Canada Agrees to Buy C$25 Billion in Mortgages (Update3)
By Frederic Tomesco and Andrew Barden
Oct. 10 (Bloomberg) -- The Canadian government shored up the nation's banks by taking on some of their mortgages in a bid to ease soaring borrowing costs that have crippled lending.
Canada Mortgage and Housing Corp., a government-run agency, will buy as much as C$25 billion ($21.6 billion) in mortgages from the banks, Finance Minister Jim Flaherty said today in Ottawa. The lenders will get cash, giving them more money to lend to consumers and businesses.
``This transaction is simply a market intervention,'' Prime Minister Stephen Harper told reporters today. ``It's a market transaction to ensure our credit markets are functioning strongly.''
Borrowing costs for Royal Bank of Canada and other lenders have soared as the global credit crisis spreads. Canadian banks have become less willing to lend to each other, let alone to customers. The difference in yield between Canada's three-month treasury bill and the three-month dollar London Interbank Offered Rate rose to the highest since at least 1990 this week.
Canadian banks are ``reluctant to lend to any other bank,'' said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which owns bank shares. ``Canada is obviously not an island unto itself. We rely on the funding costs that any other bank in the world would rely on.''
Most Canadian bank shares were mixed amid a global stocks rout. Royal Bank, the country's biggest lender, climbed 98 cents to C$42.38 at 10:44 a.m. trading on the Toronto Stock Exchange, while Toronto-Dominion Bank dropped C$1.29 cents to C$51.21.
No Comments
Spokespeople at Royal Bank, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada weren't immediately available to comment.
The mortgage buybacks may allow commercial banks to lower their prime lending rate by about a quarter percentage point, Flaherty said. The measure won't cost taxpayers any money, and the housing agency isn't taking on troubled assets, Flaherty said. He added that no banks in Canada are at risk.
``Our mortgage system is sound,'' Flaherty said. ``Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes, than is the case in the United States.''
Borrowing costs have risen so much that commercial banks this week failed to match the Bank of Canada rate cut for the first time in 11 years. The lenders lowered their prime rate, offered to their best customers, by 25 basis points, or a quarter percentage point, short of the half-point cut by the central bank.
Less Subprime
Canada's stock of residential mortgages amounts to about C$773 billion, according to the country's finance department. Subprime mortgages represent less than 5 percent of all outstanding mortgages in the country compared with about 20 percent in the U.S., the finance department said.
Nakamoto said he expects Canadian banks to match the central bank's rate cut.
``It would look quite bad to the public if they remained at a quarter point, yet they're being perceived as being helped out by the government,'' he said.
Canada Mortgage will make its first purchase of mortgages next week, Flaherty said. The Ottawa-based housing agency insures home loans and sells mortgage-backed securities to help keep mortgage costs low for consumers.
Flaherty also said he approved a request by state-owned Export Development Canada to increase its borrowing by 50 percent to C$6 billion, adding that he's prepared to take ``other measures as necessary.'' The move will help Canadian exporters secure financing, he said.
Election Campaign
Flaherty announced the bank aid four days before national elections as support for his Conservative Party weakens over the government's handling of the economic crisis.
Support for the Liberals, the largest opposition bloc in Parliament, rose after leader Stephane Dion announced in a televised leaders' debate last week that he would put together a 30-day plan to revive confidence in the economy.
The meeting today of finance ministers and officials from the Group of Seven industrialized nations in Washington is a chance to discuss a further ``coordinated response'' to the credit crisis, Flaherty said.