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Archived - Action to Improve Access to Financing and Strengthen Canada's Financial System
Introduction
Canada's financial system is sound and better equipped to cope with the challenging global financial climate than those of many other nations. Nevertheless, Canada is not immune to the global crisis, and thus a key part of Canada's Economic Action Plan is to improve access to financing and strengthen Canada's financial system.
Highlights
- Over $50 billion in funding has been provided to Canadian financial institutions through the Insured Mortgage Purchase Program and the Canada Mortgage Bond program.
- The availability of financing support for businesses through Export Development Canada and the Business Development Bank of Canada has been expanded.
- Collaboration has been increased between financial Crown corporations and private sector lenders and credit insurers under the Business Credit Availability Program.
- Consultations are underway with interested market participants on the design of the Canadian Secured Credit Facility.
- The Canadian Lenders Assurance Facility has been launched and the Canadian Life Insurers Assurance Facility will be launched in March.
"[We] support the budget initiatives that provide short-term support to Canadians and businesses, facilitate the flow of credit through the capital markets, and lay the foundation for recovery."
"The government took critical steps in the budget to stimulate liquidity, provide incentives that will encourage manufacturers to invest in machinery and equipment."
Improving Access to Financing: The Extraordinary Financing Framework
The effect of tight credit conditions is being felt throughout the Canadian economy. The Government is taking action to keep credit restrictions from deepening the economic downturn in Canada by creating the Extraordinary Financing Framework (EFF).
The EFF embraces a number of new and existing initiatives totalling $200 billion, the overall aim of which is to expand the availability of credit and to respond to gaps in credit markets.
To help manage the EFF, the Government is moving to form the Advisory Committee on Financing. This committee will include users and suppliers of financing, along with other experts. The committee will advise on financing conditions and the design, scope and scale of initiatives under the EFF. The Chair and members of the committee will be announced shortly.
Insured Mortgage Purchase Program
Through the Insured Mortgage Purchase Program (IMPP), the Government will purchase up to a total of $125 billion in insured residential mortgage pools from Canadian financial institutions to help them to continue lending to Canadian consumers and businesses.
As of February 24, 2009, $51.3 billion has been provided through eight reverse auctions. Two more auctions are scheduled to be completed in March 2009. An operational schedule for the first quarter of 2009–10 will be available before the end of March.
To date, 15 different financial institutions have participated directly in the IMPP, including banks, non-bank deposit-taking institutions, and life insurance companies.
There is strong evidence that the IMPP is working to moderate the impact of the global financial turmoil on credit conditions in Canada. During the fourth quarter of 2008, residential mortgages sold as National Housing Act mortgage-backed securities, which are eligible to be sold into both the IMPP and the Canada Mortgage Bond programs, grew at a rapid 28 per cent. More generally, consumer credit rose 1.9 per cent, residential mortgage credit increased 2.6 per cent and business credit advanced by 1.6 per cent. Financial institutions have indicated that the program helps to reduce business and consumer lending rates. The 5-year mortgage rate has decreased by 1.4 percentage points since last October when the IMPP was introduced, while the prime lending rate has dropped 1.75 percentage points.
At the two most recent auctions, financial institutions did not tender as many mortgages as the Government was prepared to buy. This is another sign that the program is providing ample funding, and it may indicate that lenders' concerns about access to funding are easing.
The June report will include a further update on the operations of the IMPP.
New Flexibilities and Resources for Financial Crown Corporations
The Extraordinary Financing Framework includes a number of initiatives to support access to credit for Canadian businesses through the financial Crown corporations.
Legislative Initiatives to Provide More Flexibility to Financial Crowns
The Government committed additional capital of $350 million to both Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) in the November 2008 Economic and Fiscal Statement, while increasing their borrowing limits. This will result in about $3 billion in increased lending capacity for the financial Crown corporations.
