OTTAWA–The federal government is bolstering efforts to keep credit flowing in Canada, including a $50 billion increase in the amount of mortgages it plans to purchase from the banks and other lenders.
The large jump in mortgage purchases shows Canada's financial system is likely worse off than previously thought, analysts said, and is bound to fuel a growing debate about the government's moves to help out banks with taxpayer money at a time when they're being criticized for becoming stingier with lending.
The measures, announced in yesterday's federal budget, are aimed at strengthening Ottawa's previous actions to prop up lending by improving access to financing for both households and businesses. Officials said the "Extraordinary Financing Framework" would provide a total of up to $200 billion to fill gaps in credit markets.
The moves show the government is concerned about the health of the financial sector.
"If we compare things to last fall or so, this is a quantum leap forward by the Canadian government with respect to the issue of Canada being fully immune from the problems in global credit markets," said Derek Holt, vice-president at Scotia Economics. "They are material steps."
The $200 billion price tag is a combination of past programs and new endeavours. The single biggest chunk comes from the Insured Mortgage Purchase Program, now worth $125 billion after yet another expansion.
The budget commits an additional $50 billion to the program, which was introduced last fall and originally set to expire at the end of March. The program allows Ottawa to buy insured residential mortgages from banks and other lenders with an eye to boosting their lending capacity. It was originally valued at $25 billion, but the program's size was later tripled to $75 billion. Some $41 billion of mortgages have been purchased to date.
Officials said this second expansion would provide lenders with stable "long-term financing," allowing them to continue lending to consumers and businesses. However, Ottawa has not sought any ironclad guarantees from lenders on how they will actually use the money.
Meanwhile, banks have been criticized for being increasingly stingy with credit. "Canadian financial institutions have been less willing to lend," Finance Minister Flaherty said during his budget speech. He also suggested that tight credit conditions could aggravate the economic downturn.
The banks insist they continue to lend at a healthy clip to creditworthy clients, and say their financial positions are strong. Most big banks, however, have recently raised equity financing to bolster their capital reserves, which has contributed to plummeting share prices over the past several months. Additionally, Ottawa did not update its estimates on how much money the taxpayer-funded program would generate for government coffers. During the fall economic statement, Flaherty said the government would earn about $1.1 billion in 2009-10 and declining amounts thereafter. That amount was expected to marginally improve with this second expansion but no specifics were provided in the budget.
Also of key concern to consumers, Ottawa is proposing to strengthen "disclosure requirements" on banks that issue credit cards, including simplifying the fine print on application forms and contracts.
Consumers, it said, should have "clear and timely" advance notice of changes in rates and fees.
The government also wants a minimum grace period on new purchases and changes to debt collection practices.
The Extraordinary Financing Framework also includes $13 billion in additional financing by boosting the capacities of the Canadian Mortgage and Housing Corp., Export Development Canada and the Business Development Bank of Canada. This includes some $5 billion in new funds that will be delivered thorough "enhanced co-operation" between these Crown corporations and financial institutions through a new Business Credit Availability Program.
The budget also establishes a new Canadian Secured Credit Facility, worth $12 billion, to breathe new life into the financing of vehicles and equipment for consumers and businesses.
"And interestingly, they've also stated in the budget that they'll be having a further discussion on changing the legislative framework for leasing business in general – which would appear to leave the door open for bank entry into (auto) leasing as a possibility still," Holt said.
The Bank Act currently prevents banks from getting directly involved in auto leasing. The Canadian Bankers Association had sought to have those constraints lifted during the 2000-01 review of the Act.
Ottawa has also tweaked its Canadian Lenders Assurance Facility, which stands ready to guarantee more than $200 billion of banks' term debt. In the absence of legislation, banks were technically unable to tap the money. But interim measures could now allow more immediate access.
Moreover, the budget creates a replica of that facility especially for life insurers. The new Canadian Life Insurers Assurance Facility will guarantee insurers' wholesale term borrowing.
Also on the government's agenda is the provision of "extraordinary liquidity" to financial institutions through the Bank of Canada. As of Jan. 22, the Bank of Canada had added $33 billion in the provision of term liquidity to the Canadian financial system.
As a source of extra funds, the budget will also create a 10-year maturity to the Canada Mortgage Bond program.
It also proposes ramped-up powers for the Finance Minister to ensure financial stability and well-functioning markets. This includes the ability to provide loans and lines of credit along with the provision and payment of guarantees.
Ottawa is also seeking the ability to buy direct equity stakes in banks under extreme circumstances. "We do not foresee the need to use this authority," Flaherty said. "But we have a duty to be prepared, should the unforeseen suddenly emerge."
Budget measures also enhance the powers of the Canadian Deposit Insurance Corp., including allowing the CDIC to establish a bridge bank that would step in to maintain financial stability in the case of a possible bank failure.
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