B. Bank of Canada

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 38-44

Page 38

The Bank of Canada came into existence as the central bank on 11 March 1935.¹

In contrast to other common law countries, the creation of a central bank was relatively late in Canadian economic history, probably because many central bank functions had been accommodated within the chartered banks over the course of the nineteenth century. The existence of national banks of significant commercial sophistication meant that one, the Bank of Montreal, could carry out some of the functions of a central bank, particularly the management of the federal government account. A national branch bank clearing system obviated the clearing problems experienced, for example, in the United States prior to the establishment of the Federal Reserve System and senior bankers advised and cooperated with the government. Such cooperation was evident during the First World War, when the Department of Finance was formed and relied on the banking community for advice when it performed some of the functions of a central bank such as holding reserves and supervising bank notes.

The economic boom of the 1920s and the economic bust of the early 1930s, together with the problem of settling balances between Canada and London once the United Kingdom abandoned the gold standard in 1931, prompted discussion of the need for a central bank to regulate monetary policy and settle international accounts. In 1933, the British Law Lord, Lord Macmillan, who had recently chaired a U.K. commission on financial matters, agreed to chair the Royal Commission on Banking and Currency in Canada which recommended the establishment of a central bank. The Bank of Canada began operations in March 1935.

The functions of the Bank of Canada are set out in the preamble to its Act:

... to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada.²

Page 39

The Bank of Canada is a corporation³established by legislation, not a Crown corporation, department, or agency of the federal government. Its head office is in Ottawa, but it may establish other branches and agencies within Canada and abroad.⁴

It is managed by a board of directors composed of the Governor, a Deputy Governor and twelve directors, together with the Deputy Minister of Finance, who does not have the right to vote.⁵

The Governor and Deputy Governor of the Bank are appointed by the board with the approval of the Governor in Council⁶for renewable seven-year terms.⁷

They are to have proven financial experience,⁸be Canadian citizens under seventy-five years of age, and not be employed by any other government agency or have associations with any other organization of a related nature.⁹

Additional Deputy Governors may be appointed by the board.¹⁰

The Governor is the chief executive officer of the Bank.¹¹

The directors are appointed by the Minister of Finance with the approval of the Governor in Council for renewable three-year terms.¹²

A director must be a Canadian citizen ordinarily resident in Canada, under seventy-five years of age, and not employed by any other government agency or have associations with any other organization of a related nature.¹³

Directors are subject to statutory disclosure of conflict rules¹⁴and are entitled to directors’ fees for attendance at directors’ meetings.¹⁵

The Governor is the chair of the board of directors.¹⁶

The Act provides that it is an offence for a Governor, Deputy Governor, or director to hold or continue in office knowing of his or her ineligibility. The penalties are on summary conviction a fine of not more

Page 40

than $100,000 or imprisonment for not more than six months or both.¹⁷

All directors, officers, and employees are required to take an oath or make a solemn affirmation of fidelity and secrecy.¹⁸

The Bank of Canada is required to have a minimum base capital of $5M divided into 100,000 shares at a par value of $50.00 each issued to the Minister of Finance to hold on behalf of the Crown in right of Canada.¹⁹

The board may employ such officers and employees as the executive committee deems necessary and establish a pension fund for them.²⁰

The Bank is required to establish a reserve fund into which any annual surplus from the operations of the Bank is to be applied if the reserve fund is less than the paid-up capital until the reserve fund is five times the paid-up capital. Then the surplus shall form part of the Consolidated Revenue Fund.²¹

The affairs of the Bank are to be audited annually by two firms of accountants appointed by the Governor in Council on the recommendation of the Minister of Finance.²²

The board is empowered to make by-laws relating to meetings, quorums, directors’ fees, duties and conduct of the officers and employees, the form of the annual statement of accounts, and the management generally of the bank.²³

Insolvency and winding-up legislation does not apply to the Bank, as it can be wound up only by Parliament.²⁴

In short, the Bank of Canada as a body corporate operates in a relatively similar fashion to any other body corporate in Canada.

The business and powers of the Bank set it apart from other corporations for the specific functions it was incorporated to perform. The Act sets out numerous activities in which it may engage, such as buying and selling precious metals, foreign currencies, government securities guaranteed by the governments of Canada, the United States, Japan, or any European Union country, International Monetary Fund (IMF) special drawing rights, certain negotiable instruments, and any other securities in a severe and unusual stress to promote Canadian financial stability.²⁵

The Bank of Canada may also make loans to the Canadian

Page 41

Payments Association or to the federal or provincial governments;²⁶accept deposits from the federal or provincial governments, any bank or certain foreign banks, the central banks of other countries, the Bank for International Settlements (BIS), the IMF, or other international financial organizations;²⁷open accounts in other central banks or in the BIS;²⁸deal in real property;²⁹and engage in any incidental or consequential business activity.³⁰

In addition to these activities, which the Bank of Canada may carry out on its own in its own right, the Act also authorizes the Bank to act in relation to other financial institutions. First, the Bank may acquire from any bank or foreign bank any collateral securities held under Part VIII of the Bank Act and exercise all rights and remedies inherent in them.³¹

Secondly, the Bank is the depository for unclaimed balances, which the Bank Act requires Canadian banks to remit to the central bank if unclaimed for a period of ten years,³²and becomes liable for the balance to the customer or the customer’s legal representative. However, the Bank of Canada is not liable if the unpaid balance was less than $1,000 and forty years have passed since the last transaction on the account or the last time a statement of account was requested or acknowledged by the customer.³³

The Bank is required to pay interest on these deposits.³⁴

Once the forty-year period has elapsed, the Bank is required to pay the amount it received, without interest, to the Receiver General of Canada, to form part of the Consolidated Revenue Fund, and the Bank may then destroy all records relating to the debt.³⁵

Thirdly, the Bank may require the Superintendent of Financial Institutions to inspect any financial institution, and the Superintendent may in turn require the Bank to pay any extraordinary costs of the inspection.³⁶

Fourthly, the Bank acts as the fiscal agent of the Government

Page 42

of Canada, including management of the public debt at...