilitiesforfinancialreportingandinternalcontrolsandexercisesthisresponsibilitythroughtheAuditCommitteeoftheBoard.TheAuditCommitteeiscomposedofmemberswhoareneitherofficersnoremployeesoftheBankandwhoarefinanciallyliterate.TheAuditCommitteeisthereforequalifiedtoreviewtheBank’sannualfinancialstatementsandtorecommendtheirapprovalbytheBoardofDirectors.TheAuditCommitteemeetswithmanagement,theChiefInternalAuditor,andtheBank’sexternalauditorswhoareappointedbyOrder-in-Council.TheAuditCommitteehasestablishedprocessestoevaluatetheindependenceoftheBank’sexternalauditorsandreviewsallservicesprovidedbythem.TheAuditCommitteehasadutytoreviewtheadoptionof,andchangesin,accountingprinciplesandproceduresthathaveamaterialeffectonthefinancialstatements,andtoreviewandassesskeymanagementjudgmentsandestimatesmaterialtothereportedfinancialinformation.

ThesefinancialstatementshavebeenauditedbytheBank’sexternalauditors,Ernst&YoungLLPandPricewaterhouseCoopersLLP,andtheirreportispresentedherein.TheexternalauditorshavefullandunrestrictedaccesstotheAuditCommitteetodiscusstheirauditandrelatedfindings.

D.A.Dodge,Governor S.Vokey,CA,ChiefAccountant

Ottawa,Canada

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BANKOFCANADA

AUDITORS’ REPORT

TotheMinisterofFinance,registeredshareholderoftheBankofCanada

WehaveauditedthebalancesheetoftheBankofCanadaasat31December2006andthestatementofrevenueandexpensefortheyearthenended.ThesefinancialstatementsaretheresponsibilityoftheBank’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudit.

WeconductedourauditinaccordancewithCanadiangenerallyacceptedauditingstandards.Thosestandardsrequirethatweplanandperformanaudittoobtainreasonableassurancewhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.

Inouropinion,thesefinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionoftheBankasat31December2006andtheresultsofitsoperationsanditscashflowsfortheyearthenendedinaccordancewithCanadiangenerallyacceptedaccountingprinciples.

Thefinancialstatementsasat31December2005andfortheyearthenendedwereauditedbyErnst&YoungLLPandDeloitte&ToucheLLPwhoexpressedanopinionwithoutreservationintheirreportdated20January2006.

ERNST&YOUNGLLP PRICEWATERHOUSECOOPERSLLPCharteredAccountants CharteredAccountants

Ottawa,Canada22January2007

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BANKOFCANADA

STATEMENT OF REVENUE AND EXPENSEYearended31December2006(Millionsofdollars)

2006 2005REVENUERevenuefrominvestments,netofinterestpaidondeposits

of$71.5million($43.9millionin2005) 2,159.6 1,978.3

EXPENSEbyfunction(notes1and3)Monetarypolicy 65.6 60.6

Currency 122.9 113.7

Financialsystem 35.5 34.1

Fundsmanagement 92.6 92.7Retaildebtservicesrecovery (53.1) (55.2)

Fundsmanagementnetofretaildebtrecovery 39.5 37.5

263.5 245.9

NETREVENUEFORACCOUNTOFTHERECEIVERGENERALFORCANADA 1,896.1 1,732.4

(Seeaccompanyingnotestothefinancialstatements.)

BANKOFCANADA

BALANCE SHEETAsat31December2006(Millionsofdollars)

2006 2005ASSETSDepositsinforeigncurrencies

U.S.dollars 1.4 84.6Othercurrencies 1.7 3.5

3.1 88.1

AdvancestomembersoftheCanadianPaymentsAssociation 12.0 –

Investments(note4)TreasurybillsofCanada 18,120.7 16,384.6OthersecuritiesissuedorguaranteedbyCanadamaturing

withinthreeyears 10,971.8 10,337.1OthersecuritiesissuedorguaranteedbyCanadamaturing

afterthreeyears 19,175.1 19,689.3Otherinvestments 38.0 38.0

48,305.6 46,449.0

Bankpremises(note5) 133.8 136.6

OtherassetsSecuritiespurchasedunderresaleagreements 2,853.8 1,297.1Allotherassets(note6) 317.2 349.5

3,171.0 1,646.6

51,625.5 48,320.3

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2006 2005LIABILITIESANDCAPITALBanknotesincirculation(note7) 48,762.2 46,077.9

DepositsGovernmentofCanada 2,228.1 911.1Banks 9.2 32.8OthermembersoftheCanadianPaymentsAssociation 2.6 17.1Otherdeposits 443.9 422.4

