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The best way to understand what the Bank of Canada has done to its balance sheet is to imagine a private institution doing the same in a free market. If a manufacturing firm sold off 42% of its assets, say some factories, and replaced them with assets classified as “other,” you can be sure the holders of that firm’s liabilities — bankers, bondholders and the like — would raise the alarm bells, maybe even selling off their holdings.
If the Royal Bank sold 42% of its performing loans and replaced them with mystery assets, it’s probable that a portion of depositors would get nervous, close their accounts, and go to the Bank of Montreal to do business.
Likewise, the Bank of Canada’s decision to lower the stability and transparency of its balance sheet may incite people to sell Bank of Canada liabilities. The result would be a drop in these liabilities’ value, which is just a different way of saying inflation, or a decline in the purchasing power of money.
Of course the bank doesn’t operate in a free market.
As a monopoly provider of currency, Canadians are forced to hold some of
its liabilities as a means of paying for the things they need. When the quality of the assets behind these liabilities is being degraded they can only bite their tongue rather than turn to another provider. This is unfortunate. Increased transparency and reassurances from the central bank that it is not sacrificing the integrity of our dollar with mystery assets just to help the big banks would help restore some trust. If not, its time to remind the bank that monopolies that don’t help Canadians deserve to be broken up.
-John Paul Koning is a stock market researcher at Pollitt & Co, a brokerage based in Toronto.