In Canada's Economic Action Plan, the Government has proposed to further strengthen the ability of EDC and BDC to respond to the needs of Canadian businesses by expanding their authorities to provide additional financing support to Canadian businesses. Proposed measures include increases to capital limits for both corporations, a higher contingent liability limit for EDC and an increase to the Canada Account portfolio limit. Moreover, the Government is temporarily permitting EDC to provide domestic financing and insurance, as a complement to BDC's and private lenders and insurers' activities.
These measures require legislative changes to the Export Development Act and the Business Development Bank of Canada Act that will come into effect once the Budget Implementation Act, 2009 receives Royal Assent.
Business Credit Availability Program
Financial Crowns are also responsible for delivering the Business Credit Availability Program (BCAP), in conjunction with private sector lenders. Under this initiative, EDC and BDC will provide loans and other forms of credit support at market rates to creditworthy businesses.
Participating private sector lenders have committed to:
- Working with the financial Crown corporations to find solutions for creditworthy business clients who would otherwise have insufficient access to credit.
- Ensuring that the extension of credit by financial Crown corporations is incremental for Canadian businesses and does not displace or substitute for private credit in aggregate.
BCAP is being facilitated by a steering group made up of senior representatives of government, the financial Crown corporations and private sector lenders, which met for the second time in early March. The program is already showing early results. Through increased bilateral discussion with their private sector partners, business referrals to the financial Crowns have increased. EDC and BDC have also developed a referral and coordination mechanism governing their activities in the domestic market. Discussions are also underway at senior levels between EDC and private sector insurers to determine how EDC can work with private sector insurers to support the provision of accounts receivables insurance during this difficult period.
The June report will contain the first update on the volume of credit extended under BCAP.
Additional Capital for EDC and BDC Announced in the November 2008 Economic and Fiscal Statement
The $350 million of additional capital allocated to BDC that was announced in the November Economic and Fiscal Statement has been earmarked to support credit extension under BCAP. Out of this $350-million investment, $250 million was provided to BDC in January 2009 so it could immediately begin to increase its term lending activities. The remaining $100 million will finance a working capital guarantee facility that is expected to be in place by April 2009.
The purchase of $350 million in additional share capital of EDC was completed on January 23, 2009. This injection has allowed EDC to offer more than $250 million in new insurance coverage so far this year. In addition, EDC has also created a $200-million high-risk financing pool for auto parts suppliers and toolers. The injection will also enable EDC to enhance its assistance to other sectors severely impacted by the credit crunch, and EDC will also be looking to work in partnership with financial institutions to leverage greater access to credit through its partners for Canadian businesses.
CMHC Loans to Municipalities for Housing-Related Infrastructure
Canada's Economic Action Plan also makes available up to $2 billion over two years in direct, low-cost loans to municipalities through CMHC for housing-related infrastructure. CMHC's Corporate and Borrowing Plans have been amended to allow implementation of the application process to begin. Loan applications have been developed and will be posted on the CMHC website in March. CMHC will be in a position to process applications in April.
An update on the volume of approved loans will be provided in the June report.
Short-Term Loans to the Automotive Industry
Recognizing the importance of the automotive industry in Canada, the Government committed to make available $2.7 billion in short-term loans in December 2008 to Chrysler Canada Inc. and General Motors of Canada Ltd. as part of a $4-billion joint federal-provincial loan facility. Discussions with the automakers are continuing on access to financing in support of their Canadian operations.
The June report will contain an update on the take-up of this facility.
Canada Small Business Financing Program
The Economic Action Plan increases the maximum loan amounts, from $250,000 to $350,000 and to $500,000 for real property, as well as the limit of allowable losses that an individual financial institution can claim for reimbursement under the Canada Small Business Financing Program, from the current 10 per cent to 12 per cent. This will provide incentives for lenders to continue to offer Canada Small Business Financing loans to small businesses, and will result in more small businesses having access to the financing they need, for an amount that is more in line with current prices. These changes are expected to result in more than $300 million in additional lending to small businesses.
This measure will come into force on April 1, 2009 or on the day on which the Budget Implementation Act, 2009 receives Royal Assent, whichever is later.
