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Improving Access to Financing and Strengthening Canada's Financial System

Highlights

• The Government has taken unprecedented action to improve the availability of financing for households and businesses in Canada.
• The Government is providing broad-based financing support to lenders, as well as special support for particularly hard-hit areas such as vehicle and equipment financing.
• Over $115 billion in financing support has been provided, all of it on a commercial basis to protect the taxpayer.
• Banks now have ample funding to lend to creditworthy borrowers, and the Government's financial Crown corporations are providing strong support.
• Credit conditions in Canada are improving although challenges continue to be faced, particularly by small- and medium-sized businesses.
• Average effective household and business interest rates have fallen significantly.

Improving Access to Financing

Canada has weathered the global financial crisis very well but is not immune to events in global financial markets. Canadians depend on access to affordable financing for their homes, cars and businesses. While banks now have ample funding to support lending, terms and conditions in Canadian credit markets have tightened significantly. Financing for small and medium-sized enterprises and for vehicles and equipment is particularly strained.

The Government has taken timely and effective measures to mitigate the impact of the global credit crunch on the Canadian economy. These initiatives have provided extraordinary liquidity to the financial system, in particular to financial institutions to support lending to Canadian households and businesses. They include the extraordinary liquidity provided to markets by the Bank of Canada, which peaked at over $40 billion in December 2008, and $58 billion of term funding provided by the Government to financial institutions through the purchase of government-insured mortgages. In addition, a new 10-year maturity for a bond program backed by Canada Mortgage and Housing Corporation has provided $7 billion in further liquidity to financial institutions to support mortgage lending. These actions are improving Canadians' ability to borrow.

The Government has recently supplemented these measures with new elements designed to support lending to households and businesses more directly. The Business Credit Availability Program is providing incremental credit, through Export Development Canada and the Business Development Bank of Canada and in cooperation with financial institutions, through direct lending and other types of financial support to businesses with viable business models whose access to financing would otherwise be restricted. The Canadian Secured Credit Facility, which has also recently been implemented, provides direct support for vehicle and equipment financing, which has been facing significant challenges. In this regard, $11 billion of support has been allocated, helping Canadians get vehicle and equipment financing.

In total, the Government has provided over $115 billion in extraordinary support to improve access to financing in Canada, which has had a noticeable impact on credit conditions for Canadians (see the box entitled "Recent Developments in Credit Conditions in Canada").

As a result of the Government's efforts, total consumer and business credit continue to grow in Canada, in contrast to the situation in other major economies such as the U.S., where credit growth has slowed markedly.

In Canada, credit growth has been combined with significantly lower interest rates for borrowers. In response to the global financial crisis, the Bank of Canada reduced its policy rate by 425 basis points between July 2007 and April 2009. The Government's measures to support access to financing, starting in the fall of 2008, have helped to alleviate market uncertainty and supported a dramatic reduction in interest rates. As a result, average effective interest rates for both households and businesses, as estimated by the Bank of Canada, have fallen by almost 200 basis points since last fall (Chart 2.12).

New Support for Vehicle and Equipment Financing

The collapse of the securitization market in Canada has caused a serious shortage of financing for vehicles and equipment for consumers and businesses, which has led to increased borrowing costs for some and limited credit availability for others. To address this, the Government implemented the Canadian Secured Credit Facility, which will purchase up to $12 billion of newly issued term asset-backed securities backed by loans and leases on vehicles and equipment and floor plan (inventory financing) loans. This is increasing money available to Canadian consumers and businesses.

The first allocation of funds has recently been made with 15 Canadian lenders participating under the Large Enterprise Tranche. This group includes the financing arms of major auto and equipment manufacturers in Canada, and covers loans, leases and dealer floor plan. These companies are now well positioned to increase lending volumes backed by their Canadian Secured Credit Facility commitments. Allocations under the $1-billion Small Enterprise Tranche have also been made. The smaller minimum transaction size under this tranche will ensure that the benefits of this facility will reach market participants large and small. In total, $11 billion has been allocated under the Canadian Secured Credit Facility. The balance of available funds will be made available in a subsequent allocation to take place no later than August 2009.

