“The sky is not falling,” said Bank of Canada Governor Mark Carney yesterday, as he and Finance Minister Jim Flaherty introduced a “backstop measure” to guarantee amounts Canadian banks borrow from foreign sources through the Canadian Lenders Assurance Facility. Mr. Carney emphasized that, although the Canadian banking system is already quite sound and in no danger of collapse, the move will keep Canada competitive with other countries that already offer the same guarantee. He said the guarantee will make it easier for the average Canadian “to obtain a mortgage and car loan at a reasonable rate of interest”.
Some bankers are disgruntled that the Canadian federal government will be making a profit up to 1.85 percentage points from the guarantee. The better the bank’s credit rating, the lower the risk of default, and hence, the lower the rate of interest — the same formula that applies to Canadian loan applicants now applies to the lenders.
Canadian bankers muttered over the high profit of the Feds. “We don’t need this,” a spokesman from Toronto- Dominion Bank said. Peter Aceto, CEO of ING Direct, said, “Of the various options that we have to cost-effectively fund our business, this is not something we would probably be interested in.” Canadian Western Bank’s CEO, Larry Pollock, said, “If this plan had allowed the banks liquidity at a lower cost, then that lower cost would have spilled through to general borrowing clients.”
Yesterday, Canadian banks auctioned off $7 billion in secured mortgages for a five-year term to CMHC, an arm of the Canadian government that will make $464 million in profit from the purchase. Two weeks ago, Finance Minister Flaherty raised deposit insurance at banks through the Canada Deposit Insurance Corp. to $100,000, far less than the banks wanted.
Mr. Carney told reports yesterday that no further measures are necessary to help Canadian banks, because the tremendous bail-outs in other countries are efforts to bring their banking up to Canadian standards. Canadian banks do not need subsidies. It’s important to place the bankers’ complaints in the context of their 2007 profits: A record $19.5 billion.
As Canadian consumers pay the banks mortgage interest, so now the bankers must pay Canadian taxpayers for using a government guarantee to make them more attractive to foreign lenders. Canadian banks have been making a 13% to 15% return on their lending for many years. The government’s profit of 1.85 percentage points is reasonable by comparison.