Canadian Secured Credit Facility
The disruption in financial markets has lessened the availability of certain types of financing, notably in the securities markets. To address this shortage, the Economic Action Plan announced the Canadian Secured Credit Facility, which will support the purchase of up to $12 billion in term asset-backed securities backed by loans and leases on vehicles and equipment.
A consultation document was published on the BDC website (www.bdc.ca) in February, and consultations have since been undertaken with a wide array of interested parties. Following the consultation period, the terms of participation, the design of the facility and the operational framework will be finalized.
The June report will contain an update on the operations of the facility.
Canadian Lenders Assurance Facility and Canadian Life Insurers Assurance Facility
Under the Canadian Lenders Assurance Facility (CLAF) and the Canadian Life Insurers Assurance Facility (CLIAF), the Government will provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions and life insurers to ensure that they are not put at a competitive disadvantage relative to foreign competitors.
These temporary facilities are offered to lenders on commercial terms so there is no expected fiscal cost. These facilities will be available until December 31, 2009.
The CLAF became operational on February 26. At present, the CLAF uses a bridging mechanism that allows for payment to bond holders under existing authorities in the highly unlikely event of a default pending enactment of a permanent appropriation authority provided for in the Budget Implementation Act, 2009.
The CLIAF, which is modelled on the CLAF, will become operational in March.
Each debt security that is issued by a financial institution using the CLAF or CLIAF will be made public on the Bank of Canada website (www.bankofcanada.ca) on a transaction-by-transaction basis.
The June report will contain an update on debt issued under the CLAF and CLIAF.
Modernization of Bank of Canada Authorities
In Budget 2008, the Government modernized the authorities of the Bank of Canada to support the stability of the financial system. The Bank has used this modernized framework to increase its provision of extraordinary liquidity through a number of facilities. This extraordinary liquidity peaked at $41 billion in December 2008 and stood at about $37 billion on February 18, 2009.
Demonstrating its ongoing commitment to support the efficient functioning of financial markets, the Bank announced a new Term Purchase and Resale Agreement Facility for Private Sector Instruments on February 23, 2009, which will allow eligible market participants with significant activities in Canada's private sector money and bond markets to obtain liquidity using a range of securities as collateral. This measure significantly broadens access to liquidity for a new group of market participants.
10-Year Canada Mortgage Bond
The Canada Mortgage Bond (CMB) program, administered by Canada Mortgage and Housing Corporation, provides mortgage funding to participating financial institutions through sales of bonds in the public market that are backed by pools of insured mortgages.
In July 2008, the Government announced an expansion of the CMB program to include a 10-year maturity. Two issues of 10-year CMBs, the most recent on February 18, have provided an additional $4.5 billion in liquidity to financial institutions. The new quarterly maturity is expected to provide up to $10 billion in incremental funding for financial institutions through 2009.
The June report will contain an update on the volume of financing provided by the 10-year CMB.
Recent Developments in Extension of Credit in Canada
Total business credit in Canada continues to rise, but at a slower pace than in past years. In January 2009, total borrowing by Canadian businesses stood 4.2 per cent above its level one year earlier. This compares to year-over-year growth of 7.8 per cent in December 2007.
Businesses borrow from banks, from non-bank lenders and directly through the financial markets. To date, the financial market channel is the one that has been most affected by the credit crunch. For example, total credit raised through securitization in financial markets fell by 14.3 per cent, or $21 billion, between the beginning of the credit crunch in July 2007 and December 2008. The business sector accounted for more than half of the decline, or about $12.3 billion.
While businesses have reduced their borrowing from financial markets, they have been able to increase their use of bank loans. As of January 2009, business credit provided by banks stood 10.4 per cent above its level one year earlier. Business lending by all financial institutions (including non-bank lenders) increased by 11.5 per cent over the same period. Banks have increased both traditional business loans (up 11.2 per cent year-over-year) and guarantees of borrowing undertaken directly by their clients (the volume of Bankers Acceptances is up 7.8 per cent year-over-year).
