October 21, 2008 / 1:15 PM / 9 years ago

Canada's banks lower prime lending rates

TORONTO (Reuters) - Canadian banks cut their prime lending rates late on Tuesday afternoon in response to lower funding costs and the Bank of Canada’s 25 basis point interest rate cut earlier in the day, giving customers a shot at lower rates on various loans.

<p>Bank of Canada Governor Mark Carney waits to testify before the Commons finance committee on Parliament Hill in Ottawa April 30, 2008. REUTERS/Chris Wattie</p>

TD Canada Trust, the domestic retail unit of Toronto-Dominion Bank, led the pack in lowering its prime rate to 4.00 percent, from 4.35 percent, effective on Wednesday.

The other large players -- Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, National Bank of Canada and Bank of Montreal -- also dropped their prime rates to 4.00 percent. Most had been at 4.25 percent previously.

“Financing costs for banks are not at normal levels, but it’s not as bad as it was the last time the (central) bank cut rates,” said Stefane Marion, assistant chief economist at National Bank Financial.

Since the week of October 6, when the central bank took part in a co-ordinated global rate cut and Canadian commercial banks reduced prime rates twice, their funding costs -- measured by the London interbank offered rate (Libor) and by Canadian dollar bankers’ acceptance rates -- have declined.

“It’s not so much that we feel inclined to be a price leader but in this particular case ... we’ve been nicely seeing our cost of funds recovering from a couple of weeks ago, when we hit a peak globally, I’d say,” Tim Hockey, president and chief executive of TD Canada Trust, said in an interview.

Meanwhile, Ottawa is monitoring whether it needs to do more to help the domestic banking sector stay on an even footing with its international peers, even as money markets show signs of beginning to thaw.

Banks are lending to each other at lower costs as confidence levels improve, Finance Minister Jim Flaherty noted in a television interview.

The government has “looked at various options” to keep domestic banks competitive with their peers elsewhere, and will continue to monitor the situation, Flaherty said.

Many observers expect Ottawa to announce a guarantee on bank-to-bank loans this week, similar to a temporary program introduced in the United States this month.

To improve the cost of borrowing, “there needs to be traditional action such as (central bank) rate cuts that are complemented by non-traditional actions such as a government plan for some type of guarantee on interbank lending,” Marion said.

On October 8, the domestic banks matched only half the Bank of Canada’s 50 basis point rate cut, by lowering prime rates a quarter of a percentage point. But they reduced prime rates again just two days later, when Ottawa announced a program to buy C$25 billion ($21 billion) in mortgages on their balance sheets.

The prime rate determines charges on a host of other loans, including some mortgages.

According to a new report from RBC Capital Markets, Royal Bank of Canada and Bank of Nova Scotia had the largest share of residential mortgages among the six largest Canadian banks, based on balance sheets to the end of the April. RBC had a 26.7 percent market share and Scotiabank had 22.9 percent.

Toronto-Dominion Bank was the biggest in personal lending, with a 28.6 percent market share, and also had the highest share of personal deposits at 23.9 percent.

RBC and Bank of Montreal led in business loans, with 24.2 percent and 22.7 percent shares, respectively, according to the RBC Capital Markets report.

($1=$1.21 Canadian)

Reporting by Lynne Olver; editing by Rob Wilson

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