Ottawa is phasing out many of the emergency support measures it put in place to help banks and insurers through the financial crisis, confident that they have successfully emerged from the dramatic events of the past 17 months.
Next week's federal budget is expected to show how the measures have eased the flow of credit, enabling the financial sector to pull through the turmoil in strong shape and continue lending throughout the recession.
Finance Minister Jim Flaherty's decision to disband a number of the aid initiatives signals the Conservative government's belief that markets are functioning on their own two feet. The government is being lobbied, in fact, by Bay Street interests to announce in the budget that it will help finance the creation of an international research organization that would capitalize on Canada's reputation for knowing how to keep banks out of trouble.
Mr. Flaherty's budget on March 4 will come one week after banks begin reporting first-quarter results. The sector is not expected to show much profit growth, but its earnings will nevertheless likely amount to billions of dollars.
The government's economic action plan – the blueprint it created to steer the financial system through the crisis – included seven measures that collectively could provide up to $200-billion in support.
In early December, when all of the measures were still in place, they had provided $135-billion worth of support, according to the government.
About $40-billion was through the Bank of Canada. The central bank is now reducing or phasing out its extraordinary liquidity facilities.
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Meanwhile, Ottawa has quietly allowed two emergency backstop programs, under which banks and insurers could obtain government guarantees on their debt, to expire.
The Canadian Lenders Assurance Facility was created in October, 2008, and extended in last year's budget when a sister program for insurers was established. Neither facility has been tapped into, distinguishing financial institutions here from those in many countries where banks needed government backing to issue debt. Australia announced this month it will close its bank-debt guarantee program in March, characterizing the move as a sign that markets had stabilized. Canada's guarantee evaporated at the end of December with no fanfare.
Another program, the Canadian Secured Credit Facility, committed to provide $12-billion of financing to Canadian companies. But as the market for asset-backed securities recovered, demand for the program decreased, prompting the Business Development Bank of Canada to decide that it would allocate funds on a first-come, first-served basis until the end of March.
The bulk of federal financial aid, more than $66-billion, has been given out by way of the Insured Mortgage Purchase Program, through which Ottawa essentially buys mortgages from banks. Demand from banks for that program, which is currently scheduled to expire at the end of March, has dwindled, and it is not clear whether Ottawa will renew it.
Some bankers argue that it should remain as a backstop in case markets snarl up again, but the broad pressure from the sector to keep it in place has diminished since Mr. Flaherty last renewed it on September 28. The government offered to buy up to $4-billion of mortgages last week, but banks only sold it $1.4-billion worth. One more purchase is scheduled for March 24.
“It eased a lot of funding stress” for the banks, Peter Routledge, an analyst at Moody's said of the mortgage program. “I don't think it hurts the system to have it as a potential outlet if something unforeseen happens.”
One measure expected to remain in effect is the Business Credit Availability Program, which provided about $3.6-billion to help more than 7,200 businesses as of the end of October. It is run through Business Development Bank of Canada and Export Development Canada. Ottawa temporarily extended EDC's mandate in the last budget, allowing the agency to operate in the domestic market for the program. EDC will keep its added powers into 2011.
Leading by example
A number of Bay Street influencers are pressing Ottawa to say in its budget that it will put money toward backing a Global Integrative Risk Management Institute, a “world-class” institute to research and promote best practices for managing risks in the financial sector.
Proponents of the idea estimate it would cost millions of dollars to set up, and require an annual budget of about $6.4-million. It would be partially financed by a number of groups including banks, insurers and pension plans. Backers say the institute would help secure Canada's image as a leader among the world's financial systems.
