Detailed terms of the Canadian Lenders Assurance Facility
program have been released.
The Government of Canada has introduced
new measures to provide liquidity to Canadian financial
institutions. (Earlier measures are described in our Financial
Services Update of
October 23, 2008.)
Today, the Ministry of Finance advised that the mortgage-backed
securities purchase program
announced previously will be increased from $25 billion to $75
billion. $12 billion in purchases have already been made from the
first tranche of the purchase program, with an additional $7
billion expected to be purchased in an auction taking place today.
The final purchases from the first tranche are expected to take
place on November 21.
Today's announcement also included a reduction in the base
premium under the Canadian Lenders Assurance Facility (CLAF) of 25
basis points and a temporary waiver of the 25 basis point
surcharge, which means that the lowest price for insurance under
the facility will be 110 basis points rather than 160 basis points
previously announced on October 23.
CLAF provides for government insurance for up to three years for
certain borrowing by banks and other qualifying deposit-taking
institutions. The reduction in pricing is an attempt to make the
program more competitive with similar programs in other
Consultations with Canadian financial institutions on the terms
of the CLAF have been completed, and a term sheet for the program
is expected to be released within a few days, which will include
details of the commercial terms and application process. We
understand that the Canadian program will be similar to the
UK's Credit Guarantee Scheme. However, unlike the UK scheme,
which appears to give government authorities some discretion in
determining which entities are eligible and the amount of support
to be provided, CLAF coverage will be available to any institution
meeting the prescribed eligibility criteria and the maximum amount
of coverage for each institution will be determined by formula.
As well, yesterday the Office of the Superintendent of Financial
Institutions (OSFI), announced changes to the regulatory capital
requirements for banks and other federally-regulated deposit-taking
institutions. Debt covered by the CLAF can now be assigned the same
risk weighting for regulatory capital purposes as Government of
Canada debt during the term of the CLAF guarantee even if that term
is less than the term to maturity of the debt. Similarly, debt
covered by similar foreign programs can now be assigned the same
risk weighting as the guaranteeing sovereign for the term of the
foreign sovereign guarantee even if that term is less than the term
to maturity of the debt.
In addition, OSFI has raised the limit on qualifying preferred
shares and "innovative instruments" as a component of
Tier 1 capital from 30 percent to 40 percent. Since the current 15
percent limit on "innovative instruments" has been left
unchanged, the effect of the change is to increase the amount of
qualifying preferred shares that can be included in Tier 1
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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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