Ottawa boosts mortgage buyout by $50B

[ErickMontreal]

Ottawa boosts mortgage buyout by $50B

 

Eoin Callan, Canwest News Service

Published: Wednesday, November 12

 

TORONTO - After a sustained lobbying campaign by Bay Street executives that culminated in a breakfast meeting with senior government officials in Toronto Wednesday, Ottawa agreed to the most pressing demands of Canadian banks squeezed by the credit crisis.

 

"We had asked for four things and we got all four," Don Drummond, a senior vice-president at TD Bank Financial Group, said after Ottawa unveiled co-ordinated measures to buy up to $75-billion worth of mortgages, facilitate access to capital markets, provide extra liquidity and loosen reserve requirements.

 

Jim Flaherty, the Finance Minister, said the moves meant Canada was making good on a pledge he made during talks with his international counterparts to collectively bolster the banking system ahead of a summit on the financial crisis this weekend in Washington.

 

The actions were a sign of the "commitment" of Ottawa to ensure the country's financial system remained strong, said Gerry McCaughey, chief executive of Canadian Imperial Bank of Commerce, which, along with TD, is thought to be among the main beneficiaries of new looser rules on minimum capital requirements.

 

But executives who participated in the process cautioned state interventions to ease the credit crisis had proven to be more art than science, as the United States Wednesday ditched an earlier plan to buy up toxic assets at the same time Ottawa was expanding its own scheme to buy mortgage-backed securities by $50 billion.

 

Executives said it remains to be seen if the interventions finalized at Wednesday morning's meeting would succeed in lowering the premium banks pay for medium-term financing, which is about five times higher than before the credit crisis.

 

In a bid to ease funding pressures, executives persuaded the Conservatives to reduce to 1.1 per cent from 1.6 per cent the fee to be charged if banks invoke a special new government guarantee when they borrow money in international capital markets.

 

Banks argued the previous higher rate had actually encouraged lenders to nudge up the premium they were charging banks at a time when other countries were offering more generous terms.

 

The Finance Minister said he would resist new global initiatives that might put Canadian institutions at a competitive disadvantage during the weekend summit in Washington.

 

But he said Ottawa's ability to influence the outcome was being undermined by the absence of a federal securities regulator in Canada, which is alone among major industrialized nations in not having national oversight of financial markets.

 

"It is difficult for us to go abroad and say governments should get their house in order when there is a glaring omission at home," he said.

 

Flaherty said a key objective of the moves announced Wednesday was addressing "concerns about the availability of credit" for business borrowers, adding that "the government stands ready to take whatever further actions are necessary to keep Canada's financial system strong among external risks."

 

The Bank of Canada also said it would boost the availability of affordable credit in the banking system by $8 billion, using new rules that mean institutions can bid for cash using almost any form of collateral.

 

Banks also welcomed a move late Tuesday by the Office of the Superintendent of Financial Institutions to allow them to top up their capital reserves with securities that are a hybrid of debt and equity.

 

The regulator clarified Wednesday that a related measure on treatment of money lent by banks to other financial institutions under the government guarantee of interbank lending "would have the effect" of "increasing their regulatory capital ratios, all else being equal", but would "not count as regulatory capital."

 

Bank analysts said the interventions were positive for Canadian banks, but warned they would be squeezed further in the coming months as the global economic slowdown hit home and losses on bad loans mount.

 

Ian de Verteuil, an analyst at BMO Capital Markets, cited as an example how falling demand for coal could by next year jeopardize more than $10 billion in bank loans made to finance the acquisition by Teck Cominco of Fording Canadian Coal Trust.

 

Royal Bank of Canada, Bank of Montreal and CIBC each have about $1 billion in exposures, while TD and Scotiabank each have $400 million of exposures to the deal, which the companies expect will be viable.

 

But bank executives remained bullish Wednesday, with TD chief executive Ed Clark saying he was still on the hunt for U.S. acquisitions.