Good news for Canadians seeking credit

Ottawa pushes to get credit markets working

RICHARD BLACKWELL AND HEATHER SCOFFIELD AND JOHN PARTRIDGE
Globe and Mail November 12, 2008 at 4:11 PM EST TORONTO

Ottawa has announced three aggressive measures to get Canada's credit markets back in working order.

Finance Minister Jim Flaherty said Wednesday the government would add $50-billion to its mortgage purchase program. He has also agreed to slash the price the government is charging to Canadian banks to insure their wholesale lending. At the same time, the Bank of Canada is injecting another $8-billion into money markets over the next few weeks,in one-month money, through a new Canadian-dollar term lending facility it is setting up.

Mr. Flaherty said the government has already made significant moves to support the financial sector, and credit markets have recently improved, but "we have to expect an extended period of stress in global credit markets.

"This could limit the availability of credit to households and businesses in the months ahead, he said in Toronto.

The credit crisis gripped global markets 15 months ago, and credit essentially froze around the world in September. Since then, frequent aggressive interventions by key central banks have brought a bit of a thaw.

But the global economy has deteriorated sharply in recent weeks, prompting fears that financial institutions, already struggling to stay afloat, would succumb.

Canada's credit markets have not been as severely hit as elsewhere, but spreads have been far wider than normal and have not narrowed much recently. At the same time, economic prospects have slid along with troubles in the auto sector and plunging commodity prices. Wednesday's moves are meant to bolster confidence among banks to get them lending freely again, despite the weakening economy.

Mr. Flaherty said he met Wednesday morning with the chief executive officers of the major banks, and his message to them was that "we each have an important role to play. It is up to private sector lenders to keep on doing their job, making loans to credit-worthy people and enterprises of all sizes. It is up to governments to step in when markets are profoundly disrupted, so that private sector lenders can maintain access to the funds they need to keep lending and supporting economic growth.

"The move to buy up more mortgage pools should make consumer and mortgage loans "more affordable and more available," Mr. Flaherty said. "At a time when GDP growth is slowing down, it will help companies to invest in the new productive technologies we need to move our economy forward.

"Gordon Nixon, chief executive officer of Royal Bank of Canada, the country's largest lender, welcomed Wednesday's changes.

"Mr. Flaherty's announcement was a constructive step in improving the functioning of the financial markets," he said, through a spokeswoman."It helps ensure consumers and businesses have access to credit and Canadian banks continue to operate from a position of strength.

"Toronto Dominion Bank chief economist Don Drummond said the changes Mr.Flaherty made are exactly what the banks wanted.

The banks wanted the mortgage bond program extended, the loan insurance scheme to be cheaper, a term facility such as the one launched by the Bank of Canada, and changes to capital rules such as those announced by the bank regulator on Tuesday.

"We asked for four things, and we got all four of them," Mr. Drummond said.

Mr. Flaherty's announcement means the government will now buy up to $75-billion of insured mortgage pools from the major banks, up from $25-billion. The extended mortgage purchase program will earn a "modest" rate of return for the government, but there will be no additional risk for taxpayers, Mr. Flaherty added.

The change in the fees on bank lending insurance will ensure that Canadian banks "are not put at a competitive disadvantage by policy actions in other countries," said Mr. Flaherty. When he looked at pricing of similar programs in other countries, it became apparent the Canadian program had to be changed to be more competitive, he said.

The two changes in pricing will effectively cut the fees for the lending insurance by half a percentage point. The lowest rate will now be 1.10 per cent of the loan value.

Commercial banks have complained loudly that the loan guarantee program designed by Ottawa a few weeks ago was too expensive to be of much use.

While other countries' banks could buy what amounts to insurance at a low price, Canadian banks were paying higher rates. The program was only useful for banks in dire trouble, and was putting the Canadian financial institutions at a competitive disadvantage globally.

Canadian Bankers Association CEO Nancy Hughes Anthony welcomed the measures announced by Mr. Flaherty, calling them very helpful.

"I think from the beginning, the CMHC auction was ... fully subscribed and there was a strong feeling that more might be needed in that area," she said in a telephone interview. "So we're very pleased to see that has been increased.

"And obviously, too, when the Lenders Assurance Facility was announced.. .there was a lot of commentary that ... the pricing just wasn't internationally competitive."

Bank of Nova Scotia spokesman Frank Switzer also welcomed the news from the finance minister, saying the changes were in line with what the industry has been asking for. "It puts Canada in the same ballpark as other countries that have initiated similar supports," he said.

In Ottawa, the Bank of Canada said it will put the additional $8-billion into one-month money markets, spread out in four auctions over the next few weeks, through a newly created Canadian-dollar term loan facility.

The Bank of Canada has hinted heavily in recent weeks that it had further measures in store, to make sure financial institutions have cash on hand to finance their transactions.

Financial institutions can post almost any kind of loan on their books as collateral, in order to take part in the auctions, the bank said.

"By providing greater flexibility for liquidity provision with respect to eligible collateral, the [new facility] will facilitate further improvement in money and credit markets.

"Canadian banks have been pressuring Ottawa to boost their help for the sector, and all countries have been urged, in a series of international meetings, to do much more in order to get the global economy back on track.

While lending spreads in some markets have edged down gradually in the past few weeks, Canada's key spreads have not moved much for a month, suggesting a lingering risk aversion among banks in Canada.

Mr. Flaherty indicated last weekend that he understood the banks' complaints, and would consider acting. But Bank of Canada Governor MarkCarney said in an interview that Ottawa had carefully designed the program, and suggested Canadian banks weren't at a global disadvantage because they are in far better shape than other banks around the world.

Mr. Flaherty told reporters Wednesday that the government is still on track to report a small budget surplus for the current fiscal year, "and I emphasize small."

The fall economic update coming in the next few weeks will provide the numbers, he said.

He also said Ottawa is "monitoring" the automotive industry, but it has not yet decided what action can be taken to support that sector. He said Industry Minister Tony Clement is talking to the auto companies "and we'll see what we're able to formulate for the industry."

Ottawa has increased the borrowing room of the Business Development Bank of Canada to $11.5-billion from $9.7-billion. The move is designed to give the bank "greater flexibility in meeting the credit demands of its small and medium-size business clients," Mr. Clement said in a statement.

Bank of Canada spokesman Jeremy Harrison said the new term loan facility announced Wednesday will have the same "economic impact" as the so-called term purchase and resale agreements (PRAs) the central bank is already offering to help lenders with liquidity.

The "nuance" is that in a PRA, the central bank buys a marketable security from a commercial bank with an agreement to sell it back later. However, the new program is designed to cover commercial banks' non-mortgage loan portfolios which are not marketable securities, Mr.Harrison said, because there is no secondary market for them, unlike bonds and corporate paper.

As a result, liquidity provided against these portfolios cannot be structured as PRAs.

"What it ends up being is a collateralized loan," he said, with the commercial banks pledging the portfolios as collateral for cash from the central bank.