A consultation paper seeking views on the potential merits of allowing banks and other federally regulated financial institutions to offer financial leasing for vehicles and household property was released on April 26. The consultation period closed on May 8, with a large number of stakeholders providing views and comments. The Government will be assessing the input received over the coming months, with the objective of supporting the future availability of leasing as a financing option for consumers and businesses.

Direct Support for Small and Medium-Sized Business

The Government is working hard to help businesses find financing to fund growth and maintain jobs. Through the Business Credit Availability Program, Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) will provide at least $5 billion in direct lending and other types of support and facilitation to businesses with viable business models whose access to financing would otherwise be restricted. By working in close cooperation with private sector lenders, this program will fill gaps in market access and lever additional lending by private sector institutions in cases where joint participation facilitates private action.

The Business Credit Availability Program includes all incremental financing-related activity for creditworthy businesses provided by EDC and BDC arising from the new flexibilities and powers introduced in the November 2008 Economic and Fiscal Statement and January 2009 budget. As a result, this program includes both direct lending and other types of support and facilitation, such as guarantees, insurance and bonding to private lenders and businesses.

The Business Credit Availability Program is based on renewed co-operation between private lenders and the financial Crown corporations to find solutions for creditworthy businesses that would otherwise lack sufficient access to financing due to the global credit crunch. To that end, private lenders and the Crowns have developed new ways of working together. Participating private lenders have committed to ongoing reporting on the steps they have taken to enhance co-operation with the financial Crown corporations.

EDC and BDC have established principles and processes to ensure funding provided under the Business Credit Availability Program is incremental. Participating private lenders have committed to ongoing reporting about the specific processes and systems they have established to ensure the extension of credit by the financial Crown corporations does not displace or substitute for their own extension of credit.

Although the Budget Implementation Act, 2009 only received Royal Assent on March 12, 2009, EDC and BDC have already made significant progress in providing loans and other forms of credit support under this program. As of mid-May, the financial Crown corporations had all of their new business lines in place and were fully open for business. This includes an EDC commitment of up to $1 billion for domestic accounts receivable insurance, signed agreements that have been put in place by both Crown corporations with respect to commercial mortgages, a syndication facility and surety business. In addition, BDC has developed enhanced relationships with financial institutions for referrals and deal sharing for coordinated efforts for small loan processing and its new Operating Line of Credit Guarantee.

EDC and BDC have reported total activity under the Business Credit Availability Program close to $700 million, assisting over 800 businesses. The financial Crown corporations provided assistance in regions all across the country and in all sectors of the economy, with a particular focus on small businesses. Program activity is expected to ramp up quickly over the coming weeks.

A dedicated Business Credit Availability Program website (www.fin.gc.ca/bcap) has been launched to provide information about the program for Canadian companies and for private sector lenders. The effectiveness of this program is further highlighted by the numerous success stories to date, a sample of which is set out in the box below.

EDC's domestic activity under the Business Credit Availability Program was only made possible when the Budget Implementation Act, 2009 received Royal Assent in March. Nonetheless, in the first four months of 2009, EDC took on more than 920 new customers and supported $22.5 billion in financing and insurance. EDC has also facilitated almost 1,400 transactions in partnership with banks and surety companies. Since the financial crisis began in the fall of 2008, BDC has conducted $2 billion in financing volumes. As of May 31, 2009, BDC had assisted 28,000 clients and its portfolio had grown by 15 per cent compared to fiscal year 2008, and is now over $12 billion.

Support for Canadian Lenders

The global credit crunch has made it more challenging for Canadian banks and other lenders to raise the funds they need to continue to extend credit to their clients. The Extraordinary Financing Framework has helped Canadian financial institutions keep lending to Canadian consumers and businesses in the following ways.

Under the Insured Mortgage Purchase Program, the Government stands ready to buy up to $125 billion of insured mortgage pools from Canadian lenders. To date, $58 billion of term liquidity has been provided to financial institutions in this way. As liquidity conditions for financial institutions have improved over the past months, lenders have not participated as aggressively in the Insured Mortgage Purchase Program. However, this program continues to be an important source of liquidity should alternative sources of funding become less available.