While the volume of business lending continues to rise, the terms and conditions available to borrowers continue to tighten. In the most recent Bank of Canada survey of senior loan officers at banks, conducted over the fourth quarter of 2008, survey respondents reported a further widespread tightening in lending conditions. Similarly, in the Bank of Canada's most recent Business Outlook Survey, nearly two-thirds of firms reported tighter credit conditions over the past three months relative to the previous three months. Most firms reported that the tightening came in the form of higher borrowing costs.
Growth in household credit (including consumer loans and residential mortgages) has remained relatively strong in recent months. In December, mortgage lending stood 10.7 per cent above its level one year earlier. Use of household lines of credit has expanded as well, leading to a 10.2-per-cent increase year-over-year in total household credit as of December 2008.
Despite the decline in the prime and 5-year mortgage rates, credit conditions have generally tightened for consumers as well. For example, before the credit crunch began, floating rate mortgages and consumer lines of credit were available at rates as much as 1 percentage point below the prime rate. Now these loans are being renewed at rates as much as 1 percentage point above prime.
Strengthening Canada's Financial System
While the Extraordinary Financing Framework provides an immediate response to alleviate the impact of the global credit crunch in Canada, Canada's Economic Action Plan also has initiatives that will strengthen Canada's financial system and modernize the regulatory framework going forward.
Safeguards for Financial Stability
While the recent financial turmoil has demonstrated that Canada possesses one of the most stable and well capitalized financial systems in the world, events around the world demonstrate that it is prudent to ensure that the Government is equipped with a broad range of flexible tools to safeguard the financial system.
Canada Deposit Insurance Corporation
The Budget Implementation Act, 2009 contains legislative amendments to the Canada Deposit Insurance Corporation Act that would provide the Canada Deposit Insurance Corporation with more flexible and up-to-date regulatory tools for dealing with weak or failing institutions in Canada. Recent events have demonstrated the need for increased flexibility to deal with exceptional circumstances in financial markets.
Minister of Finance
The Budget Implementation Act, 2009 broadens the powers of the Minister of Finance under the Financial Administration Act to enter into transactions that promote financial stability and maintain efficient and well-functioning markets. It also includes authority for the Government to inject capital into federally regulated institutions, upon the determination of the Minister of Finance that circumstances warrant it.
These standby authorities will become effective once the Budget Implementation Act, 2009 receives Royal Assent.
Securities Regulation
The Canadian Securities Regulation Regime Transition Office Act (CSRRTOA) has been tabled in Parliament as part of the Budget Implementation Act, 2009. The CSRRTOA provides the legal authority and mandate for the Transition Office. The Budget Implementation Act, 2009 also includes authority for the Minister of Finance to make direct payments, in an aggregate amount not exceeding $150 million, to provinces and territories for matters relating to the establishment of a Canadian securities regulation regime and a Canadian regulatory authority.
Action will be taken to set up the Transition Office once the CSRRTOA comes into force, and an update on progress will be provided in the June report.
Helping Consumers of Financial Products
A strong and stable financial system depends on the ability of its users to make informed decisions when managing the risk associated with using credit. To strengthen consumer protection, the Government is moving to limit business practices by federally regulated financial institutions that may not be beneficial to consumers who use credit cards, or who pay for mortgage insurance. Moreover, the Government is moving to ensure that the information that financial institutions are required to disclose is clearer and more understandable to consumers.
With Royal Assent of the Budget Implementation Act, 2009, the Government will be in a position to move quickly to bring forward specific regulations for public comment.
Financial literacy is an important life skill that empowers consumers to make the best financial decisions in their particular circumstances. The Government has announced the establishment of an independent task force, which will make recommendations to the Minister of Finance on a cohesive national strategy on financial literacy.
The task force will be launched in the spring of 2009, and the June report will contain an update on its progress.
Federally Regulated Private Pension Plans
A public consultation paper on the legislative and regulatory regime for federally regulated private pension plans was released in January, seeking written submissions from interested stakeholders. Public consultations led by the Parliamentary Secretary to the Minister of Finance will begin in March and will conclude by the end of April 2009. Legislative amendments will be put forward later this year.
The Office of the Superintendent of Financial Institutions recently released additional guidance on the use of smoothing in asset valuations for federally regulated plans on March 6, 2009.
