October 9, 2008 / 12:29 PM / 9 years ago

Flaherty says banks need funds, seeks new G7 talks

OTTAWA (Reuters) - The Canadian government sees no need to bail out its banks, but it said on Thursday it is looking at ways to ease "severe restrictions" in lending and it also called for a second G7 finance ministers meeting.

"I have concerns about the availability of credit," Finance Minister Jim Flaherty told a news conference. "Interbank lending has been virtually frozen globally."

He said he has no question about the solvency of Canada's banks but said that deterioration in credit markets was beginning to squeeze their ability to raise longer-term funds and the government was looking at steps to alleviate the problem.

Flaherty said this weekend's meeting of finance ministers of the Group of Seven leading industrialized nations will be the most serious such gathering since he took office in 2006 and that the meeting will strengthen a coordinated response.

It will identify additional steps to get at the root causes of the financial turbulence, he said.

"Given that the turmoil is likely to continue, I have called for G7 finance ministers to meet a second time in the coming weeks to ensure the active implementation of these measures," Flaherty told a news conference.

Canada also strongly backs France's call for a G7 summit. The political will exists for such a meeting and this weekend would be the time to look at when it could be scheduled, he said.

"There's nothing more important going on right now in terms of the lives of people and preserving jobs and preserving investments than this credit crisis and it needs to be resolved. And, appropriately, Prime Minister (Stephen) Harper and other world leaders are giving it the highest priority."

Flaherty said credit has tightened markedly since Bank of Canada Governor Mark Carney said on September 25 that there was no evidence until then of unusual credit restrictions.

"You know, I speak with our bankers and, of course, I've been briefed regularly and I speak with my colleagues internationally and there's no question that the credit tightening has increased," he said.

Short-term funding is available, he added. "The Bank of Canada has helped with that but there are severe restrictions with respect to longer-term lending. And that's where we get into concerns about the availability of credit in Canada.

"This is not a problem that originated in Canada but the spillover effect can, if there's not adequate liquidity in the system, can make it difficult for Canadians to obtain credit."

The Globe and Mail newspaper reported that one plan being considered is for the government's Canada Mortgage and Housing Corp to establish a term-lending facility under which it would absorb some of the Canadian banks' mortgages.

Asked to confirm he was working on such a plan, he said: "Yes, we are looking at additional steps that could be taken," but he declined later to confirm specifically he was considering CMHC involvement.

Pressed on whether such a plan would amount to a bailout, he said: "We are not looking at a rescue package for banks... We are not looking at creating any additional risk for taxpayers' money in Canada by bailing out banks. What we are looking at are measures that would increase liquidity in the Canadian market which would help ensure the availability of credit for Canadian homeowners, for Canadian businesses, for car loans, for credit generally."

He stressed that he had "absolutely no concern about the health of our Canadian financial institutions." A World Economic Forum report on Thursday said Canada has the soundest banking system in the world.

Reporting by Randall Palmer; Editing by Peter Galloway

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