Under the Canadian Lenders Assurance Facility, the Government will provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions to ensure that they are not put at a competitive disadvantage relative to foreign competitors which have access to similar guarantee programs in their home countries. The Canadian Lenders Assurance Facility is now fully operational. To date, no financial institution has elected to use this facility. The Canadian Life Insurers Assurance Facility, which is now also available, extends the same type of facility to life insurance companies. To date, no life insurance company has elected to use the Canadian Life Insurers Assurance Facility.

The Bank of Canada has provided extraordinary liquidity to the Canadian financial system since mid-2007. This peaked at over $40 billion in December 2008 and stood at about $24 billion on May 28, 2009.

Progress in implementing other initiatives under the Extraordinary Financing Framework can be found in Table 2.14.

Strengthening Canada's Financial System

Canada's financial system has shown exceptional stability throughout the crisis and has become a globally noted leader in best banking practices. The Canadian banking system was recently rated the soundest in the world by the World Economic Forum. The International Monetary Fund noted in March that while financial conditions in Canada have tightened, "strains are considerably less severe than in other major countries, and credit growth remains solid, both of which reflect a resilient financial system."¹ The British Broadcasting Corporation's economics editor recently bestowed the "best prepared country" award to Canada, noting that "nowhere is immune, but by most key measures, the Canadians are coming out of this crisis in a league of their own."²

The strengths of the Canadian financial system include a more conservative risk appetite and capital requirements for financial institutions that are well above minimum international standards and higher than in many other jurisdictions. In fact, Canadian institutions voluntarily maintain capital buffers well above the required minimum and, due in part to a regulatory cap, are less leveraged than many of their international peers. In addition, large Canadian investment dealers have been bank-owned since the early 1990s and are subject to consolidated supervision that takes into account the risk of the full bank.

Canada has a very prudent mortgage market, and recent adjustments to the rules for government-insured mortgages have further protected and strengthened the Canadian housing market. The new rules apply to all government-backed mortgage insurance policies for high-ratio mortgage loans on residential properties, and include:

• Fixing the maximum amortization period at 35 years.
• Requiring a minimum down payment of 5 per cent.
• Establishing a consistent minimum credit score requirement.
• Introducing new loan documentation standards.

The Government will also be taking measures to make mortgage insurance more transparent, understandable and affordable by enhancing disclosure to consumers about the characteristics of mortgage insurance and by setting out new measures to ensure that Canadians are charged no more for mortgage insurance than the true cost of obtaining that insurance.

Taken as a whole, the Government's initiatives on mortgages demonstrate a responsible and measured approach to ensure Canada's housing market remains strong. They have restrained the growth of a sub-prime mortgage lending component and prevented the proliferation of products and marketing practices that have led to the large-scale problems experienced in some other countries.

The Government of Canada has taken action through Budget 2009 to ensure the stability of our financial system amidst the current global financial market turmoil. This includes providing the Canada Deposit Insurance Corporation with greater flexibility to enhance its ability to safeguard financial stability in Canada, and providing a standby authority for the Government to inject capital into federally regulated financial institutions to support financial stability.

The Government is also fully engaged and playing a significant role in a coordinated, international effort to address the financial crisis. Canada led a working group established by the G20 leaders to identify steps to enhance sound regulation and strengthen transparency. Canada is committed to the resulting April 2009 G20 action plan to address the causes and weaknesses that led to the market turmoil.

These actions will take a Canadian financial system that is already sound, and make it stronger and increase its status as a global leader.

Helping Consumers of Financial Products

On May 21, the Minister of Finance announced new proposed regulations aimed at limiting business practices that are not beneficial to consumers and providing clear and timely information to Canadians about credit cards.

The proposed regulations will:

• Mandate an effective minimum 21-day, interest-free grace period on all new credit card purchases when a customer pays the outstanding balance in full.
• Lower interest costs by mandating allocations of payments in favour of the consumer.
• Allow consumers to keep better track of their personal finances by requiring express consent for credit limit increases.
• Limit debt collection practices that financial institutions use in contacting a consumer to collect on a debt.
• Prohibit over-the-limit fees solely arising from holds placed by merchants.
• Provide clear information in credit contracts and credit card application forms through a summary box that will set out key features, such as interest rates and fees.
• Assist consumers to manage their credit card obligations by providing information on the time it would take to fully repay the balance if only the minimum payment is made every month.
• Mandate advance disclosure of interest rate increases prior to their taking effect, even if this information had been included in the credit contract.

