Overnight loans in Canada are short-term borrowing arrangements between financial institutions, usually banks, where funds are lent for one business day at an interest rate tied to the central bank's overnight rate. These loans help banks manage daily liquidity by allowing those with surpluses to lend and those with shortfalls to borrow through systems like the Large Value Transfer System. The Bank of Canada sets the target overnight rate and maintains an operating band to guide market rates, influencing prime rates and broader economic conditions. While overnight loans offer flexibility and lower costs for institutions, they also expose them to market volatility and liquidity risks.
Requirements and Conditions
Requirements
Conditions
Overnight loans are essential for maintaining short-term financing and liquidity in the financial system. They allow financial institutions to borrow or lend funds for very short periods, usually just one business day, helping to keep interbank transactions running smoothly and supporting the overall stability of the banking sector. The overnight lending market also plays a key role in monetary policy, as central banks use the overnight rate to guide broader economic conditions.
