Credit crisis hits Canada

[cdr108]

Credit crisis hits Canada
Thursday October 9, 11:40 am ET
By Rob Gillies, Associated Press Writer
Canadian finance minister looking for ways to keep credit flowing

TORONTO (AP) -- The global credit crisis is starting to restrict the ability of Canadians to obtain loans for mortgages, cars and investments, Canada's finance minister said Thursday. Finance Minister Jim Flaherty said he is looking to increase liquidity in the market but declined to release details.

In an indication of the uncertainty in the markets, Canada's private banks declined to pass on to consumers the full half percentage point cut in interest rates announced by central banks around the world.

The banks cut interest a quarter of a point instead, the first time since the Asian financial crisis in 1997 that they haven't followed what Canada's central bank has done.

Flaherty pointed out that Australia's banks only passed along 80 of the 100 basis point cut their central bank made this week.

"What I've said to the banks is do as much as possible in the present circumstances," Flaherty said.

Flaherty said they are not looking at a rescue package or bailout of the Canadian banks. He said he has "absolutely no concern about the health of our Canadian financial institutions. I have concerns about the availability of credit."

Flaherty called the news conference in advance of his meetings with other G7 ministers in Washington -- meetings he called the most important he's attended since becoming finance minister.

"We have to ensure that credit continues to be available," Flaherty said. "I'm concerned about that. I know many Canadians are because it affects the costs of mortgages, it affects the costs of car loans, it affects loans to small business, the ability of business to invest and reinvest."

Prime Minister Stephen Harper has maintained that Canada will avoid the mortgage meltdown and banking crisis that are hitting the United States and Europe hard.

Harper's Conservative party has been sliding in the polls since he said during an election debate last week that Canadians weren't concerned about their jobs or their mortgages.

Harper said Tuesday the stock market was overreacting to bad news and that stocks were cheap.

The prime minister called early elections for Oct. 14 in hopes his party can increase its numbers in the 308-seat Parliament.

 

[Glen]

I never thought I would say this................................

It is time for a national bank. Why bother lending banks more money when they are just sitting on it to fix their balance sheets?

 

[Edward Skira]

I would rather they keep the money instead of collapsing like in the US. However, I would ask them to stop paying dividends. That's a lot of capital going out the door.

 

[AlvinofDiaspar]

From the Globe:

Ottawa looks to help banks access cheaper funds
HEATHER SCOFFIELD

Globe and Mail Update

October 9, 2008 at 2:46 PM EDT

OTTAWA — The federal government is planning to announce a proposal to help banks access cheaper funds to fuel lending, while putting out the message that the plan is not a bailout.

In a plan to be announced as early as Friday, Ottawa would help the banks get cheaper access to funding by allowing them to securitize more of the government-backed mortgages they hold on their books.

The aim is to alleviate the commercial banks' intensifying problems in accessing cash in global money markets.

“We are doing everything to ensure we can navigate through these troubled waters, and protect Canadians,†Finance Minister Jim Flaherty said at a news conference Thursday morning in Ottawa. “The government stands ready to take whatever actions are necessary to protect the stability of the Canadian financial system.â€

Mr. Flaherty had been on the verge of making the announcement of the banking plan on Wednesday night, but by Thursday morning had opted instead to focus on what the government is not willing to do: increase deposit insurance and directly bail out the banks, according to sources familiar with the matter.

At the news conference, Mr. Flaherty said, “We are not looking at a rescue package for banks ... We are not looking at creating any additional risk for taxpayers.â€

The Conservative's mortgage-bond swap plan, reported by the Globe and Mail early Thursday, fits into this line of thinking. It would see the federal government expanding its capacity to buy up Canada Mortgage Bonds, and give banks more liquid securities instead.

The plan would not mean any extra federal money on commercial banks' balance sheets, but it would help them have the tools they need to finance their banking operations more freely. In other words, not a bail-out, but helping hand in accessing liquidity.

The big banks have been urging Ottawa for some time to adopt such measures, not because they're desperate but because credit conditions are worsening.

In a campaign stop in Richmond, B.C., Conservative leader Stephen Harper echoed Mr. Flaherty's message that this move should not be regarded as a bailout.

