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OTTAWA, RICHMOND, B.C. and TORONTO — The federal government is moving to backstop the Canadian banks' capacity to lend money in an acknowledgment that not even the country's sturdy banking system is immune to the global financial crisis.
A plan originally earmarked for Friday morning would see the government assume some mortgages currently held by the banks by giving them to the Canadian Mortgage and Housing Corp., a Crown corporation. In turn, the banks might receive CMHC paper – possibly bonds – against which they could use as collateral for their own loans from other banks.
In recent weeks, the big banks have faced a sharp rise in the cost of borrowing money in international markets to cover Canadian mortgages – a situation that puts them at risk of losing ever-increasing amounts of money on one of their core businesses.
Prime Minister Stephen Harper, Finance Minister Jim Flaherty and the banks say no bailout is on the table and the plan falls short of an intervention, but sources told The Globe and Mail Ottawa now recognizes the fast-changing economic landscape requires action to help the banks access cheaper funds to fuel lending.
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With the double whammy of the last days of an election combining with the global economic slowdown, the federal government and senior bank executives are hypersensitive. The Conservative Party has been insisting throughout the election campaign that the fundamentals of the economy are strong. But in the past 24 hours a new reality has set in.
Mr. Flaherty, who is expected to be in Washington Friday at an emergency G7 session of finance ministers, had been preparing to make the announcement of a banking plan Thursday, but after word leaked Wednesday night, the plans were delayed, sources say, in an illustration of how important it is for the government to try to control the message.
Pressure from the banks is growing, with executives arguing their sector needs federal help immediately to ease their credit pressure.
Banks want it right now but the Harper government has to reconcile calls for immediate assistance with its insistence the Canadian banking system requires no extraordinary measures.
Financial stocks were battered Thursday. Toronto-based insurers Sun Life Financial and Manulife Financial fell 13.96 per cent and 11.35 per cent, respectively. Bank of Montreal dropped 4.59 per cent, Toronto-Dominion Bank 6.42 per cent, Bank of Nova Scotia 7.15 per cent, and both Royal Bank of Canada and Canadian Imperial Bank of Commerce fell 9.01 per cent. Comparatively, the S&P/TSX composite fell 4.54 per cent.
The Conservatives have watched their lead in the polls shrink over the past two weeks as financial turmoil boils over. Mr. Harper had argued that the economy is strong enough not to require urgent action, and that the stock-market plunge was a buying opportunity. That messaging has come to an end, however, as the Conservatives try to appear more sympathetic in helping put an end to the turmoil. As the election campaign comes to its conclusion, Mr. Harper has argued that Canadians should re-elect the Conservatives because they are the steadiest hand in guiding the turbulent economy.
Asked Thursday whether the government is working on a plan to help the flow of funds to borrowers by expanding mortgage security, Mr. Flaherty confirmed that “yes, we are looking at additional steps that could be taken.”
In British Columbia Thursday, Mr. Harper defended the idea of extending a helping hand. “To be very clear: there is no question, no possibility of bailing out the banks and the banks aren't seeking to be bailed out and the government won't be bailing them out,” he said. He added, however, that the banks need help to cope with the “growing tightness in world credit markets” now. “We're doing that to make sure there's money available for routine loans [for] small business, for car loans, for mortgages.”
But his main rival for the prime minister's job dismissed Mr. Harper for acting too late.
Asked if it was appropriate for the government to be intervening, Liberal Leader Stéphane Dion said it's the Tories who are panicking.
“It's too little, too late for Mr. Flaherty and Mr. Harper,” Mr. Dion said. “They have no plan. It's too late for them.”
The Tories have been facing increasing criticism this week for their handling of the crisis.
On Thursday, an executive said he was “shocked” when Mr. Flaherty said that two Canadian banks had run the risk of falling outside Canada's capitalization requirements.
