Canada seen poised to shore up bank lending

Tue Oct 14, 2008 4:40pm EDT
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By Louise Egan and Lynne Olver

OTTAWA/TORONTO (Reuters) - The Canadian government is widely expected to offer public money within days to facilitate interbank borrowing after bailouts in other countries have put Canada's otherwise robust banks at a disadvantage.

After European banks stepped in on Monday to offer massive rescue packages to banks, Canadian Finance Minister Jim Flaherty promised to take steps to protect Canada's financial system from "unintended consequences from policy measures by other countries that would put wholesale borrowing in Canada at a competitive disadvantage".

The Bank of Canada repeated that sentiment on Tuesday, a strong signal that Ottawa has a plan in the works. Washington on Tuesday said it would take equity stakes worth US$250 billion in financial institutions, an incursion into the private sector that it called a regrettable last resort.

"Having one set of global banks with more explicit guarantees than another set of global banks obviously puts that latter set at a disadvantage and I think that's pretty obvious," said Michael Gregory, managing director and senior economist at BMO Capital Markets.

As other countries expand insurance and guarantees on bank deposits and debts along with capital injections, Canadian banks may have a tougher time competing for big chunks of short-term funding in the international market since their debt does not have the same government backing as that of other international banks.

So the onus is now on Ottawa to level the playing field.

"I suspect these (measures) are in the wings....this is something that may be announced in the next few days potentially," Gregory said.

Timing is a tricky issue for the government and it is in wait-and-see mode before making a move because banks may also benefit from the collective action by the United States and Europe, which should reduce funding costs in the interbank market.   Continued...

<p>Canada's Finance Minister Jim Flaherty speaks during a news conference on Parliament Hill in Ottawa, October 9, 2008. REUTERS/Christopher Pike</p>