The Bank of Canada may have exceeded its statutory authority in its efforts to provide liquidity during the credit crunch, according to a research note from the C.D. Howe Institute. As a result, the think tank says that the central bank’s governing legislation should be revisited.

“When trouble erupted last summer in credit markets around the world, several central banks, including the Bank of Canada, took special steps to ensure short-term financing was available to financial institutions. For the Bank of Canada, these steps included extending the list of securities it would accept as collateral when providing financing,” it notes.

However, according to the brief by John-Paul Koning, the Bank’s actions in August may have exceeded its statutory authority. “If Parliament believes the Bank should have the scope in law to act as it did, accepting some commercial financial securities as collateral – without requiring the governor to declare a financial market emergency – legislative changes are needed,” it maintains.

The paper says that Parliament should decide whether it is necessary to change the Bank of Canada Act to allow open-market operations to include modern commercial debt securities such as commercial paper, foreign bonds, and corporate bonds. “There would be risks associated with such an extension, if market participants came to expect the Bank to provide financial liquidity in an ever-widening set of circumstances, yet clarity on the Bank’s authority is nonetheless needed,” it says.

“It would be doubly unfortunate if the issue goes ignored and, come the next crisis, the Bank again announces an extension of its powers,” it says.

“This would be unfortunate for two reasons. As a matter of principle, arbitrary exercise of power is problematic in any democratic context,” the paper adds. “Second, while… the Act gives the Bank extended buying and selling powers in case of a perceived financial emergency, deploying these powers requires the Governor to publicly state that an emergency exists. He is permitted to delay this declaration if such an announcement would be expected to exacerbate the situation – as typically it would. This difficulty makes the efficacy of this section questionable.”

“Any future announcement by the Bank giving itself powers beyond its normal mandate could only imply that the Bank believes a crisis is at hand, and that the Governor knows something that observers do not,” it says, pointing out that the potential for confusion deserves redress.

Additionally, it says that the Bank of Canada should offer Canadians a comment on its actions of this past August.