The regulations were published in Part 1 of the Canada Gazette for public comment.

In addition, new proposed regulations on mortgage insurance are forthcoming and a process is well underway to establish a national task force on financial literacy.

Securities Regulation

The Government is committed to working closely with all jurisdictions as it moves forward on this important initiative. A critical mass of provinces and territories has already indicated its willingness to participate in the establishment of a Canadian securities regulator.

The Budget Implementation Act, 2009, which was adopted in March, provides the legal authority for the establishment of the Transition Office, which will lead the transition to a Canadian securities regulator and develop an implementation plan. The process to establish a Transition Office is ongoing.

Federally Regulated Private Pension Plans

Draft regulations implementing the temporary solvency funding relief measures for defined benefit plans that were proposed in the 2008 Economic and Fiscal Statement and in Budget 2009 were pre-published in the Canada Gazette. The Government is reviewing and assessing comments received on the draft temporary relief regulations to determine whether any changes might be warranted for the final regulations. Final regulations will be in place by the August 14, 2009 deadline for filing December 31, 2008 pension valuation reports.

A public consultation paper on the legislative and regulatory regime for federally regulated private pension plans was released in January. Public consultations, led by the Parliamentary Secretary to the Minister of Finance, Mr. Ted Menzies, were held in March and April across Canada. Given the interest and comments received to date, the deadline for submitting written comments on the consultation paper was extended to May 31, 2009. The Government is assessing submissions and representations received in the course of the consultations and will put forward legislative and regulatory proposals later this year.

At their recent meeting on May 25^th, federal and provincial Ministers of Finance completed the Triennial Review of the Canada Pension Plan and agreed on a package of proposed changes to improve the retirement benefits within the Plan. They recommended that the current premium rate be maintained and noted the soundness of the Plan and of the other key pillars of Canada's retirement income system. Ministers continued their dialogue on initiatives related to the pension plans they regulate and agreed to create a Research Working Group on retirement income adequacy to report back by the end of the year.

Progress in implementing other initiatives to strengthen the Canadian financial system can be found in Table 2.14.

Table 2.14
Improving Access to Financing and Strengthening Canada's Financial System

	Total Financing Available (billions of dollars)	Authorities in Place	Total Financing Used (billions of dollars)	Financing Available
Insured Mortgage   Purchase Program	Up to 125	Yes	57.8	Ongoing
Business Credit Availability Program,  supported by expanded powers  and additional capital for Export  Development Canada/Business  Development Bank of Canada	At least 5	Yes	0.7	April
Canada Small Business  Financing Program	Up to 0.3	Yes	–	April
Canadian Secured Credit Facility	Up to 12	Yes	11	May
Canadian Lenders Assurance Facility	N/A	Yes	–	February
Canadian Life Insurers  Assurance Facility	N/A	Yes	–	May
Modernization of  Bank of Canada authorities	40	Yes	40	Ongoing
Canada Mortgage Bond	Up to 10	Yes	7	Ongoing
Advisory Committee on Financing	N/A	Yes	–	N/A
Canada Deposit Insurance Corporation  authorities and mandate	N/A	Yes	–	N/A
Expanded powers for Minister	N/A	Yes	–	N/A
Recapitalization/equity  investments in banks	N/A	Yes	–	N/A
Measures to protect consumers regarding  credit cards	N/A	Yes	–	N/A
Canadian securities regulator	N/A	Yes	–	N/A
Measures to protect consumers  regarding mortgage insurance	N/A	Yes	–	N/A
Consultations on leasing powers	N/A	Yes	–	N/A
National task force on financial literacy	N/A	Yes	–	N/A
Improving the legislative and regulatory  framework for federally regulated  pension plans	N/A	Yes	–	N/A

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¹ International Monetary Fund, 2009 Article IV Mission to Canada: Concluding Statement (March 9, 2009).
² Stephanomics From the BBC's economics editor Stephanie Flanders, http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/03/the_best_prepared_awar.html.