Regulations to implement the temporary solvency funding relief announced in Canada's Economic Action Plan and in the November 2008 Economic and Fiscal Statement are currently being developed and will be in place ahead of the June 2009 deadline for filing 2008 valuation reports.
| 2009–10 Stimulus Value (millions of dollars) | Authorities in Place | Next Steps | Funding to Flow/Benefits Available | |
|---|---|---|---|---|
| Insured Mortgage Purchase Program | Up to $125,000 in financing | Yes | June report on program activity. | Ongoing |
| Expanded powers for Export Development Canada (EDC)/Business Development Bank of Canada (BDC) | N/A | Upon Royal Assent of BIA | June report on program activity. | April |
| Business Credit Availability Program | At least $5,000 in financial support | Yes | June report on program activity. | Ongoing |
| Additional capital for EDC and BDC | Up to $3,000 in financing | Yes | June report on activity. | Ongoing |
| Canada Mortgage and Housing Corporation loans to municipalities | Up to $1,000 in financing | Yes | June report on activity. | April |
| Loans to auto industry | Up to $2,700 in financing | Yes | June report on take-up. | Ongoing |
| Canada Small Business Financing program | Up to $300 in loans | Upon Royal Assent of BIA | June report on program activity. | April |
| Canadian Secured Credit Facility | Up to $12,000 in financing | Yes | Finalization of framework; June report on operations. | May |
| Canadian Lenders Assurance Facility | N/A | Yes | June report on activity. | February |
| Canadian Life Insurers Assurance Facility | N/A | Yes | June report on activity. | March |
| Modernization of Bank of Canada authorities | Yes | June report on activity. | Ongoing | |
| Canada Mortgage Bond | Up to $10,000 in financing | Yes | Issue bonds on quarterly basis; June report on activity. | Ongoing |
| Advisory Committee on Financing | N/A | N/A | Finalize committee and hold periodic meetings. | N/A |
| Canada Deposit Insurance Corporation authorities and mandate | N/A | Upon Royal Assent of BIA | Standby authority. | N/A |
| Expanded powers for Minister | N/A | Upon Royal Assent of BIA | Standby authority. | N/A |
| Recapitalization/equity investments in banks | N/A | Upon Royal Assent of BIA | Standby authority. | N/A |
| Measures to protect consumers regarding credit cards | N/A | Upon Royal Assent of BIA | Publish draft regulations; June report on status. | N/A |
| Canadian securities regulator | Upon Royal Assent of BIA | Set up Transition Office; legislation to be tabled in the fall. | N/A | |
| Measures to protect consumers regarding mortgage insurance | N/A | Upon Royal Assent of BIA | Publish draft regulations; June report on status. | N/A |
| National strategy on financial literacy | Yes | Appoint task force; June report on status. | N/A | |
| Improving the legislative and regulatory framework for federally regulated pension plans | N/A | Expected
by end of 2009–10 |
Public consultations March-April; legislation to be tabled in the fall. | N/A |
Other Tax Measures
The following table summarizes the current state of implementation for other tax measures announced in the Economic Action Plan.
| 2009–10 Stimulus Value (millions of dollars) |
Authorities in Place | Next Steps | Funding to Flow/Benefits Available | |
|---|---|---|---|---|
| Registered Retirement Savings Plan/Registered Retirement Income Fund losses after death | – | Part of BIA | Royal Assent to BIA. | February |
| International taxation | – | Part of BIA | Royal Assent to BIA. | After 2011 |
| Timing of acquisition of control of a corporation | – | Part of BIA | Royal Assent to BIA. | February |
| Canada Revenue Agency strategic review—electronic filing | – | Part of BIA | Royal Assent to BIA. | After 2009 |
| Simplify Goods and Services Tax/Harmonized Sales Tax application for direct sellers | – | Budget 2009 | Consultations on legislative proposals in Budget 2009. | 2010 |
| Aboriginal tax policy measures | – | – | Ongoing negotiations with Aboriginal governments. | – |
