To bolster the resilience of the financial system, the Bank of Canada is planning to introduce a new liquidity backstop for financial institutions that face unusual stress due to an event such as a crippling cyberattack or natural disaster.
On Wednesday, the central bank announced the launch of the Standing Term Liquidity Facility (STLF), which would provide loans to a financial firm facing exceptional liquidity stress.
That stress could be brought on by a major cyber breach, a systems failure, a natural disaster or other events that induce a liquidity shock for a particular firm.
The new facility would be used to prevent liquidity stress from spreading throughout the financial system, causing a much bigger problem.
“The STLF is intended to provide greater confidence that, where the Bank of Canada has no concerns about its soundness, a financial institution facing an idiosyncratic liquidity stress will have access to central bank liquidity on terms that are known in advance,” the central bank said.
The provision of the STLF will be disclosed in the central bank’s periodic reporting, but it will not identify firms that utilize the facility.
In the weeks ahead, the Bank of Canada says that it will conduct targeted consultations on the proposed design of the new liquidity facility. It aims to complete those consultations by the end of the year, and to publish its formal policy in the first half of 2020.
“While the bank’s current framework has been effective in achieving the bank’s objectives, the addition of the STLF will further strengthen the overall framework in response to ongoing changes in the financial system,” the central bank said.