Ottawa to guarantee interbank lending
Will Canadian’s interest payments be deposited to their tax accounts?
Kevin Carmichael, The Globe and Mail
October 23, 2008
OTTAWA – Canada’s government has pledged to temporarily guarantee banks’ medium and longer term borrowing in a bid to keep pace with the multi-billion dollar financial rescues offered by other countries over the past couple of weeks.
Finance Minister Jim Flaherty said Thursday that he will establish the Canadian Lenders Assurance Facility, which will offer financial institutions insurance on any debt they issue with terms greater than three months.
Canada’s decision to offer a backstop for interbank lending comes almost two weeks after it signed a pledge by Group of Seven nations to work together to restore confidence in the global financial system. At least a dozen other countries have already offered some form of backstop for the wholesale debt market, including the United States, Australia and most recently Sweden.
The worry in Ottawa was that all these rescue packages would make it more difficult for Canada’s banks to secure money abroad. While there’s little evidence that this is happening now, the risk is that international lenders will opt to do business with counterparties that are backed by their government’s treasuries. That could force Canadian banks to offer higher yields, an extra cost that would eventually be absorbed by consumers and businesses.
“This is a proactive step,” Mr. Flaherty told reporters. “There is this concern that our institutions could be disadvantaged competitively.”
Canada’s government has had to do less than other nations to salvage the financial system because the countries banks are relatively sound. Institutions such as Royal Bank of Canada largely avoided the frenzy for the now toxic assets linked to U.S. subprime mortgage market, and stronger regulations forced banks to keep plenty of cash in reserve.
Mr. Flaherty repeated Thursday that Canada’s banks are “sound.”
The government didn’t attach a cost to the program. With international credit markets calmer, there’s a chance the program won’t be used. At the same time, if conditions worsen, the government could potentially be responsible for billions of dollars worth of loans.
When asked to further define Canada’s potential liability, Mr. Flaherty said “zero to a lot.”
Canada’s response to the credit crisis is modest compared with programs in the U.S. and Europe, where governments have used billions of taxpayers’ funds to take stakes in financial institutions and guarantee all deposits.
Mr. Flaherty suggested Thursday that he feels he’s done enough for now, saying Canada’s banks are well capitalized and that he’s satisfied with Canada’s current guarantee on deposits of up to $100,000.
Two weeks ago, Mr. Flaherty set up a program that will allow Canadian financial institutions to swap up to $25-billion of mortgages in return for cash to bolster their balance sheets.
The insurance program will start early next month, and remain in place until April 30, 2009. All federally regulated deposit-taking institutions are eligible to apply for insurance on each issuance of debt with terms longer than three months.
The backstop will come at a cost. The base fee will be 1.35 per cent on each request, with a surcharge of an extra quarter point for institutions with a credit rating of A- or above. Financial institutions with a lower credit rating will have to pay a surcharge of a half point.Source | See also: More cash needed to save economy: Bernanke | Wall Street banks in $70bn staff payout | German parliament backs bail-out | Regulator says brokers failed on ABCP, sets new guidelines | US Bailout Cost Heads Towards $5 Trillion | Market Euphoria Dissipates | Loonie leaps, then reverses course | $25B credit backstop for banks ‘not a bailout’: Harper | Brown wants ‘global’ bank support | US considers following British example of taking stakes in banks | New World Order: Global co-operation, nationalisation and state intervention – all in one day | TSX closes up 226 points in wild day after rate cuts | Federal Reserve Moves to Monetize Commercial Paper Debts | Stocks recoup some losses after markets hit by panic selling | Star column blames ‘Capitalism’ for market woes, offers false choice: Authoritarianism or Socialism | Bank of Canada greases financial system with $12B in new cash | Stock markets drop despite bailout | Why Paulson’s Plan is a Fraud | Representatives Were Threatened With Martial Law In America Over Bailout Bill | Congress Rejects (First) Bail-Out Plan | Congressman Ron Paul: Bailout Will Destroy Dollar, World Economy | Paul Martin calls for ‘global solution’ | Markets sink as woes spread | UK banking shares plunge as crisis deepens | Congressman Ron Paul Schools Fed Chairman Bernanke on the Bailout Plan | Bailout is “petty cash”, Inflation is the Federal Reserve’s real crime | Private Federal Reserve Makes Power Grab as Bush, McCain Urge Congress to Approve Plan | Canadian Supreme Court refuses to hear appeal in ABCP case | Last major investment banks in U.S. change status | U.S., British market regulators ban short-selling | Next Federal Reserve bank bailout round could cost taxpayers 1$ Trillion Dollars | Bank of Canada piles on in global inflationary swindle | Central banks continue inflating global economy | Central Banks Move to Transfer Wealth from Taxpayers to Banks | Crisis on Wall St. as firms collapse | Goldman-Sachs Alumni Hold Reins of Financial System | Frontrunners emerge in scramble to save another major bank | Lehman Brothers on Verge of Collapse, Wall Street Fears | US Treasury nationalizes Freddie Mae, Fannie Mac | Cities Debate Giving Away Public Infrastructure to Bankers | Court Grants Big Banks Immunity from Lawsuits over Derivatives Losses | Bush Calls for New Highway Tolls, More Private Funding of Roads | US mortgage firm bailout includes rider clause to expand police state: all credit card transactions now to be reported to IRS | Global ‘liberalization’ illusion under threat. Economist calls for world economic regime, Keynesian saviour. Irony? | Federal Reserve cites global stakes in Fannie and Freddie rescue | Financial ’super cop’ role for Fed | What Really Killed Bear Stearns? | Soros points out regulated markets fail to operate on market fundamentals, calls for more regulation | Competition study calls for lowered barriers to foreign ownership, bank mergers | Massive overhaul urged on foreign investment in airlines, media, and banks | Bilderberg Seeks Bank Centralization Agenda | Secretive Bilderberg Group Reverses Policy, Releases Press Release and Attendance List | Banks face “new world order,” consolidation: report
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