Bank of Canada Annual Report 2006 · policy interest rate (the target for the overnight interest...
Transcript of 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
ww
w.b
anko
fcan
ada.
ca
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
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
Ñ
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
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
2
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
�
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
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
�
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.
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
6
“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
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
�
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
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
�
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
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
�
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.
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
��
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
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
�2
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>.
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
��
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 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
�4
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
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
��
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
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
�6
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
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
��
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
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
��
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
0
1
2
3
4
5
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
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
20
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
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
2�
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.
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
22
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
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
2�
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
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
2�
medium-termplan,theBankaimstoreducecounterfeitingtofewerthan100detectedcounterfeitspermillionnotesincirculationby2009,from221in2006and326in2005.
Number of Counterfeit Bank Notes Found in Circulation
Value of Counterfeit Bank Notes Found in Circulation
0
2
4
6
8
10
12
14
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.
0
100
200
300
400
500
600
2006200520042003200220012000
$5 $20 $100
$10 $50
Thousands of notes
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
26
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.
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
2�
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.
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
2�
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.
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
2�
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.
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
��
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
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
�2
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
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
��
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.
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
�4
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
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
��
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
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
��
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
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
��
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.
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
��
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
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
4�
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
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
42
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
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
4�
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.
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
44
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.
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
4�
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
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
4�
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
0
50
100
150
200
250
300
20062005200420032002
$ millions
Operating Expenses
Net of retail debt recovery
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
4�
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.
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
�0
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)
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
�2
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
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
��
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
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
��
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.)
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
�6
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
(Seeaccompanyingnotestothefinancialstatements.)
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
��
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
(Seeaccompanyingnotestothefinancialstatements.)
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
��
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.
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
��
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.
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
60
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.
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
6�
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.
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
62
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.
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
6�
4. InvestmentsTheBankinvestsintreasurybillsandbondsissuedbytheGovernmentofCanada.TheseholdingsaredistributedtobroadlyresemblethestructureoftheGovernmentofCanadadomesticdebtoutstandingandaretypicallyheldtomaturity.Theamortizedbookvaluesoftheseinvestmentsapproximatetheirparvalues.
TherewerenosecuritiesloanedundertheSecuritiesLendingProgramasat31December2006.
TheBankalsoholds9,441sharesintheBankforInternationalSettlements(BIS)inordertoparticipateintheBISandininternationalinitiativesgenerally.
CreditriskTheportfolioisessentiallyfreeofcreditriskbecausethesecuritiesheldaredirectobligationsoftheGovernmentofCanada,theBank’sshareholder.AdvancestoMembersoftheCanadianPaymentsAssociationandsecuritiespurchasedunderresaleagreementsdonotposematerialcreditriskfortheBankbecausetheyarecollateralizedtransactionsfullybackedbyhigh-qualityCanadian-dollar-denominatedsecurities.Thecreditqualityofcollateralismanagedthroughasetofexposurelimitstiedtocreditratingsofthecollateralandtermtomaturity.
InterestrateriskTheBankisexposedtointerestrateriskarisingfromfluctuationsininterestratesontreasurybillsandbondsissuedbytheGovernmentofCanada.SincetheBank’srevenuesgreatlyexceedexpenses,changesininterestrateswouldnotaffecttheabilityoftheBanktofulfillitsobligations.FluctuationsinfairvalueoftheinstrumentresultingfromchangesininterestratesarenotreflectedintheBank’srevenuesincetheinvestmentsaretypicallyheldtomaturity.TheBankdoesnotusederivativeinstrumentstoreduceitsexposuretointerestraterisk.
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
64
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
5.4
5,768.0 6,024.4
5.1
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
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
6�
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).
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
66
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.
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
6�
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.
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
6�
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
130.7
(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.
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
6�
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)
67.7
2.3
8.3
(12.9)
71.8
2.3
(135.8)
(12.6)
–
1.0
(0.1)
3.5
–
1.0
(16.8)
3.5Benefit plan expense recognized in the year 15.3 7.9 19.1 17.2
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
�0
SignificantassumptionsThesignificantassumptionsusedareasfollows(onaweighted-averagebasis).
Pensionbenefitplans Otherbenefitplans2006 2005 2006 2005
Accruedbenefitobligationasat31DecemberDiscountrateRateofcompensationincrease
4.25%3.50%+merit
4.25%3.50%+merit
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
0/0
(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)
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
��
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).
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
�2
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.
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
��
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
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
��
* 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
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
�6
AtlanticProvinces1583HollisStreet,5thFloor,Halifax,NovaScotiaB3J1V4DavidAmirault,Senior Regional
Representative (Economics)MoniqueGuérin,Senior Regional
Representative (Currency)
Quebec1501McGillCollegeAvenue,Suite2030Montréal,QuebecH3A3M8ThérèseLaflèche,Senior Regional
Representative (Economics)Vacant,Senior Regional
Representative (Currency)
Ontario150KingStreetWest,20thFloor,Suite2000Toronto,OntarioM5H1J9Hung-HayLau,Senior Regional
Representative (Economics)PauldeSwart,Senior Regional
Representative (Currency)
PrairieProvinces,Nunavut,andNorthwestTerritories404–6thAvenueSW,Suite200Calgary,AlbertaT2P0R9MarkIlling,Senior Regional
Representative (Economics)TedMieszkalski,Senior Regional
Representative (Currency)
BritishColumbiaandYukon200GranvilleStreet,Suite2710Vancouver,BritishColumbiaV6C1S4FaridNovin,Senior Regional
Representative (Economics)TrevorFrers,Senior Regional
Representative (Currency)
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.
Bank of Canada Banking and Financial Statistics AcomprehensivepackageofCanadiandata.Publishedmonthly.Bysubscription.
Weekly Financial StatisticsA20-pagepackageofbankingandmoneymarketstatistics.Bysubscription.
Forinformationabouttheseandotherpublications,contact:PublicationsDistribution234WellingtonStreet,OttawaK1A0G9Telephone:613782-8248TollfreeinNorthAmerica:1877782-8248Fax:613782-8874Email:[email protected]
Internetwww.bankofcanada.ca
Providestimelyaccesstopressreleases,speechesbytheGovernor,mostofourmajorpublications,andcurrentfinancialdata.
PublicInformationForgeneralinformationontheroleandfunctionsoftheBank,contactourPublicInformationOffice.
Telephone:1800303-1282Fax:613782-7713Email:[email protected]
For information on unclaimed balances: Telephone:1888891-6398Fax:613782-7802Email:[email protected]
BankofCanadaRegionalOffices