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The Canadian government is discussing ideas to help Canada's banks weather the global credit crisis by giving them access to high quality assets backed by the federal treasury, people familiar with the matter said.

While Canada's financial institutions remain in good shape, high-level officials are taking a closer look at proposals from banking executives to ease credit markets should the financial turmoil that has gripped global credit markets for the past month persist.

One plan under consideration would require the participation of Canada Mortgage and Housing Corp., the Crown agency that buys mortgages from financial institutions and resells the loans as securities with the full backing of the Canadian government.

Under the proposal, CMHC would establish something called a term lending facility, under which the agency would absorb some of the banks' mortgages. In exchange, CMHC would give the banks securities with the CHMC stamp, the sources said. That would leave the banks with assets that other lenders, including the Bank of Canada, would be willing to accept as collateral for short-term loans. That, in turn, would allow them to increase their own ability to lend. “They have to do this – they need things in place just in case,” said a top executive at one of the Big Five banks.

The executive cautioned that although the banks do not need that added support today, the government is moving quickly to ensure they can react if the financing situation continues to deteriorate.

“You have to work on this like you need it tomorrow,” he said.

The banks have also put forward requests that the Tories consider a range of options, including an increase in deposit insurance in the wake of similar moves in the United States and around world. Deposits are currently insured up to $100,000 and the United States recently boosted coverage to $250,000 (U.S.).

Finance Minister Jim Flaherty told reporters yesterday in Toronto that the government is prepared to take further steps to fight the credit crisis, although he declined to elaborate on what he might do.

“If it is necessary to take further steps to protect the stability of the financial system in Canada from spillover effects from the United States, from the United Kingdom, from other G7 countries, we will take those steps,” Mr. Flaherty said.

The Finance Minister is scheduled to meet with reporters again this morning in Ottawa.

Kory Teneycke, a spokesman for Prime Minister Stephen Harper, said the Finance Minister isn't making any announcements. Mr. Flaherty's intention is to use today's meeting to discuss this weekend's gathering of finance ministers and central bankers from the Group of Seven nations in Washington, Mr. Teneycke said.

The goal of any plan to help the banks is to lower credit costs by offering them a chance to load up their balance sheets with safe assets at a reasonable price. In the wake of the failure of U.S. investment bank Lehman Brothers Holdings Inc. last month, lenders are hoarding their cash out of concern they might lose it if they do business with the wrong counterparty.

Their fear has caused the price that banks pay for short-term loans to jump to record highs. Central banks around the world, including the Bank of Canada, have flushed the financial system with billions of dollars in loans to give financial institutions access to the cash they need to balance their accounts.

The decision by the Harper government to take bolder measures is a reversal, reflecting the persistence of financial turmoil that continues to rage even after the U.S. government approved a $700-billion (U.S.) rescue package last week.

Since the beginning of the campaign for the Oct. 14 vote, Mr. Harper and Mr. Flaherty have insisted that Canada is relatively sheltered from the credit crisis because the country's banks remain well capitalized.

That position has drawn criticism from the government's political opponents as evidence that Mr. Harper is out of touch during the worst financial crisis since the Great Depression.

The Canadian banking system is widely viewed as the healthiest in the world, easily surpassing its peers in terms of stock market performance and capital strength. Banks here tended to keep mortgages on their balance sheets, rather than package them off as complex securities, and avoided much of the toxic sub-prime lending that punished their counterparts in the United States.

Yet even this conservatism hasn't immunized them against a global credit crunch that has frozen lending between banks and made it difficult for even the healthiest companies—including financial institutions—to obtain financing.

By expanding CMHC's involvement in the securitization market, banks would be able to move mortgages off their books and get access to a cheaper form of funding. This, in turn, would free up more cash for other lending efforts and hopefully help thaw some of the frozen credit markets.

“You're taking big chunks [of loans] off of balance sheets that are sitting there as unsecured money, funded by deposits,” one senior Canadian banker said. “You're essentially freeing funds that can be used as term lending.”

Here's how it might work: A bank will pool together a group of mortgages and package them off to CMHC. This is one of the cheapest ways for the banks to fund the home loans they make—especially today, when access to credit has shrivelled and borrowing rates have climbed.

Stephanie Rubec, a spokeswoman for CMHC, declined to comment.

CMHC, through its Canada Housing Trust arm, sell bonds comprising these insured mortgages to investors, who have the comfort of investing in a security that is backed by the government of Canada.

The problem is, there's a limit—total mortgage backed securities issued by the CMHC totalled around $190-billion at the end of August, or less than 25 per cent of the overall mortgage market. Banks have been lobbying Ottawa since the spring to expand the amount of mortgages CMHC will accept for securitization to help make funding cheaper and more accessible.

“The easiest way to support the Canadian banks is to expand the CMHC securitization pie,” added another banker. “It is a cheap funding vehicle.”

In recent weeks, some Canadian banks have urged Ottawa to increase the size of the current program substantially, to a few hundred billion dollars. Indeed, sources say that in a call this week between the heads of the big banks and Bank of Canada Governor Mark Carney, it was evident that the financing problems are becoming more of a strain for some of the Big Five.

Different options to help bolster bank financing were being discussed, including an expansion of the amount of bonds the CMHC issues, or a so-called “term repo” facility, which is akin to a sale and repurchase agreement: the banks would effectively be lent money for a specified period, and then be required to pay it back.