The concept of settlement balances is simple in definition but complex when it comes to understanding how they interact between a central bank and the financial system. Settlement balances can be defined as interest-bearing deposits that belong to participants in Canada’s payment system and are an integral part of the high-value payment system.
In response to the economic shock caused by the COVID-19 pandemic, the Bank of Canada has taken a series of extraordinary policy actions to provide exceptional liquidity to support the economy and ensure a stable and efficient Canadian financial system. The Bank’s extraordinary political actions resulted in a rapid increase in the Bank’s assets, followed by a corresponding increase in liabilities, primarily in the form of settlement balances. In fact, settlement balances have grown more than 1,500 times their pre-pandemic amount.
The significant increase in settlement balances has sparked public interest; people want to understand them better. Specifically, people want to explore how settlement balances are created and the Bank’s role in this process, and what effects high levels can have on the Bank’s balance sheet and the financial system in general.
This article breaks down settlement balances into four key concepts. It also provides historical context, explores the current state of settlement balances at the Bank of Canada, explains the factors that will influence their future development, and examines the regulatory impacts of some of the actions taken. This work aims to broaden public understanding of the Bank’s role in promoting a safe and stable financial system in Canada.