Yesterday, the Canadian Department of Finance, in response to "prolonged global financial market turbulence," announced the creation of the Canadian Lenders Assurance Facility . The new facility is intended to provide insurance on wholesale term borrowings by federally regulated deposit-taking institutions. The facility is 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, and builds on the program announced by the Department of Finance on October 10 to purchase insured mortgage pools from Canadian lenders through the Canada Mortgage and Housing Corporation.
The new Facility, which is only temporary and will expire six months after its start date, will be available to lenders of new issues of certain senior unsecured marketable wholesale debt instruments with a term to maturity of at least 3 months that are denominated in Canadian dollars, US dollars, Euros, Sterling and Yen. The program is available on a voluntary basis to all Canadian banks, credit unions, trust and loan companies that accept deposits. The aggregate amount of insurance provided through the Facility to any particular institution will be the greater of 125% of that institution's contractual maturities of wholesale debt during the six-month period beginning on November 1, 2008, or 20% of the institution's deposits as of October 1, 2008. Participating institutions will be charged a base annualized fee of 135 basis points, subject to additional surcharges based on the institution's rating and whether the insurance is for non-Canadian dollar denominated debt, with the result that the Department of Finance believes there will be "no expected fiscal cost." The Facility is similar to the FDIC's recently Temporary Liquidity Guarantee Program for newly-issued senior unsecured debt of FDIC-insured institutions, both in terms of the maximum amount of insurance coverage, the imposition of fees to participate, and the temporary nature of both country's programs.
According to Canadian Minister of Finance Jim Flaherty, "[t]he underlying strengths of the Canadian system have been especially evident during the profound disruption in global credit markets." He noted that Canadian institutions "voluntarily maintain capital buffers well above the required minimum and are less leveraged than many of their international peers" and that the Canadian housing finance market "does not have a large sub-prime component," and therefore "has not witnessed the proliferation of products and marketing practices that have led to the serious problems being experienced in the United States." The creation of the Facility will help "ensure that financial institutions in this country are not put at a competitive disadvantage when raising funds in wholesale markets to lend to consumers and businesses."