Bank of Canada is on track to lose over $5 billion in 2023: report

In 2022, the Bank of Canada experienced its first loss in its 87-year history, and despite this, they paid themselves nearly $10 million in performance bonuses. This year, the bank is on track to lose over $5 billion.

Bank of Canada is on track to lose over $5 billion in 2023: report
THE CANADIAN PRESS/Adrian Wyld
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The Bank of Canada released its third fiscal quarter report last month and the numbers paint an incredibly bleak outlook for the country.

The central bank has incurred $4,461 billion in net losses for the nine-month period ending on September 30, 2023, and no one wants to talk about it, said 'Martyupnorth,' a fact-checker based out of rural Alberta.

"Not even the Conservatives [want to talk about it] because it's so bad," he claimed. "They don't want to scare Canadians."

According to the Bank’s quarterly report, the extensive losses occurred primarily because the interest incurred on deposits exceeded the interest earned on investments. 

The interest expense on deposits rose after a 4.75% interest rate hike from 0.25% in the first quarter of 2022 to 5.00% in the third quarter of 2023.

"Last year the Bank of Canada had its first loss in its 87-year history, and they paid themselves nearly $10 million in performance bonuses," said Martyupnorth. "This year the bank is on track to lose over $5 billion because of bad borrowing."

Last December, Bank of Canada Governor Tiff Macklem acknowledged the central bank would expect losses for the first time since its inception in 1935. It went on to lose $522 million during the third quarter of 2022.

The Bank of Canada expanded its assets significantly during the pandemic as part of its government bond purchasing program, earning swift pushback from Opposition parties at the Commons.

Also known as quantitative easing, the policy served the central bank's efforts to stimulate the economy, until an April 13, 2022, announcement suggested murky waters ahead.

"The Bank’s mandate under the Bank of Canada Act is to promote the economic and financial welfare of Canada," said the quarterly report. "Its activities and operations are undertaken in support of this mandate and not with the objective of generating revenue or profit."

However, the expansion in assets now costs the central bank more than it earns from those assets, having paid for the COVID government bonds with the creation of settlement balances.

The bank’s aggressive push to increase interest rates since the first quarter of 2022 led to notable discrepancies on the balance sheet that are expected to worsen as interest rates remain elevated.

"It is now paying a higher interest rate on its liabilities – mostly deposits by Bay Street banks held at the central bank — than it is earning on its assets," reported the Globe and Mail.

Bank of Canada spokesperson Paul Badertscher told the publication that the central bank is expecting total losses of between $5 billion and $6 billion over the next few years. 

"Roughly estimated, the bank should return to positive net interest income sometime in 2024 or 2025," he said.

Macklem noted the size and duration of the losses would depend on the path of interest rates and the economy's evolution. "As interest rates increase, we are starting to incur net interest rate losses," he said at the time.

He extrapolated that the Bank would return to positive net earnings after "a period of losses" — looking to the federal government for a solution to balance its books. Economists noted taxpayers would cover those losses, reported CTV News.

In January 2023, the C.D. Howe Institute estimated the total losses over the next two to three years would add up to between $3.6 and $8.8 billion.

"A lot of what determines the size of the losses really comes down to what interest rates are going to be over the next two to three years," said Trevor Tombe, an economics professor at the University of Calgary and co-author of the report.

"Any other potential reputational hits that it takes might further erode public confidence in the institution," he added.

However, Macklem and Tombe concurred the unprecedented $522 million loss would not affect the Bank's ability to conduct monetary policy, given it had always turned a profit. According to the report, those profits since 1935 amount to roughly $160 billion in 2021 dollars.

The report co-author suggested an amendment to the Bank of Canada Act to permit the central bank to hold onto profits instead of a mandated transfer to federal coffers.

"We should anticipate that we might find ourselves in a situation like this, again," said Tombe. "And so, this is an opportunity to potentially think about larger reforms to the Bank of Canada Act to ensure that we are ready for the next time."

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