The Canadian government has launched or expanded several programs intended to increase the lending capacity of Canadian banks and financial institutions and encourage increased economic activity.
$125 Billion Insured Mortgage Purchase Program
Under the Insured Mortgage Purchase Program (IMPP), Canada Mortgage and Housing Corporation (CMHC), a wholly owned Crown corporation of the Canadian government, purchases securities comprised of pools of insured residential mortgages from Canadian financial institutions. These are high-quality assets that are backed by CMHC insurance or insurance from an acceptable private mortgage insurer. The goal of this initiative is to increase liquidity and lending by the major institutions. The IMPP is being financed through the issuance of Government of Canada Treasury bills and bonds, raising the amount of high-quality assets available for purchase by bond market investors.
The first tranche of the program was announced on October 10, 2008, and included purchases up to $25 billion. Under an expanded initiative announced on November 12, 2008, Canadian financial institutions were granted access to up to an additional $50 billion of longer-term funding, bringing the total for the IMPP to $75 billion. The federal budget introduced in January 2009 increased this by another $50 billion, raising the total amount of available funding to $125 billion. As of March 31, 2009, more than $55 billion of pooled mortgages had been purchased by CMHC under the IMMP.
The program has easily attracted political and public support, as it is profitable to the government and does not increase the national debt. It is expected that purchases will continue throughout 2009, although it is not clear that the entire available amount of the IMPP will be utilized unless credit conditions worsen again. It is interesting to note that while the first six auctions through January 23 were fully taken up, the last four have been undersubscribed, and the take-up rate is trending downward. In the auction held March 11, banks sold $2.1 billion in mortgages, when up to $4 billion in funding was available, and in the subsequent auction held March 24, only $1.57 billion of mortgages were sold out of the $4 billion available.
A key factor in the financial institutions’ declining participation, ironically, may be the shaky equity markets and other features of the ongoing crisis. As investors pull savings from the stock market and mutual funds and invest in term deposits and GICs, banks’ deposits, and corresponding capital available for loans, increases. One bank recently announced that deposits in chequing and savings accounts had increased 14% over the previous year.3 In addition, the falling housing market has dramatically decreased demand for new mortgage financing.
Canada Mortgage Bond Program
Canada Housing Trust No. 1 (CHT), a special purpose securitization trust, has since 2001 issued Canada Mortgage Bonds (CMB) in an aggregate principal amount well in excess of $180 billion. All CMB are provided with Canada’s sovereign guarantee through CMHC. Under this Program, similar to the IMPP purchases by CMHC described above, CHT purchases securities comprised of pools of insured residential mortgages from Canadian financial institutions. These are high-quality assets that are backed by CMHC insurance or insurance from an acceptable private mortgage insurer. The goal of this initiative is to increase liquidity and mortgage lending by the major institutions and reduce interest rates homeowners pay on their mortgages.
During 2008, CHT issued $43.5 billion of CMB. It is expected that CMB issuances will likely continue at this torrid pace throughout 2009, but not materially higher than this pace, given the new IMPP described above. As of March 24, 2009, new CMB issuances and reopenings of existing CMB issuances for 2009 have totalled $13.7 billion.
Between the IMPP and the CMB Program, what has been the impact on homeowners? The government would no doubt say that its policies are working. One bank, The Bank of Nova Scotia, issued a press release on March 6, 2009, directly citing the CMB Program as the reason why it reduced its 10-year mortgage rate from 7.15% to 5.25%. In addition, according to the Bank of Canada, five-year mortgage rates have declined from 7.2% at the start of the crisis to 5.79% as of March 18.
Canadian Lenders Assurance Facility
This Facility, announced October 23, 2008, makes available government insurance of up to three years for borrowings by banks and other qualifying deposit-taking institutions. This initiative was designed to help to secure access to longer-term funds so that Canadian financial institutions could continue lending to consumers, homebuyers and businesses in Canada.
In the fall of 2008, many countries had announced new and comprehensive policy initiatives to restore or protect the stability of their financial systems. The Facility was designed to ensure that financial institutions in Canada were not put at a competitive disadvantage when raising funds in wholesale markets.
The Facility is also a component of Canada’s implementation of the G7 Plan of Action to stabilize financial markets, restore the flow of credit and support global economic growth. It was made available, on a voluntary basis, to all federally regulated deposit-taking financial institutions and the Caisse centrale Desjardins.
When announced, commercial banks complained loudly that the Facility was too expensive to be of much use. While other countries’ banks could buy what amounts to insurance at a low price, Canadian banks were paying higher rates. The program was only useful for banks in dire trouble, and was putting the Canadian financial institutions at a competitive disadvantage globally. Accordingly, changes to pricing were announced on November 12, 2008, such that the lowest price for insurance under the Facility is 110 basis points, rather than 160 basis points, as announced on October 23. A 25-basis-point surcharge for lower-rated and unrated borrowers, and a further surcharge for foreign currency issuance, remains.
The federal budget introduced in January 2009 extended the availability of the Facility to the end of December 2009. The budget also mandated the creation of a similar program, called the Canadian Life Insurers Assurance Facility, for life insurers.
