Archived - Backgrounder
Reinforcing Financial System Stability
Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.
Since the earliest days of the global credit crunch, the Government has taken important steps to strengthen the position of Canada’s financial system, which is ranked among the soundest in the world. These include:
- Modernizing the Bank of Canada Act to allow the Bank of Canada more flexibility in providing liquidity to the financial system. Consequently, the Bank has been able to widen the collateral it will accept and add more than $35 billion in liquidity to the Canadian financial system at a time when global credit markets have been severely stressed.
- Expanding the Canada Mortgage Bond (CMB) program, including a record $12.5-billion CMB issue in June and the introduction in November of a CMB with a 10-year maturity to allow the program to attract a broader pool of investors.
- Supporting the availability of longer-term credit in Canada by purchasing up to $75 billion in insured mortgage pools through Canada Mortgage and Housing Corporation under the Insured Mortgage Purchase Program (IMPP). This action will provide Canada’s financial institutions with significant and stable access to longer-term funds that they can then make available to consumers, homebuyers and businesses in Canada. The IMPP will earn a modest rate of return for the Government with no additional risk to the taxpayer.
- Launching the Canadian Lenders Assurance Facility to ensure Canada’s financial system is not put at a competitive disadvantage by similar guarantee programs in other countries. The Facility will further help to secure access to term funding so that Canadian financial institutions can continue lending to consumers, homebuyers and businesses.
- Appointing an Expert Panel on Securities Regulation to advise the Government on the best way forward to improve the content, structure and enforcement of securities regulation in Canada, which the current turmoil has highlighted as a clear deficiency in the Canadian framework.
- Fixing the maximum amortization period for new government-backed mortgages to 35 years, requiring a minimum down payment of 5 per cent for new government-backed mortgages, establishing a consistent minimum credit score requirement and introducing new loan documentation standards. These measures will help prevent U.S.-style mortgage bubbles from happening in Canada.
- Ensuring that the complementary forms of credit provided through its Crown agencies—Export Development Canada (EDC) and the Business Development Bank of Canada (BDC)—are available to counter the effects of the credit crunch. BDC and EDC have been responding to the needs of their clientele by maintaining and enhancing their existing suite of financing solutions. Recently the Government approved a $2-billion increase in the borrowing authority of EDC as well as a $1.8-billion increase in BDC’s borrowing capacity, which enables them to offer additional flexibility to existing clients.
To help address emerging stresses and financial gaps in Canada’s export sector, most notably in auto-related and other manufacturing enterprises, the Government is providing EDC with an additional $350 million in capital to support up to about $1.5 billion in increased credit capacity for those most affected by the financial crisis. The Government will provide BDC with an additional $350 million in capital so that it can increase its credit capacity by about $1.5 billion for term lending activities and a new time-limited facility providing guarantees to financial institutions for their lines of credit for viable small and medium-sized companies.
The Government of Canada stands ready to take whatever further action is necessary to protect the stability of the Canadian financial system.
Accordingly, the Government is proposing that the Minister of Finance and the Governor in Council be granted additional flexibility to support financial institutions and the financial system in extraordinary circumstances. This additional flexibility is a precaution that would bring Canada’s regulatory toolkit in line with international best practices. The proposals would also equip Canada to fulfill the commitment to implement the G7 and G20 Plans of Action to stabilize financial markets, restore the flow of credit, and foster global economic growth. And they would ensure that Canada’s strong financial system is not put at a competitive disadvantage by developments in other countries.
The proposed new powers, which include appropriate provisions for transparency and accountability, involve standby authorities that include additional options for resolving difficulties in financial institutions should they arise. These powers would also provide the Government with new means to support systemically important financial institutions and ensure that they can raise capital and continue lending to households and businesses.
These proposed measures will provide authority for:
- Funding in the unlikely event that there is a draw on the Canadian Lenders Assurance Facility.
- Canada Deposit Insurance Corporation (CDIC) to establish a bridge bank as a further resolution tool to help preserve banking functions.
- An increase in the borrowing limit of CDIC to $15 billion to reflect the growth of insured deposits since the last increase in 1992.
- The power to direct CDIC to undertake resolution measures when necessary to prevent adverse effects on financial stability.
- The provision to CDIC of greater flexibility in the timing of preparatory examinations.
- The Government to inject capital into a federally regulated financial institution to support financial stability, with appropriate provisions to protect taxpayers.