The Bank of Canada’s proposed liquidity backstop for troubled financial firms is a positive for Canadian banks and credit unions, says Moody’s Investors Service.
Last week, the central bank announced plans for the Standing Term Liquidity Facility (STLF), which would serve as a “last-resort liquidity mechanism” for financial institutions that face a specific operational risk event, such as a major cyberattack, system failure or natural disaster.
Moody’s said the STLF, which is to be implemented by the end of 2020, “would be credit-positive for Canadian banks and credit unions because it would provide temporary liquidity support to otherwise financially sound institutions undergoing an operational event that erodes depositor and investor confidence.”
The proposed facility will be available to a broader selection of financial institutions than the existing liquidity mechanisms, and will accept a wider range of securities as collateral, Moody’s said. “Eligible collateral and related costs will be known in advance, which will allow institutions to adjust their contingent liquidity plans to align with those of the central bank.”
The rating agency said the proposed facility would also help enhance the resilience of the overall financial system.
“Significantly, the central bank will provide support to financial institutions facing cybersecurity threats,” the agency said, noting that the banking sector faces a “high” level of cyber risk. “Data and technology are integral to banks’ franchise strength, making them an attractive target for cybercriminals.”