The Facility finally became available to be used by banks on February 25, 2009, but as of yet there is no information as to whether any banks have required access to it. So far, it appears that recourse to the Facility by banks or life insurers will not be needed unless credit conditions worsen again.
Bank of Canada Liquidity and Collateral
Throughout the fall of 2008 and into early 2009, the Bank of Canada has provided exceptional liquidity to the Canadian financial system and support for the market for private sector securities.
Most recently, the Bank of Canada announced on February 23, 2009, a proposal for a new Term Purchase and Resale Agreement (PRA) Facility for Private Sector Instruments. The proposed new facility will for the first time include eligible corporate bonds and will replace the existing Term Purchase and Resale Agreement Facility for Private Sector Money Market Instruments introduced in November 2008. The Bank will seek the views of market participants on this proposal through industry consultations. Final details, including the schedule of operations to be conducted up to June 2009, will be announced following the completion of this consultation process.
It is proposed that the eligible securities for transactions under the new facility will consist of Canadian dollar-denominated
- bankers’ acceptances and promissory notes, including those of foreign issuers (maximum term 364 days), with a minimum issuer credit rating of R1 (low) by the Dominion Bond Rating Service (DBRS), or A-1 (mid) by Standard and Poor’s (S&P), or P1 by Moody’s Investors Service (Moody’s);
- commercial paper, including that of foreign issuers (maximum term 364 days), with a minimum issuer credit rating of R1 (low) by DBRS, or A-1 (mid) by S&P, or P1 by Moody’s;
- asset-backed commercial paper of eligible programs, with a minimum of two credit ratings, at least two ratings that are either R1 (high) by DBRS, A-1 (high) by S&P, P1 by Moody’s, or F1+ by Fitch Ratings; and
- corporate bonds with a minimum long term issuer credit rating of A (low) by DBRS, or A by S&P, or A3 by Moody’s.
The Bank of Canada has indicated that securities issued or guaranteed by affiliates are not eligible, with the exception of banksponsored ABCP that has met the Bank of Canada’s criteria. Margins will be the same as those used in existing Term PRA operations. Depending on the term to maturity of the operation, participants may have the right to substitute the securities underlying the transaction on specified dates. The Bank of Canada has also stated that consideration will be given to extending eligible securities for all Bank of Canada Term PRAs to include corporate bonds with a minimum rating of BBB and term Asset-Backed Securities (ABS) in due course.
In announcing this proposed new facility, the Bank of Canada has stated that it will continue to provide exceptional liquidity to the Canadian financial system as long as conditions warrant.
On March 17, the Bank of Canada offered $1 billion in short-term funding. However, it only lent CAD$750 million of that amount, at an average monthly yield of 0.773%.
As with the IMPP, and likely for the same reasons, it appears that the requirement by banks for government-sponsored credit is lessening.
$12 Billion Canadian Secured Credit Facility
On February 23, 2009, the Government of Canada launched a consultation on how to best implement the Canadian Secured Credit Facility (CSCF). Responses from interested parties were due by March 6, 2009.
The CSCF was announced in the January 2009 federal budget, with an allocation of up to $12 billion to purchase term asset-backed securities (ABS) backed by loans and leases on vehicles and equipment. The consultation paper states that the CSCF is intended to ensure continued access to financing for the purchase and leasing of automobiles, capital equipment, medical equipment and other similar assets. The inclusion of specific reference to capital equipment and medical equipment expands the CSCF from the description in the budget.
The government maintains that the CSCF will be priced on commercial terms to minimize the risk to taxpayers. The Department of Finance and the Business Development Bank of Canada (BDC) will jointly proceed with the consultation process with potential participants and interested stakeholders on aspects of the CSCF. The CSCF will be managed by the BDC and administered within parameters jointly developed by the Department of Finance and the BDC following the consultation process.
The government has been seeking comments on several aspects of the CSCF, including what structure would best facilitate the restarting of the term ABS market in Canada, how purchases should be priced and how funds should be allocated among eligible participants and different categories of ABS. As of yet, there is no firm timetable for the launch of the CSCF, although it is hoped that it can be put in place by early summer 2009.
Other Federal Budget Measures
Other measures introduced in the January 2009 federal budget include the raising of the amount of capital and liabilities that Export Development Canada (EDC) and the BDC can potentially have. It will also allow EDC, a financier and insurer to exporters, to support financing in the domestic Canadian market, including accounts receivable insurance, for a period of two years. EDC and the BDC’s authorized capital limits will double, to $3 billion apiece, while EDC’s liability limit rises from $30 billion to $45 billion, and the BDC’s limit rises from $13 billion to $20 billion. Additionally, through a newly created Business Credit Availability Program, the BDC and EDC will provide at least $5 billion in loans and credit support at market rates to companies that are having trouble obtaining loans.
For small businesses, there will be an increase in the maximum loan a company can access under the Canada Small Business Financing Program, as of April. The limit will be raised from $250,000 to $350,000, and will double to $500,000 for loans that are taken out to buy real property. Together with an increase in the amount of losses that will be reimbursed, this is expected to result in more than $300 million in additional financing.