Ottawa poised to bolster bank lending

October 20, 2008

20 October 2008

Ottawa poised to bolster bank lending

 

The following article is excerpted from the 19 October 2008 edition of “globeandmail.com”.

 

Ottawa is poised to guarantee loans Canada's banks extend to other financial institutions, a dramatic step aimed at ensuring the raft of multibillion-dollar bailouts around the world don't leave the banks at a competitive disadvantage.

 

Finance Minister Jim Flaherty arrives in Ottawa today for his first face-to-face briefings with officials since the Conservatives won last week's election. …

 

Top of the list is a pledge, which could be unveiled by midweek, to back new issuance “wholesale debt” – medium-term loans banks make to fund retail lending and other day-to-day operations.

 

While the guarantee may never be used, it could help keep the cost of consumer and business loans down by ensuring Canada's banks have access to cash at the same rates as their competitors abroad. For example, a lender could potentially have to offer more for a loan from a bank in Asia if the Canadian bank is competing with an American firm that has government backing.

 

The problems in the wholesale debt market are at the core of the financial crisis, and policy-makers have responded aggressively out of concern that the freeze of interbank lending would further harm a global economy that's on the verge of recession.

 

The rates that banks pay to fund their operations rose so high through September that the global financial system virtually seized, forcing governments in the United States and Europe to promise billions of dollars to backstop lending in a bid to restore confidence. Governmental worry was evidence that banks were beginning to pass their costs onto consumers, driving up rates on everything from mortgages to small-business lines of credit.

 

The strains are less severe in Canada and Mr. Flaherty hasn't decided whether Canada needs to follow suit, sources said.

 

Mr. Flaherty was prepared to guarantee interbank lending last week, but held off, in large part because Canada's banks weren't aggressively asking for help, sources said….

 

Still, global conditions have been making it more difficult for Canada's banks to raise funds for 90 days or more. Banks are reluctant to lend to one another for more than very short periods because they don't know whether other banks will have trouble repaying debts.

 


Topic(s): 
Canadian Economy & Politics
Information Source: 
Canadian News Channel
Document Type: 
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