2,683.8 1,383.4

OtherliabilitiesSecuritiessoldunderrepurchaseagreements – 684.3Allotherliabilities 149.5 144.7

149.5 829.0

51,595.5 48,290.3

CapitalSharecapital(note8) 5.0 5.0Statutoryreserve(note9) 25.0 25.0

30.0 30.0

51,625.5 48,320.3

D.A.Dodge,Governor S.Vokey,CA,ChiefAccountant

OnbehalfoftheBoard

M.L.O’Brien,FCA, J.-G.Desjardins,LScCom,CFA,Chair,AuditCommittee Chair,PlanningandBudgetCommittee

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BANKOFCANADA

NOTES TO THE FINANCIAL STATEMENTSYearended31December2006(Amountsinthenotestothefinancialstatementsareinmillionsofdollars,unlessotherwisestated.)

1. ThebusinessoftheBankTheBankofCanada’sresponsibilitiesfocusonthegoalsoflowandstableinflation,asafeandsecurecurrency,financialstability,andtheefficientmanagementofgovernmentfundsandpublicdebt.Theseresponsibilitiesarecarriedoutaspartofthebroadfunctionsdescribedbelow.ExpensesintheStatement of revenue and expensearereportedonthebasisofthesefourcorporatefunctionsasderivedthroughtheBank’sallocationmodel.

MonetarypolicyContributestosolideconomicperformanceandrisinglivingstandardsforCanadiansbykeepinginflationlow,stable,andpredictable.

CurrencyDesigns,produces,anddistributesCanada’sbanknotes,focusingoncounterfeitdeterrencethroughresearchonsecurityfeatures,publiceducation,andpartnershipwithlawenforcement;replacesanddestroyswornnotes.

FinancialsystemPromotesasafe,sound,andefficientfinancialsystem,bothwithinCanadaandinternationally.

FundsmanagementProvideshigh-quality,effective,andefficientfunds-managementservices:forthegovernment,asitsfiscalagentincludingthedeliveryofretaildebtservices;fortheBank;andforotherclients.TheBankrecoversthecostofretaildebtservicesfromtheCanadaInvestmentandSavingsAgency.

InaccordancewiththeBankofCanadaAct,thenetrevenueoftheBankisremittedtotheReceiverGeneralforCanada.

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2. SignificantaccountingpoliciesThefinancialstatementsoftheBankareinaccordancewithCanadiangenerallyacceptedaccountingprinciples(GAAP)andconformtothedisclosureandaccountingrequirementsoftheBankofCanadaActandtheBank’sbylaws.Acash-flowstatementhasnotbeenprepared,sincetheliquidityandcashpositionoftheBankandothercash-flowinformationregardingtheBank’sactivitiesmaybederivedfromtheStatement of revenue and expenseandtheBalance sheet.

ThesignificantaccountingpoliciesoftheBankare:

a) AccountingestimatesThepreparationoffinancialstatementsinaccordancewithCanadiangenerallyacceptedaccountingprinciplesrequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedinthefinancialstatementsandthenotestothefinancialstatements.Theseestimates,mostlyintheareaofpensionandotheremployeefuturebenefits,arebasedonmanagement’sbestknowledgeofcurrentevents.Actualresultsmaydifferfromthoseestimates.

b) RevenuesandexpensesRevenuesandexpensesareaccountedforonanaccrualbasis.

c) EmployeebenefitplansTheBanksponsorsanumberofdefined-benefitplansthatprovidepensionandotherpost-retirementandpost-employmentbenefitstoitseligibleemployees.TheBankaccruesitsobligationsunderthesebenefitplansandtherelatedcosts,netofplanassets.Thecostsandtheobligationsoftheplansareactuariallydeterminedusingtheprojectedbenefitmethodandusingmanagement’sbestestimateoftheexpectedinvestmentperfor-manceoftheplans,salaryescalation,retirementagesofemployees,andexpectedhealthcarecosts.

Thebenefitplanexpense(income)fortheyearconsistsofthecurrentservicecost,theinterestcost,theexpectedreturnonplanassets,andtheamortizationofunrecognizedpastservicecosts,actuariallosses(gains),aswellasthetransitionalobligation(asset).Calculationoftheexpectedreturnonassetsfortheyearisbasedonthemarketvalueofplanassetsusingamarket-relatedvalueapproach.Themarket-relatedvalueofplanassetsisdeterminedusingamethodologywherethedifferencebetweentheactualandexpectedreturnonthemarketvalueofplanassetsisamortizedoverfiveyears.

Theexcessofthenetaccumulatedactuarialloss(gain)over10percentofthegreaterofthebenefitobligationandthemarket-relatedvalueofplanassetsisamortizedovertheexpectedaverageremainingservicelifetime(EARSL)ofplanmembers.Pastservicecostsarisingfromplanamendmentsaredeferredandamortizedonastraight-linebasisovertheEARSLatthedateofamendments.

