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Canada to Guarantee Bank Loans
OTTAWA — Loan guarantees offered by the Canadian government on Thursday suggest that even healthy banking systems might require government support for international borrowing.
Tight regulation, a once-robust economy and an avoidance of subprime debt have left Canada's five major banks in good financial shape. While that should allow them to continue to borrow in international markets without government guarantees, Jim Flaherty, the finance minister, said that Canadian banks might face demands for such insurance given the support other nations are offering their financial institutions.
"The concern is that our financial institutions might have more difficulty borrowing in international markets," he told a news conference here, adding that the guarantees should avoid putting Canadian banks at a "competitive disadvantage when raising funds in wholesale markets."
Mr. Flaherty and Nancy Hughes Anthony, the president and the chief executive of the Canadian Bankers Association, emphasized that no lender has yet to demand such guarantees from a Canadian bank.
"This is there if they need it," Ms. Hughes Anthony said. "It provides a backstop."
Mr. Flaherty declined to estimate how much debt the government would guarantee beyond saying that it could range from "zero to a lot."
While presenting a gloomy quarterly outlook for Canada's economy during a separate news conference, Mark J. Carney, the governor of the Bank of Canada, suggested that Canada's banks are now the envy of his colleagues around the world.
"Other countries are trying to get their banks to our low level of leverage in our banking system," he said. "The fundamental issues are outside our borders, and they're spilling back into Canada."
Canada's banking system does not separate investment banking from retail banking, a segment that has been profitable in recent years. The large base of deposits from those retail operations, said Laurence D. Booth, a professor of finance at the Rotman School of Business at the University of Toronto, means that Canadian banks rely on international borrowing for only a relatively small portion of their financing.
"Given their captive deposit base, it's not immediately obvious that the banks need any help," Professor Booth said.
In his forecast, Mr. Carney projected that the Canadian economy would shrink by 0.4 percent in the final quarter of this year and remain unchanged in the first quarter of next year. He repeatedly declined, however, to characterize that situation as a recession, although many economists view two consecutive quarters of shrinkage as the sign of one. Instead he preferred to describe the coming months as "a period of sluggish growth."
