OTTAWA (Reuters) - Bank of Canada Governor Mark Carney threw his support behind Washington’s “bold and timely” $700-billion financial industry bailout package on Thursday, saying it could minimize the economic cost and duration of the global credit crisis if well executed.
He said Canada’s financial institutions were much better capitalized than their U.S. and global peers, but warned that the Canadian economy is not immune to the fallout from the global financial crisis.
Carney said several articles of faith in the financial system have been shaken -- that good collateral can always be used to raise liquidity, that certain institutions are too big or interconnected to fail, and that this was merely a liquidity crisis.
“Fortunately, even this ferocious storm has a silver lining: its cathartic nature and the decisive policy response it is prompting could mark the beginning of the end of a 14-month crisis that has gripped the global financial system,” he said in a speech in Montreal.
The U.S. bailout plan being examined in Washington now would help firms “right-size” their balance sheets, re-liquefy closed markets and establish market prices for distressed assets, Carney said.
“This should eventually encourage private buyers to re-enter the market and complete the deleveraging process. A well-executed program will undoubtedly speed the resolution of this crisis and limit its economic cost.”
This was the last scheduled speech by the Bank of Canada before its October 21 interest rate decision. Carney did not directly address rates except to say the central bank would not deviate from its “relentless focus on monetary policy to achieve low, stable and predictable inflation”.
However, he did say the bank was revisiting its projection for the U.S. economy and now sees a greater risk that it could underperform the bank’s estimate of 1.5 percent growth next year due to a “negative feedback loop between a weaker U.S. economy and tighter credit markets”.
He said he expects housing to continue to drag on the U.S. economy for a few quarters yet and said no one should expect the usual sharp rebound in housing activity when a turnaround does come.
And while any U.S. slowdown has consequences for Canada, he said the current situation posed particular problems because the housing slump has hurt Canadian lumber exports and the fall in U.S. motor vehicle sales has affected Canada’s auto sector.
Carney warned that the turmoil sweeping through the global economy was far from over, and that financial institutions around the world would need to raise additional capital.
“The months ahead will bring more financial losses, significant consolidation in the financial industry and further increases in the cost of capital. The eventual reordering of the financial system will be historic.”
Assets sales alone will be insufficient, and in countries other than Canada public capital may be necessary to complete the deleveraging process in an orderly and timely way, he said.
In Canada, there are few signs banks are restricting credit to households and in fact the growth of credit has been robust, Carney said. Nor is there evidence that corporations are facing unusual credit restrictions.
Major Canadian banks have an average asset-to-capital ratio of 18, compared with more than 25 in the United States, in the 30s for European banks and over 40 for some big global banks.
In fact, he said, this flexibility gives Canada’s economy a rare advantage. “Canadian banks could modestly increase leverage by growing their lending relative to their current capital base,” he said.
Additional reporting by Louise Egan; Editing by Peter Galloway