On1January2000,theBankadoptedthenewaccountingstandardonemployeefuturebenefitsusingtheprospectiveapplicationmethod.Theinitialtransitionalbalancesareamortizedonastraight-linebasisovertheEARSL,asatthedateofadoption.TheEARSLhasbeendeterminedtobe11years(12yearsfortheperiod2002–04)forthepensionplansandforthelong-servicebenefitprogram,14yearsforthepost-retirementhealthcareplan,and7yearsforpost-employmentbenefitsplans.

d) TranslationofforeigncurrenciesAssetsandliabilitiesdenominatedinforeigncurrenciesaretranslatedtoCanadiandollarsattheratesofexchangeprevailingatthebalancesheetdates.

Investmentincomeistranslatedattherateineffectatthedateofthetransaction.TheresultinggainsandlossesareincludedintheStatement of revenue and expense.

e) AdvancesAdvancestomembersoftheCanadianPaymentsAssociationareliquidityloansthatarefullycollateralizedandgenerallyovernightinduration.TheBankchargesinterestonadvancesundertheLargeValueTransferSystem(LVTS)attheBankRate.

f) InvestmentsSecurities,consistingmainlyofGovernmentofCanadatreasurybillsandbonds,areheldforinvestmentpurposes.Theseinvestmentsarerecordedatcostandareadjustedforamortizationofpurchasediscountsandpremiumsusingtheconstant-yieldmethodfortreasurybillsandbankers’acceptancesandthestraight-linemethodforbonds.Theamortization,aswellasgainsandlossesondisposition,isincludedintheStatement of revenue and expenseasrevenue.

g) SecuritiesLendingProgramTheBankoperatesaSecuritiesLendingProgramtosupporttheliquidityofGovernmentofCanadasecuritiesbyprovidingasecondaryandtemporarysourceofthesesecuritiestothemarket.Thesesecurities-lendingtransactionsarefullycollateralizedandaregenerallyovernightinduration.Thesecuritiesloanedcontinuetobeaccountedforasinvestmentassets.LendingfeeschargedbytheBankonthesetransactionsareincludedinrevenueatthedateofthetransaction.

h) BankpremisesBankpremises,consistingofland,buildings,computerhardware/software,andotherequipment,arerecordedatcostlessaccumulatedamortization.Amortizationiscalcu-latedusingthestraight-linemethodandisappliedovertheestimatedusefullivesoftheassets,asshownbelow.

BuildingsComputerhardware/softwareOtherequipment

25to40years3to7years

5to15years

Projectsinprogressarenotamortizeduntiltheassetisputintouse.

i) SecuritiespurchasedunderresaleagreementsSecuritiespurchasedunderresaleagreementsarereverserepo-typetransactionsinwhichtheBankpurchasesGovernmentofCanadasecuritiesfromdesignatedcounterpartieswithanagreementtosellthembackatapredeterminedpriceonanagreedtransactiondate.Theseagreementsaretreatedascollateralizedlendingtransactionsandarerecordedonthebalancesheetattheamountsatwhichthesecuritieswereoriginallyacquiredplusaccruedinterest.

j) DepositsTheliabilitieswithinthiscategoryareCanadian-dollardemanddeposits.TheBankpaysinterestonthedepositsfortheGovernmentofCanada,banks,andotherfinancialinstitutionsatmarket-relatedrates.Interestpaidondepositsisincludedinthe Statement of revenue and expense.

k) SecuritiessoldunderrepurchaseagreementsSecuritiessoldunderrepurchaseagreementsarerepo-typetransactionsinwhichtheBanksellsGovernmentofCanadasecuritiestodesignatedcounterpartieswithanagree-menttobuythembackatapredeterminedpriceonanagreedtransactiondate.Theseagreementsaretreatedascollateralizedborrowingtransactionsandarerecordedonthebalancesheetattheamountsatwhichthesecuritieswereoriginallysoldplusaccruedinterest.

l) InsuranceTheBankdoesnotinsureagainstdirectrisksoflosstotheBank,exceptforpotentialliabilitiestothirdpartiesandwheretherearelegalorcontractualobligationstocarryinsurance.Anycostsarisingfromtheserisksarerecordedintheaccountsatthetimetheycanbereasonablyestimated.

m)FutureaccountingchangesTheCanadianInstituteofCharteredAccountants(CICA)issuedtwonewaccountingstandardsfortherecognitionandmeasurementoffinancialinstrumentsthatwillimpacttheBank:Section1530,ComprehensiveIncome;andSection3855,FinancialInstruments—RecognitionandMeasurement.TheBankwillapplytheCICA’snewaccountingrequirementseffective1January2007.

