By Ketki Saxena
Investing.com -- In a week of earnings from Big Canadian banks, we have the latest results from the biggest bank of all: the Bank of Canada.
And the picture is far from rosy. For the first time in its 87-year history, the Bank of Canada incurred a quarterly loss. The Bank of Canada lost $522 million in the third quarter of this year, attributing the loss to interest charges on deposits at the bank, which have grown amid rapidly rising interest rates.
In a way, the situation is of the central bank’s own making: this year’s interest rate hikes spree has raised the cost of interest charges the BoC must pay on settlement balances deposited in the accounts of big banks.
These settlement balances were used to pay for the BoC’s purchasing program of of government bonds, which it dramatically expanded during the pandemic to stimulate demand in the economy (quantitative easing).
While interest expenses grow, the income received from government bonds remains fixed.The losses on settlement balances interest were enough to outweigh the bank’s increasing revenue from interest on its assets.
The quarterly loss had been largely expected, with BoC governor Tiff Macklem preemptively addressing the situation at his appearance before the House of Commons finance committee last week.
At the time, Mr. Macklem noted that "Following a period of losses, the Bank of Canada will return to positive net earnings”. He did not however provide an anticipated timeline for the expected period of losses, noting instead that it will depend on interest rates and the state of the economy. He noted the size and duration of the losses will depend on the path of interest rates and the evolution of the economy.
Mr. Macklem also emphasized that the loss is an accounting concern, unrelated to the bank’s ability to conduct monetary policy.