Canadians need access to affordable financing for their homes, cars and businesses. The level of interest rates and access to loans influence how Canadians invest and spend their money, which drives our economy and promotes job creation. Strong financial conditions are vital for a sustained recovery in Canada and elsewhere in the world.
The Canadian financial system withstood the global financial crisis better than most. The global crisis, however, made it difficult for Canadian banks and other lenders to obtain funds from international markets at reasonable costs. To soften the impact of the crisis, Canada’s Economic Action Plan included measures to provide up to $200 billion to support lending to Canadian households and businesses through the Extraordinary Financing Framework.
The Extraordinary Financing Framework measures, most of which are ending as credit conditions improve, included: the Insured Mortgage Purchase Program; a new 10-year maturity in the ongoing Canada Mortgage Bond program; the Canadian Secured Credit Facility; support for the Bank of Canada’s emergency liquidity measures; increased flexibilities and capacities for financial Crown corporations, including the introduction of the Business Credit Availability Program; and assurance facilities for banks and insurance companies. All of this support has been offered on a commercial basis to protect taxpayers.
The Government’s actions under the Extraordinary Financing Framework have contributed significantly to improved credit conditions. In Canada, total credit growth remains healthy, reflecting solid growth in household credit together with continued improvements in business credit. As a result, total credit growth in Canada continued to outpace that of the United States through the first half of 2010 (Chart 2.6.1). Improved financial market conditions have also led to a rebound in net corporate bond and equity issuances, following a retrenchment in these activities in late 2008 (Chart 2.6.2). Meanwhile, the difference between corporate and government bond rates has narrowed considerably.
In Canada, credit growth has been supported by 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. Since then, economic conditions have improved, leading the Bank of Canada to adjust its policy rate upward by 75 basis points since June 2010; however, its policy rate remains “exceptionally stimulative”(Chart 2.6.3). The Government’s measures to support access to financing have helped to alleviate market uncertainty and supported a dramatic reduction in market interest rates. As a result, average effective interest rates for households and businesses, as estimated by the Bank of Canada, are now about 200 basis points and 235 basis points, respectively, lower from their level in the fall of 2008.
Canada’s Economic Action Plan enhanced the resources and scope of action available to Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) so that they could extend additional financing to Canadian businesses. The Government increased the authorized capital limits of EDC and BDC by $1.5 billion each, and increased their associated borrowing limits. The Government also increased EDC’s contingent liability limit to $45 billion to enable EDC to grow and enhance its guarantee and insurance programs, increased the Canada Account limit from $13 billion to $20 billion, and enabled EDC to support financing in the domestic market, including in the area of accounts receivable insurance, for a temporary period.
As part of Canada’s Economic Action Plan, the Government initiated the Business Credit Availability Program, improving access to financing for Canadian businesses through enhanced cooperation between private sector financial institutions and the financial Crown corporations. The Business Credit Availability Program is continuing to help businesses find financing solutions to preserve jobs and fund growth. As of the end of July, EDC and BDC reported total activity under the Business Credit Availability Program of about $8 billion, exceeding the target of at least $5 billion that was set out in Budget 2009. The financial Crown corporations have provided assistance in regions all across the country and in all sectors of the economy, with a particular focus on small businesses.
Ensuring that businesses of all sizes have adequate access to financing to acquire vehicles and equipment will become increasingly important as the economic recovery matures. Access to financing has normalized for larger finance and leasing companies that can access capital markets directly. However, some smaller finance and leasing companies, although creditworthy, cannot obtain enough financing to meet the growing needs of their customers. These independent lenders provide specialized financing, often to smaller businesses, supplementing the credit available from banks and other large financing providers.
The Government therefore announced the creation of the Vehicle and Equipment Financing Partnership as part of the Business Credit Availability Program in Budget 2010. This program is funded and managed by BDC, with an initial allocation of $500 million in funding, in partnership with experienced lenders and investors in the private market for
The partnership expands financing options for small and medium-sized finance and leasing companies, increasing the availability of credit at market rates for dealers and users of vehicles and equipment.
BDC announced the formation of two public-private partnerships with TAO Asset Management Inc. and Sun Life Financial to facilitate funding under the Vehicle and Equipment Financing Partnership. These partnerships provide a more economical and efficient way to access the securitization markets for small and medium-sized companies, which may not have the structuring and administration expertise or transaction volume to cost-effectively establish their own program.
The Business Credit Availability Program has successfully increased the collaboration of the financial Crown corporations and private sector lenders, which has benefited small and medium-sized businesses across Canada. This program will continue to assist the needs of creditworthy businesses over the remainder of the fiscal year.
A breakdown of activity by sector, region and size of borrower, as well as recent success stories, can be found at www.fin.gc.ca/bcap.
Reflecting improved credit conditions in funding markets, the Canadian Lenders Assurance Facility and the Canadian Life Insurers Assurance Facility expired at the end of December 2009. The Insured Mortgage Purchase Program and the Canadian Secured Credit Facility ran to the end of March 2010. In addition, the Bank of Canada has taken steps to exit from its extraordinary liquidity facilities. During the global financial crisis, the extraordinary liquidity provided by the Bank of Canada peaked at over $40 billion in December 2008.
Considerable progress has been made in recent months in moving forward on the Government’s commitment to establish a Canadian securities regulator with willing provinces and territories.
On May 26, 2010, the proposed Canadian Securities Act was tabled for information in Parliament, marking a key step toward the establishment of a Canadian securities regulator. The proposed Canadian Securities Act reflects the input of 10 participating provinces and territories. It harmonizes existing legislation in the form of a single statute and proposes significant improvements to governance, adjudication, financial stability, and regulatory and criminal enforcement. Concurrent with releasing the proposed Canadian Securities Act, the Government has referred the proposed Act to the Supreme Court of Canada for its opinion on whether it is within the legislative authority of Parliament.
On July 13, 2010, the Canadian Securities Transition Office released to the public a detailed Transition Plan for the Canadian securities regulator. The Transition Plan sets out a comprehensive roadmap for the establishment of a Canadian securities regulator, and addresses administrative and organizational matters. The Government remains committed to working with participating provinces and territories to help ensure a smooth and orderly transition to a Canadian securities regulator.
On August 16, 2010, most of the provisions of the Code of Conduct for the Credit and Debit Card Industry in Canada took effect. This Code will make fees and rates more transparent for business owners and for consumers who use credit and debit cards, and it will promote fairness, competition and choice. In addition, with the passage of the Jobs and Economic Growth Act on July 13, 2010, the Financial Consumer Agency of Canada has been empowered to monitor compliance with the Code.