Section1530introducesanewcomponenttoequityentitledComprehensive incometorecordunrealizedgainsandlossesresultingfromthechangeinfairvalueofassetsthatareclassifiedasavailable-for-sale.RealizedgainsandlosseswouldberecognizedintheStatement of revenue and expense.

UponinitialadoptionofthenewSection3855,theBankwillberequiredtoclassifyitsfinancialassetsasheld-for-trading(HFT),available-for-sale(AFS),held-to-maturity(HTM),orloansandreceivables(L&R).Itisexpectedthat,commencingin2007,theTreasury billsandtheOther investmentsportfolioswillbeclassifiedasAFSwhiletheOther securities issued or guaranteed by CanadaportfoliowillbeclassifiedasHTM.

3. Expensebyclassofexpenditure

2006 2005

Salaries 92.9 89.5Benefitsandotherstaffexpenses 53.2 43.2Currencycosts 57.6 55.4Premisesmaintenance 23.3 21.1Servicesandsupplies 82.8 84.0Amortization 16.3 17.2

326.1 310.4RecoveriesRetaildebtservices (53.1) (55.2)Other (9.5) (9.3)

263.5 245.9

RetaildebtservicesarerecoveredfromtheCanadaInvestmentandSavingsAgency.OtherrecoveriesrepresentthefeeschargedbytheBankforavarietyofservices.

4. InvestmentsTheBankinvestsintreasurybillsandbondsissuedbytheGovernmentofCanada.TheseholdingsaredistributedtobroadlyresemblethestructureoftheGovernmentofCanadadomesticdebtoutstandingandaretypicallyheldtomaturity.Theamortizedbookvaluesoftheseinvestmentsapproximatetheirparvalues.

TherewerenosecuritiesloanedundertheSecuritiesLendingProgramasat31December2006.

TheBankalsoholds9,441sharesintheBankforInternationalSettlements(BIS)inordertoparticipateintheBISandininternationalinitiativesgenerally.

CreditriskTheportfolioisessentiallyfreeofcreditriskbecausethesecuritiesheldaredirectobligationsoftheGovernmentofCanada,theBank’sshareholder.AdvancestoMembersoftheCanadianPaymentsAssociationandsecuritiespurchasedunderresaleagreementsdonotposematerialcreditriskfortheBankbecausetheyarecollateralizedtransactionsfullybackedbyhigh-qualityCanadian-dollar-denominatedsecurities.Thecreditqualityofcollateralismanagedthroughasetofexposurelimitstiedtocreditratingsofthecollateralandtermtomaturity.

InterestrateriskTheBankisexposedtointerestrateriskarisingfromfluctuationsininterestratesontreasurybillsandbondsissuedbytheGovernmentofCanada.SincetheBank’srevenuesgreatlyexceedexpenses,changesininterestrateswouldnotaffecttheabilityoftheBanktofulfillitsobligations.FluctuationsinfairvalueoftheinstrumentresultingfromchangesininterestratesarenotreflectedintheBank’srevenuesincetheinvestmentsaretypicallyheldtomaturity.TheBankdoesnotusederivativeinstrumentstoreduceitsexposuretointerestraterisk.

FairvaluesThefairvaluesofthesecuritiespresentedbelowarebasedonquotedmarketprices.TheamortizedcostofallotherfinancialinstrumentsheldbytheBank(assetsorliabilitiesincludingaccountspayable,securitiespurchasedunderresaleagreements,andsecuritiessoldunderrepurchaseagreements)approximatesthefairvalue,giventheirshort-termnature.

TheBISsharesarenottraded;however,basedonrecentshareissues,theirfairvalueisestimatedasbeing70percentoftheBank’sinterestintheBISshareholder’sequity,whichisdenominatedinspecialdrawingrights(SDRs).

2006 2005

SecuritiesAmortizedcost Fairvalue

Averageyieldpercent

Amortizedcost

Fairvalue

Averageyieldpercent

TreasurybillsofCanada 18,120.7 18,122.7 4.2 16,384.6 16,365.2 3.2Othersecuritiesissuedor

guaranteedbyCanadamaturingwithin3years 10,971.8 11,108.4 5.0 10,337.1 10,534.9 5.1

OthersecuritiesissuedorguaranteedbyCanadamaturingafter3yearsbutnotover5years

6,639.0

6,982.0

5,768.0 6,024.4

OthersecuritiesissuedorguaranteedbyCanadamaturingafter5yearsbutnotover10years 6,438.9 6,774.7 5.0 8,127.9 8,802.2 5.4

OthersecuritiesissuedorguaranteedbyCanadamaturingafter10years 6,097.2 7,563.8 5.8 5,793.4 7,379.3 5.9