“There is no question, no possibility of bailing out the banks,†he said. “The banks aren't seeking to be bailed out, the government won't be bailing them out. That isn't going to happen.â€

Mr. Flaherty also rejected any notion of increasing insurance on bank deposits. Countries around the world have quickly moved to guarantee bank deposits as the first step in protecting their economies from the fall-out of the global financial crisis, and to discourage depositors from pulling their money out of banks and putting it under their mattresses. But Mr. Flaherty said there is no need to follow suit in Canada.

“I think what we have right now is adequate.â€

Instead, Ottawa will narrow its focus and take measures that will only serve to improve the availability of credit, he said.

“The disruption of global credit markets that originated in the United States will continue to have spillover effects on Canadian financial institutions,†he warned. “The spillover effect can – if there's not adequate liquidity in the system – can make it difficult for Canadians to obtain credit.â€

“They have to do this – they need things in place just in case,†a top executive at one of the Big Five banks told the Globe and Mail on Wednesday.

Still, the Conservatives are clearly taking pains to make sure their message does not create panic among bank customers, nor hurt their electoral chances.

A new report by the World Economic Forum describes Canada's banking system as the world's strongest, Mr. Harper pointed out.

And Mr. Flaherty pointed out repeatedly that he understands the anxiety Canadians are feeling because of the global financial crisis.

“People are worried about the global economy and its effects in Canada. They're also worried about their job security, they're worried about their homes,†he said.

“I share their concerns,†he said.

The Conservatives have come under fire and watched their lead in the polls evaporate over the past two weeks as financial turmoil boiled 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, as the Conservative try to appear more sympathetic and activist in helping put an end to the turmoil.

http://www.reportonbusiness.com/servlet/story/RTGAM.20081009.wbankplan1009/BNStory/Business/home
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In a plan to be announced as early as Friday, Ottawa would help the banks get cheaper access to funding by allowing them to securitize more of the government-backed mortgages they hold on their books.

The aim is to alleviate the commercial banks' intensifying problems in accessing cash in global money markets.

Geez, that's real wise considering securitized mortgages and other exotic financial products was what started the mess in the first place.

AoD

 

[cacruden]

I would rather they keep the money instead of collapsing like in the US. However, I would ask them to stop paying dividends. That's a lot of capital going out the door.

To anyone that has BNS or TD stock.... sell... panic .... sell..... panic.....

It is only going to get worse!

Of course - that is exactly what would happen if they cut the dividend. It would send the message that the bank is in trouble.... and lacking capital. But I really really do want the price of the stock to go down a little more - I am looking at acquiring a small stake in each of those institutions (5+ year money).

If we go back in time - basically a Bank - borrows money from A, and lends money to B. Preferably, you take money in on deposit and term deposit (they are the cheapest source of funds), and lend money to another party (a mortgage). You make money on the spread between the two. Now a bank has capital requirements, and can only loan out up to maximum multiple of it (12 sounds familiar). It is rare that a bank will have an exact balance between deposits and mortgages, so they either have extra cash or need to finance the mortgages by acquiring those funds from another source. Problem is that it is getting harder and more expensive to finance the difference - which means if you can't get it - you can't lend it - even if you are well within your capital requirements. That is where the credit crisis is starting to hit. In response the banks are widening the spread to cover it - so that they can continue to lend.

If you were a conservative bank and are well capitalized - and don't have those bad assets on your books.... things are beginning to look interesting. You are able to snatch up the cream of any bank, their network (to complement yours). Now if the FDIC takes the bad assets away - the remaining banks get a steal (i.e. JP Morgan). Of course the banks that are buying these assets - would not have been able to if the regulations where not changed (Glass-Steagall revoked) - and in that case - I don't know who would be buying . Now the down side is that after the crisis is over, the US is going to look a lot more like Canada. The Big 5 or Big 4: Bank of America, Wells Fargo, Citibank (the least well managed of this 4), JP Morgan, and ?.

 

[kEiThZ]

We were bound to take some hits from what happens in the US. But it's hardly a crisis when our banks are riding through (and probably waiting to make acquisition in the US). Look at the upside...we're not in the same situation as Iceland!

 

[cacruden]

We are going to take some hits this year, but I find it funny that the Banks in Canada will likely ride through it in relatively good shape (compared to EU and US). These are the same banks that were used as a political football a few years ago because they were making too much profit (which I always thought was good since they are widely held in pensions/rrsps etc).