After months of reassuring the public that Canadian banks were rock solid, Finance Minister Jim Flaherty has announced a plan to help them out all the same.
Under the plan, the government will purchase up to $25 billion in higher-quality mortgages — those insured by the Canada Mortgage and Housing Corporation (CMHC). It is hoped that the purchase will persuade the banks to lend a similar amount to consumers and businesses.
“It is important to underline that Canada’s banks and other financial institutions are sound, well capitalized and less leveraged than their international peers,” said Flaherty. “Our mortgage system is sound. Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes than in the U.S.
“However, it is becoming increasingly clear that the continuing disruption of global credit markets, which has been severe and protracted, is making it difficult for our financial institutions to raise long-term funding. This is beginning to affect the availability of mortgage loans and other types of credit in Canada.
“The government has therefore decided to act to address the current scarcity of private sector lending to Canadian mortgage markets and lending markets overall. This is going to make loans and mortgages more available and more affordable for ordinary Canadians and businesses.”
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The minister went on to point out that the plan should cost taxpayers nothing, because the mortgage pools are insured, and that the interest earned would be higher than the government’s own cost of borrowing.
The first purchase of $5 billion in mortgage pools will begin on October 16, and is to be followed by additional purchases.
The plan seems to have had an impact on lending policies within hours, as some of the banks announced cuts to their prime lending rate. TD and CIBC cut their prime rates by 15 basis points to 4.35, effective Tuesday, October 14, 2008, while Scotiabank offered up a 25 bps cut, to 4.25%.
The retail banks were roundly criticized earlier in the week, when they failed to match a 50 bps cut by the Bank of Canada.
Business lending conditions have tightened in the third quarter, according to a report out of the Bank of Canada Friday. The Senior Loan Officer Survey on Business-Lending Practices in Canada is essentially an opinion survey, and reports on the perspectives of respondents on price and non-price terms of business lending.
The survey found a 50% balance of opinion that credit conditions were tightening. The Bank explains that “the balance of opinion is calculated as the weighted percentage of surveyed financial institutions reporting tightened credit conditions minus the weighted percentage reporting eased credit conditions.”
Filed by Steven Lamb, Advisor.ca, firstname.lastname@example.org