48,267.6 50,551.6 46,411.0 49,106.0

SharesintheBankforInternationalSettlements 38.0 254.4 38.0 226.0

48,305.6 50,806.0 46,449.0 49,332.0

5. Bankpremises

2006 2005

CostAccumulatedamortization

Netbookvalue Cost

Accumulatedamortization

Netbookvalue

Landandbuildings 183.5 94.0 89.5 181.6 89.5 92.1Computerhardware/

software 61.7 47.6 14.1 63.8 45.9 17.9Otherequipment 139.0 114.5 24.5 137.6 111.6 26.0

384.2 256.1 128.1 383.0 247.0 136.0

Projectsinprogress 5.7 – 5.7 0.6 – 0.6

389.9 256.1 133.8 383.6 247.0 136.6

Projectsinprogressin2006consistofupgradestotheBank’scomputerinfrastructure.

6. AllotherassetsThiscategory includesaccruedinterestonCanadianinvestmentsof$211.9million($227.5millionin2005).Italsoincludesthepensionaccruedbenefitassetof$70.6million($81.0millionin2005).

7. BanknotesincirculationInaccordancewiththeBankofCanadaAct,theBankhasthesoleauthoritytoissuebanknotesforcirculationinCanada.

Abreakdownbydenominationispresentedbelow.

2006 2005

$5 994.3 920.8$10 1,060.8 1,039.0$20 15,027.7 14,312.4$50 6,924.1 6,524.2$100 23,005.2 21,421.3Otherbanknotes 1,750.1 1,860.2

48,762.2 46,077.9

Otherbanknotesincludedenominationsthatarenolongerissuedbutremainaslegaltender.

8. SharecapitalTheauthorizedcapitaloftheBankis$5.0milliondividedinto100,000shareswithaparvalueof$50each.Thesharesarefullypaidand,inaccordancewiththeBankofCanadaAct,havebeenissuedtotheMinisterofFinance,whoisholdingthemonbehalfoftheGovernmentofCanada.

9. StatutoryreserveThestatutoryreservewasestablishedinaccordancewiththeBankofCanadaAct.Itwasaccumulatedoutofnetrevenueuntilitreachedthestipulatedmaximumamountof$25.0millionin1955.

10. EmployeebenefitplansTheBanksponsorsanumberofdefined-benefitplansthatprovidepensionandotherpost-retirementandpost-employmentbenefitstoitseligibleemployees.

ThepensionplansprovidebenefitsunderaRegisteredPensionPlanandaSupplementaryPensionArrangement.Pensioncalculationisbasedmainlyonyearsofserviceandaveragepensionableincomeandisgenerallyapplicablefromthefirstdayofemployment.Thepensionisindexedtoreflectchangesintheconsumerpriceindexonthedatepaymentsbeginandeach1Januarythereafter.

TheBanksponsorspost-retirementhealth,dental,andlifeinsurancebenefits,aswellaspost-employmentself-insuredLong-TermDisabilityandcontinuationofbenefitstodisabledemployees.TheBankalsosponsorsalong-servicebenefitprogramforemployeeshiredbefore1January2003.

TheBankmeasuresitsaccruedbenefitsobligationsandfairvalueofplanassetsforaccountingpurposesasat31Decemberofeachyear.ThemostrecentactuarialvaluationforfundingpurposesoftheRegisteredPensionPlanwasdoneasof1January2005,andthenextrequiredvaluationwillbeasof1January2008.

Thetotalcashpaymentforemployeefuturebenefitsfor2006was$10.4million($8.8millionin2005),consistingof$4.7million($4.2millionin2005)incashcontributedbytheBanktoitsfundedpensionplansand$5.7million($4.6millionin2005)incashpaymentsdirectlytobeneficiariesforitsunfundedotherbenefitsplans.

Informationabouttheemployeebenefitplansispresentedinthetablesbelow.

Planassets,benefitobligation,andplanstatusPensionbenefitplans1 Otherbenefitplans2006 2005 2006 2005

PlanassetsFairvalueofplanassetsatbeginningofyearBank’scontributionsEmployees’contributionsBenefitpaymentsandtransfersActualreturnonplanassets

893.54.76.3

(30.3)110.7

799.44.26.1

(28.8)112.6

–––––

Fair value of plan assets at year-end2 984.9 893.5 – –

BenefitobligationBenefitobligationatbeginningofyearCurrentservicecostInterestcostBenefitpaymentsandtransfersActuarialloss

