October 23, 2008 / 12:36 AM / in 9 years

Canada bolsters banks with loan guarantees

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.

<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>

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.

The Canadian Bankers Association said it welcomed the new measures, even though domestic banks were strong without them.

“Canada’s banks are well capitalized and financially sound with or without this federal government loan insurance,” said Nancy Hughes Anthony, president and chief executive of the CBA.

But, without the guarantees, it would have been tougher for the banks to compete for loans on the international market, she said in a statement.

Although Canadian banks were more cautious in their lending practices than U.S. or European institutions, that did not isolate them from the credit market fallout in the form of rising wholesale funding costs.

Earlier in the month, Ottawa announced a plan to buy up to $25 billion in mortgage assets from the banks to help them boost liquidity and to encourage lending to consumers and businesses.

The federal government bought $5 billion in mortgages in the first phase of the program on October 16 and a second auction of up to $7 billion is scheduled for Thursday.

The government has said Canada is on track for a modest budget surplus this year, despite the economic turmoil, but cannot rule out a deficit in 2009.

“We’re watching what’s happening globally. This is obviously a serious situation. Events are unfolding day by day,” a subdued Flaherty said at a news conference after announcing the bank guarantee plan.

Flaherty said the government’s fall fiscal update would be released in about a month.

Under the plan announced Thursday, banks would be insured for up to 20 percent of their deposits as of October 1. The annualized fee would be 135 basis points, with a surcharge of 25 basis points for institutions rated A- or above and a further surcharge of 25 basis points for all other eligible institutions, according to the Finance Department.

Writing by Richard Valdmanis; editing by Rob Wilson

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