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Government-backed interbank lending program up and running

OTTAWA -- Four months after the government announced its creation, the Department of Finance has informed banks that it can now tap into an insurance program that guarantees interbank lending.

But the chartered banks -- which aggressively called for the backstop at the peak of the credit crisis last fall -- are not expected to line up and seek help, observers say, in large part thanks to their solid balance sheets that has allowed them to tap credit, unlike their counterparts in the United States. Tighter banking regulations and more conservative lending practices helped the Canadian banks avoid most of the US$1.1-trillion in debt-related writedowns and losses taken by finance companies worldwide.

"I don't foresee a large deluge of demand coming down the pipe," said Andrew Fleming, a senior partner at Ogilvy Renault and an expert of corporate financings.

"I don't think anybody feels that they need it," added Don Drummond, chief economist at Toronto-Dominion Bank. "There is a fairly steep price associated with it -- so you would have to be fairly desperate to want to use it."

This is a marked change from October when banks lobbied Ottawa aggressively to provide a government-backed guarantee on wholesale debt, just as other nations were doing to help their domestic lenders deal with the financial crisis. Without such a guarantee, the Canadian banks argued, they would be put at a competitive disadvantage in the middle of a severe credit crisis.

The guarantee was offered, but through a temporary insurance scheme that charged banks a premium of 1.6%. A month later, Ottawa lowered the premium to 1.1% after bank executives said it was too expensive. Further, in the budget last month, the Department of Finance extended the availability of the insurance scheme to until the end of year, and said that life insurance companies would be eligible to participate.

A Finance official said the delay in bringing the insurance program into force was attributed to Parliament disbanding in December, in which legislation implementing the facility was on the order paper. Moreover, the department said the putting together the facility was "complex," as rating agencies had to be consulted to ensure the insurance backing had a triple-A rating.

For its part, the Canadian Bankers Association said in a statement that its members "won't necessarily need to use this facility, but it's good to know it is there as one more tool in the toolkit."

Mr. Drummond said Canadian banks have been able to obtain short-term financing through the Bank of Canada, via its buybank of government securities; and medium-term financing through Ottawa's acquisition of insured mortgage pools.

The mortgage buyback program has proved particularly popular, the economist said. To date, Ottawa has purchased $51-billion of banks' mortgages, which were already backed by the Crown through Canada Mortgage and Housing Corp.

-- with files from Bloomberg News

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