887.228.738.1

(30.3)0.1

715.222.137.7

(28.8)141.0

151.16.16.4

(5.7)2.2

126.24.76.5

(4.6)18.3

Benefit obligation at year-end 923.8 887.2 160.1 151.1

PlanstatusExcess(deficiency)offairvalueofplanassets

overbenefitobligationatyear-endUnamortizednettransitionalobligation(asset)UnamortizedcostofamendmentsUnamortizednetactuarialloss

61.1(64.6)17.256.9

6.3(75.5)19.5

(160.1)18.8

2.041.3

(151.1)22.2

3.041.6

Accrued benefit asset (liability) 70.6 81.0 (98.0) (84.3)

1.FortheSupplementaryPensionArrangement,inwhichtheaccruedbenefitobligationexceedsplanassets,theaccruedbenefitobligationandfairvalueofplanassetstotalled$51.0million($48.0millionin2005)and$32.5million($26.7millionin2005),respectively.

2.Theassetsofthepensionbenefitplanswerecomposedasfollows:59percentequities,26percentbonds;9percentrealreturninvestments;3percentrealestateassets;and3percentshort-termsecuritiesandcash(58percent,27percent,10percent,3percent,and2percent,respectively,in2005).

Theaccruedbenefitassetforthedefined-benefitpensionplansisincludedinthebalancesheetcategoryAll other assets.ThetotalaccruedbenefitliabilityfortheotherbenefitsplansisincludedinthebalancesheetcategoryAll other liabilities.

BenefitplanexpensePensionbenefitplans Otherbenefitplans

2006 2005 2006 2005Currentservicecost,netof

employees’contributionsInterestcostActualreturnonplanassetsActuarialloss

22.438.1

(110.7)0.1

16.137.7

(112.6)141.0

6.16.4

–2.2

4.76.5

–18.3

Benefit plan expense (income), before adjustments to recognize the long-term nature of employee future benefit costs (50.1) 82.2 14.7 29.5

AdjustmentsDifferencebetweenexpectedreturnandactual

returnonplanassetsfortheyearDifferencebetweenamortizationofpastservice

costsfortheyearandactualplanamendmentsfortheyear

Differencebetweenamortizationofactuariallossfortheyearandactuallossonaccruedbenefitobligationfortheyear

Amortizationoftransitionalobligation(asset)

(12.9)

(135.8)

(12.6)

(16.8)

3.5Benefit plan expense recognized in the year 15.3 7.9 19.1 17.2

SignificantassumptionsThesignificantassumptionsusedareasfollows(onaweighted-averagebasis).

Pensionbenefitplans Otherbenefitplans2006 2005 2006 2005

Accruedbenefitobligationasat31DecemberDiscountrateRateofcompensationincrease

4.25%3.50%+merit

4.15%3.50%+merit

Benefitplanexpenseforyearended31DecemberDiscountrateExpectedrateofreturnonassetsRateofcompensationincrease

4.25%5.50%3.50%+merit

5.00%5.50%3.50%+merit

4.20%–3.50%+merit

4.80%–3.50%+merit

AssumedhealthcarecosttrendInitialhealthcarecosttrendrateHealthcarecosttrendratedeclinestoYearthattheratereachestheultimatetrendrate

8.20%4.75%2016

8.25%4.80%2015

2006sensitivityofkeyassumptionsChangeinobligation Changeinexpense

Impactof0.25percentincrease/decreaseinassumptions

PensionbenefitplansChangeindiscountrateChangeinthelong-termrateofreturn

onplanassets

(39.9) / 42.6

(4.6) / 4.9

(2.0) / 2.0

OtherbenefitplansChangeindiscountrate (6.5) / 7.0 (0.2) / 0.2

Impactof1.00percentincrease/decreaseinassumptions

OtherbenefitplansChangeintheassumedhealthcare

costtrendrates 22.3 / (16.8) 1.8 / (1.3)

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11. Commitments,contingencies,andguaranteesa) Operations

TheBankhasalong-termcontractwithanoutsideserviceproviderforretaildebtservices,expiringin2011.Asat31December2006,fixedpaymentstotalling$70.7millionremained,plusavariablecomponentbasedonthevolumeoftransactions.TheBankrecoversthecostofretaildebtservicesfromtheCanadaInvestmentandSavingsAgency.

TheBankoccupiesleasedpremisesinHalifax,Montréal,Toronto,Calgary,andVancouver.Asat31December2006,thefutureminimumpaymentsare$3.4millionforrent,realestatetaxesandbuildingoperations.Theexpirydatesvaryforeachlease,fromOctober2007toAugust2014.

