Bank of Canada phasing out 3 programs set up in early days of COVID-19 to provide emergency liquidity

The Bank of Canada is winding down three emergency programs it set up to provide support to financial institutions during the early days of the pandemic, as demand for all three programs is falling now thatthings are getting back to normal.

In a news release late Thursday, thecentral bank saidit will closetwo programs known as the Bankers' Acceptance Purchase Facility, or BAPF,andthe Canada Mortgage Bond Purchase Program, or CMBPP,as of Oct.26. The bank also saidit will reduce the frequency of another program, known as the Term Repo operations, from once a weekto everytwo weeksstarting on Oct.21.

The programs are all slightly different in their focusbut serve the same broad function: they were set up in the spring as a way to ensure that financial firms have access to cash to lend out to credit-worthy consumers and businesses that need it.

The mortgage bond program accomplishedthis by having the central bank buy up billions of dollars worth ofinsured mortgages from lenders and move them on to its balance sheet, which makes it easier forlenders to go out and lendmoney to someone else.

The bankers' acceptances and repoor "repurchase" programs functioned much the same way, each essentially lowering the cost of borrowing for financial firms that participated, so that those companies could then turn around and lend money out to consumers and businesses as cheaply as possible, too.

The central bank said it was willing to take on upto $500 million worth of mortgages a week as of March, and some weeks came close to that threshold. But since August, banks have been using the program much less.

Similarly, the bankers' acceptances hasn't been used since April, and the term repo facility was used heavily up until about May, but lightly so ever since.

Economist Benjamin Reitzeswith Bank of Montrealsays the market reacted by driving up the yields on existing CMBs by a few basis points, something he described as an "overreaction."

"The announcement comes as a bit of surprise as there was no hint of this coming, and so the knee-jerk reaction can be forgiven," he said.

"The program hasn't seen significant use in recent months so the termination makes some sense.[And]the housing market is absolutely on fire, so it's not as if it needs any more support."

Scaling back other programs

The moves come about a month after the central bank announced it was scaling back two other emergency programs, one to buy provincial money market securitiesand another that bought up federal government treasury bills for the same reason to backstop liquidity.

All of these liquidity programs winding down are a sign that the financial system is getting back to normal, and the bank no longer feels obligated to roll out emergency programs to keep things running.

"Canadian banks are flush with cash right now," said Ian Pollick, head of fixed income at CIBC.

He saidCanadian banks are currently sitting on about $330 billion in cash and cash equivalents10 times the level they had before the pandemicso it's small wonder there is now limited demand for these emergency programs.

"There has not been any take-up in the Bank of Canada's term-repo operations for four consecutive weeks now," Pollicksaid.

While the moves werean encouraging sign that things may be getting back to normal, the bank madeit clear it is ready to reopen the programsif things change.

"The Bank remains committed to providing liquidity as required to support the functioning of the Canadian financial system," the Bank of Canada said. "Any discontinued facilities can be restarted if necessary."