Canada bolsters banks with loan guarantees

Thu Oct 23, 2008 11:08am EDT
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By David Ljunggren

OTTAWA (Reuters) - Finance Minister Jim Flaherty said on Thursday the government would guarantee borrowing by the nation's banks to ease a lending crunch and keep them on equal footing with foreign competitors.

The widely anticipated move is the latest effort by Canada to shore up its banking system against the spillover effect of a global financial crisis that has battered markets and threatened economic growth.

"The government of Canada is acting today to ensure that financial institutions in this country are not put at a competitive disadvantage when raising funds in wholesale markets to lend to consumers and businesses," Flaherty said.

He said the program would provide insurance on wholesale term borrowing by federally regulated banks to help them secure longer-term funds to enhance their own ability to provide loans.

The move comes after governments in the United States and Europe promised billions of dollars to backstop lending in a bid to restore confidence after a series of bank failures -- many stemming from soured investments in bad U.S. mortgages.

Canada's program will begin in early November and continue for at least six months, Flaherty said. He said he hoped the country's banks -- ranked the most secure in the world by the World Economic Forum -- would find the program unnecessary.

"There may be no takeup on this and ... the excellent result would be that it's not necessary, that the banks don't take it up," Flaherty said.

He said the program would be offered on a commercial fee basis and would likely come at no fiscal cost.   Continued...

<p>Finance Minister Jim Flaherty listens to a question during a news conference at Parliament Hill in Ottawa October 23, 2008. REUTERS/Chris Wattie</p>