Minimumannualpaymentsforlong-termcommitmentsOutsourced

servicesLeased

space Total

2007 18.2 1.2 19.42008 17.1 0.6 17.72009 16.2 0.3 16.52010 15.4 0.3 15.72011 3.8 0.3 4.1Thereafter – 0.7 0.7

70.7 3.4 74.1

b) ForeigncurrencycontractsTheBankisaparticipantinforeigncurrencyswapfacilitieswiththeU.S.FederalReserveforUS$2billion,theBancodeMéxicoforCan$1billion,andwiththeExchangeFundAccountoftheGovernmentofCanada.Therewerenodrawingsunderanyofthosefacilitiesin2006or2005and,therefore,therewerenocommitmentsoutstandingasat31December2006.

c) InvestmentcontractsSaleinvestmentcontractsoutstandingasat31December2006,of$2,853.8million,ataninterestrateof4.23percentunderspecialpurchaseandresaleagreements,weresettledby8January2007($1,297.1attheendof2005ataninterestrateof3.21percent).

Nopurchaseinvestmentcontractswereoutstandingasat31December2006($684.3millionattheendof2005,ataninterestrateof3.25percent).

d) ContingencyThe9,441sharesintheBIShaveanominalvalueof5,000specialdrawingrights(SDRs)ofwhich25percent,i.e.,SDR1,250,ispaidup.ThebalanceofSDR3,750iscallableatthreemonths’noticebydecisionoftheBISBoardofDirectors.TheCanadianequivalentofthiscontingentliabilitywas$62.1millionat31December2006,basedonprevailingexchangerates.

e) LegalproceedingsIn2004,legalproceedingswereinitiatedagainsttheBankrelatingtotheBankofCanadaRegisteredPensionPlan.SincetheBank’slegalcounselisoftheviewthattheplaintiff ’sclaimsforcompensationdonothaveasoundlegalbasis,managementdoesnotexpecttheoutcomeoftheproceedingstohaveamaterialeffectonthefinancialpositionoroperationsoftheBank.

f) GuaranteesInthenormalcourseofoperations,theBankentersintocertainguarantees,whicharedescribedbelow.

LargeValueTransferSystem(LVTS)GuaranteeTheLVTSisalarge-valuepaymentsystem,ownedandoperatedbytheCanadianPaymentsAssociation.Thesystem’sriskcontrolfeatures,whichincludecapsonnetdebitpositionsandcollateraltosecuretheuseofoverdraftcredit,aresufficienttopermitthesystemtoobtainthenecessaryliquiditytosettleintheeventofthefailureofthesingleLVTSparticipanthavingthelargestpossiblenetamountowing.TheBankguaranteestoprovidethisliquidity,andintheeventofthesingleparticipantfailure,theliquidityloanwillbefullycollateralized.IntheextremelyunlikelyeventthatthereweredefaultsbymorethanoneparticipantduringtheLVTSoperatingday,inanaggregateamountinexcessofthelargestpossiblenetamountowingbyasingleparticipant,therewouldnotlikelybeenoughcollateraltosecuretheamountofliquiditythattheBankwouldneedtoprovidetosettlethesystem.ThismightresultintheBankhavingunsecuredclaimsonthedefaultingparticipantsinexcessoftheamountofcollateralpledgedtotheBanktocovertheliquidityloans.TheBankwouldhavetheright,asanunsecuredcreditor,torecoveranyamountofitsliquidityloanthatwasunpaid.Theamountpotentiallyatriskunderthisguaranteeisnotdeterminable,sincetheguaranteewouldbecalledupononlyifaseriesofextremelylowprobabilityeventsweretooccur.NoamounthaseverbeenprovidedforintheliabilitiesoftheBank,andnoamounthaseverbeenpaidunderthisguarantee.

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OtherIndemnificationAgreementsInthenormalcourseofoperations,theBankprovidesindemnificationagreementswithvariouscounterpartiesintransactionssuchasserviceagreements,softwarelicences,leases,andpurchasesofgoods.Undertheseagreements,theBankagreestoindemnifythecounterpartyagainstlossorliabilityarisingfromtheactsoromissionsoftheBankinrelationtotheagreement.ThenatureoftheindemnificationagreementspreventstheBankfrommakingareasonableestimateofthemaximumpotentialamountthattheBankwouldberequiredtopaysuchcounterparties.

