The Canadian government today announced a temporary program to
guarantee mid to longer term debt issued by Canadian banks and
other federally-regulated deposit-taking institutions. The Canadian Lenders Assurance Facility will insure
certain categories of senior unsecured wholesale debt with a term
to maturity of at least three months.
This insurance will cover principal and interest payments on
eligible debt instruments for up to three years from the date of
issue. Debt denominated in Canadian dollars, US dollars, Euros,
Sterling or Yen is eligible for the program.
The facility will charge a base annualized premium of 135 basis
points, with surcharges depending on the credit rating of the
issuing institution and an additional surcharge for debt that is
not denominated in Canadian dollars.Insurance will be available
beginning in early November and will be issued until April 30,
2009. There is a limit on the amount of insurance available to each
institution, based on the amount of wholesale debt of the
institution maturing in the next six months, and on the amount of
deposits held by the institution.
The Canadian Lenders Assurance Facility is a response to the
government guarantees of interbank lending that have been
introduced in many foreign jurisdictions. There was concern that
Canadian institutions, although fundamentally sound, would be at a
disadvantage when competing for debt capital with foreign
institutions who have the benefit of a government guarantee.
This is the second major Canadian initiative in implementing the
G7 plan of action to stabilize global financial markets. The first,
announced on October 10th, was a program to provide additional
liquidity to Canadian financial institutions through the purchase
of up to $25 billion of mortgage-backed securities. Banks, trust
companies, insurance companies, credit unions, loan companies and
caisses populaires who issue mortgage-backed securities under the
National Housing Act MBS program are eligible to participate. Since
the underlying mortgages already carry guarantees backed by the
Canadian government, there is no incremental risk to the government
in the purchase of these securities. The purchases are being
undertaken through a series of competitive auctions, with $5
billion purchased in the first auction on October 16th, and up to
$7 billion in additional purchases taking place today.
These programs are modest compared to those in some other
countries. However, Canadian banks are well-capitalized by
international standards, and have not suffered the domestic
mortgage losses experienced by their counterparts in other
jurisdictions. Public statements by the federal Minister of Finance
suggest that no further assistance to Canadian financial
institutions is contemplated at this time. For example, it appears
that there are no plans to raise the deposit insurance limit above
its current level of $100,000. If Canada's banks continue to be
the most sound in the world, as shown in the World Economic Forum's Global Competitiveness
Report released earlier this month, then the present
initiatives may well be sufficient to see them through the current
global liquidity squeeze.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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