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Budget offers a $70-billion credit kickstart

Globe and Mail Update

OTTAWA, TORONTO — The federal government is extending its reach into Canada's financial system in a bid to support banks and borrowers, making almost $70-billion in new credit available and planning new powers such as the ability to buy stakes in financial institutions should they need capital injections.

The budget includes measures to grease mortgage lending, auto financing and business borrowing, as well as tools to backstop the borrowing of Canadian banks and insurers, in the wake of the financial crisis that has sucked the air out of a number of lending markets.

Coupled with measures announced late last year, the increase in what Ottawa calls its “Extraordinary Financing Framework” means the government will be providing up to $200-billion to the country's credit markets.

Finance Minister Jim Flaherty also proposes giving himself and the Canada Deposit Insurance Corp. new powers to promote financial stability if necessary, including the ability to buy stakes in banks and provide loans and lines of credit. Under the proposal, CDIC could even establish a new bank that could possibly buy up bad assets to aid banks.

“It's all about flexibility, about having more tools in the toolkit should they be required,” Blair Keefe, a financial services lawyer with Torys LLP, said of the new powers. “Neither the government nor industry expects them to be necessary, but everyone believes that it is desirable to have the maximum flexibility to address matters as they unfold.”

While most of the measures had been rumoured, the fact that the government did so many was a surprise to many analysts.

“Over all, they are the right moves for liquidity,” said Mark Chandler, a fixed income strategist at RBC Capital Markets, adding that all may not be necessary and “come to fruition.”

Even so, Ottawa needs to give “serious thought” to further expanding asset purchases to loosen other areas of the credit markets, said Eric Lascelles, chief economics and rates strategist at TD Securities. One possibility would be to purchase home equity line of credit loans from banks, which would free up more capital for lending.

He also questioned the idea of giving money to Export Development Canada and the Business Development Bank of Canada in a bid to make more loans available.

“It is an open question whether the money allocated to BDB and EDC could be better served propping up the corporate bond market,” Mr. Lascelles said.

The government will also ruffle feathers on Bay St. because it expects to earn a profit from its aid programs over all, and will charge financial institutions market prices to access the facilities for mortgages and vehicle loans and leases. The interventions are expected “to generate a positive return for the government over all,” and therefore have no fiscal cost, the budget said.

Bank of Nova Scotia chief executive officer Rick Waugh recently warned that the banking sector needs moral support from Ottawa at this time, and not to be viewed as a source of government revenue.

The government is also requiring banks to provide consumers with a minimum grace period for credit card purchases, and boost disclosure to cardholders.

Kevin Stanton, president of MasterCard Canada, suggested the government needs to be wary of raising costs for banks that issue credit cards.

“I think that, in trying to address perceived ills, we have to make sure that there are ills, and we have to be aware of unintended consequences of making adjustments to one part of an overall contractual arrangement between a consumer and a financial institution,” he said.

Rocky global credit markets have raised borrowing costs for Canadian financial institutions, the budget notes, and actions that other countries are taking to help their institutions risk putting those in Canada at a competitive disadvantage.

Parts of Canada's credit markets have ceased to function well, and businesses that borrow are facing rising costs.

“Tighter credit conditions are now rippling into the real economy,” the budget states. “If the government did not take further action, this could deepen the economic downturn in Canada.”

Ottawa will form a committee of experts to advise it on the scope and scale of initiatives.

The government plans to boost its $75-billion program to buy mortgages from financial institutions by $50-billion, bringing it to $125-billion. That program aims to reduce the price of mortgages by making more financing available to banks.

So far, it has been working, according to a research note released this week by Toronto-Dominion Bank's economic department. Mortgage lending in December was up 11.6 per cent from a year ago, demonstrating that the program is indeed boosting home buyers' access to funds, the report said.

Ottawa has also decided to allocate up to $12-billion to a new program that will buy securities backed by loans and leases on vehicles and equipment, making more financing available for these products.

To promote business financing, it will raise the amount of capital and liabilities that Export Development Canada and the Business Development Bank of Canada can potentially have. It will also allow EDC – which currently provides finance and insurance to exporters – to support financing in the domestic market, including accounts receivable insurance, for a period of two years.

EDC and BDC's authorized capital limits will double, to $3-billion apiece, while EDC's liability limit rises from $30-billion to $45-billion, and the Canada Account limit grows from $13-billion to $20-billion.

Through a newly created Business Credit Availability Program, BDC and EDC will provide at least $5-billion in loans and credit support at market rates to company's that are having trouble accessing financing. Ottawa is asking banks and other private sector lenders to work with the crown corporations to ensure the new financing isn't displacing private credit.

The government also extending a program to guarantee bank debt from April 30 to the end of December, and will create a similar program – called the Canadian Life Insurers Assurance Facility – for life insurers.

For small businesses, Ottawa will increase the maximum loan a company can access under the Canada Small Business Financing Program as of April. The limit will be raised from $250,000 to $350,000, and will double to $500,000 for loans that are taken out to buy real property. That, coupled with an increase in the amount of losses that will be reimbursed, is expected to result in more than $300-million in additional lending.

The government said that this country's financial system has proven to be among the most resilient in the world, but it is prudent to ensure that Ottawa has a broad range of tools to deal with potential problems as they arise.

As a result, it proposes giving the minister of finance new authority to promote stability, including the authority to provide loans, credit, and guarantees.

The government wants to give CDIC - a Crown corporation established in 1967 to provide insurance for deposits - with the ability to: create a bridge bank that could step in if a financial institution failed; take on costs that might be necessary to deal with a bank failure; do an assessment of a bank's deposit base when it wants to; and own shares in its member institutions.

It also proposes increasing CDIC's borrowing limit from $6-billion to $15-billion, because of the growth in deposits since the last increase in 1992, and giving the finance minister the power to direct CDIC to take actions to prevent “adverse effects on financial stability.”

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