12. ComparativefiguresCertainofthe2005comparativefigureshavebeenreclassifiedtoconformtothecurrentyear’spresentation.

s e n i o R o f f i c e R s

GoverningCouncil

DavidA.Dodge,Governor,*W.PaulJenkins,Senior Deputy Governor*

Deputy Governors

PierreDuguay,*SherylKennedy,*DavidJ.Longworth,*TiffMacklem*

MarcusL.Jewett,QC,GeneralCounselandCorporateSecretary*

Advisers

JanetCosier,*1ClydeA.Goodlet,SteveAmbler,2JohnD.Murray,RonaldM.Parker,3

GeorgePickering,BonnieJ.Schwab,JohnG.Selody

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* MemberofExecutiveManagementCommittee1.AlsoChairoftheBoardofDirectorsoftheCanadianPaymentsAssociation2.VisitingSpecialAdviser3. OnExecutiveInterchangetoGovernmentofCanada4.AlsoDeputyChairoftheBoardofDirectorsoftheCanadianPaymentsAssociation

Note:Positionsasof31January2007

FinancialMarketsDonnaHoward,ChiefCarolynWilkins,Deputy ChiefRossMacKinnon,Director, Toronto DivisionMivilleTremblay,Director, Montréal DivisionScottHendry,Research DirectorRonMorrow,Director3

PaulChilcott,Director

FinancialRiskOfficeMarkZelmer,Director4

ResearchAgatheCôté,ChiefPaulFenton,Deputy ChiefRobertAmano,Research DirectorSharonKozicki,Research DirectorStephenMurchison,Research Director

MonetaryandFinancialAnalysisAllanCrawford,ChiefDinahMaclean,Deputy ChiefWalterN.Engert,Research DirectorPierreSt-Amant,Research Director

InternationalLawrenceL.Schembri,ChiefGraydonPaulin,Deputy ChiefDonaldColetti,Research DirectorRobertLafrance,Research Director

BankingOperationsGerryT.Gaetz,ChiefDaleM.Fleck,Associate ChiefLouiseHyland,Director, Financial System and

Funds Management

NicolePoirier,Director, Currency Communication and Compliance

CharlesSpencer,Director, Currency Research and Development

RichardWall,Director, Currency Operations

ExecutiveandLegalServicesMarcusL.Jewett,General Counsel and

Corporate Secretary*ColleenLeighton,Deputy Corporate SecretaryLornaThomas,Special Assistant to the GovernorRobertTurnbull,Assistant General Counsel

CommunicationsDenisSchuthe,Chief

CorporateServicesSheilaNiven,Chief*JaniceGabie,Deputy ChiefFrancesBoire-Carrière,Director, Human

Resources ServicesJohnOtterspoor,Director, Information

Technology ServicesSteveLittle,Deputy Director, Information

Technology ServicesJohnReinburg,Director, Security and

Facilities Services

FinancialServicesSheilaVokey,Chief and Chief Accountant*RudyWytenburg,Deputy Chief

AuditDavidSullivan,Chief Internal Auditor

ForFurtherInformationabouttheBankofCanada

AtlanticProvinces1583HollisStreet,5thFloor,Halifax,NovaScotiaB3J1V4DavidAmirault,Senior Regional

Representative (Economics)MoniqueGuérin,Senior Regional

Representative (Currency)

Quebec1501McGillCollegeAvenue,Suite2030Montréal,QuebecH3A3M8ThérèseLaflèche,Senior Regional

Representative (Economics)Vacant,Senior Regional

Ontario150KingStreetWest,20thFloor,Suite2000Toronto,OntarioM5H1J9Hung-HayLau,Senior Regional

Representative (Economics)PauldeSwart,Senior Regional

PrairieProvinces,Nunavut,andNorthwestTerritories404–6thAvenueSW,Suite200Calgary,AlbertaT2P0R9MarkIlling,Senior Regional

Representative (Economics)TedMieszkalski,Senior Regional

BritishColumbiaandYukon200GranvilleStreet,Suite2710Vancouver,BritishColumbiaV6C1S4FaridNovin,Senior Regional

Representative (Economics)TrevorFrers,Senior Regional

NewYorkOfficeCanadianConsulateGeneral1251AvenueoftheAmericasNewYork,NY10020-1175U.S.A.ZahirLalani,Consul and Senior

Representative for the Bank of Canada

PublicationsMonetary Policy Report and UpdatesAdetailedsummaryoftheBank’spoliciesandstrategies,aswellasalookatthecurrenteconomicclimateanditsimplicationsforinflation.ReportspublishedinAprilandOctober;UpdatespublishedinJanuaryandJuly.Withoutcharge.

Business Outlook SurveyPublishedquarterly.Withoutcharge.

Financial System ReviewBringstogethertheBank’sresearch,analyses,andjudgmentsonvariousissuesanddevelopmentsconcerningthefinancialsystem.Publishedsemi-annually.Withoutcharge.

Bank of Canada ReviewAquarterlypublicationthatcontainseconomiccommentaryandfeaturearticles.Bysubscription.

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Bank of Canada Annual Report 2006 · policy interest rate (the target for the overnight interest...

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Transcript of Bank of Canada Annual Report 2006 · policy interest rate (the target for the overnight interest...

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1 Interest Rate Options Interest rate options provide the right to receive one interest rate and pay another. An interest rate call pays off if the.