In response to the recent turmoil in global markets, Canadian Minister of Finance Jim Flaherty announced this morning the creation of the Canadian Lenders Assurance Facility. The facility, to commence in November and run for six months, will offer insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. Insurance will be available on certain debt issues with a term to maturity of at least three months. The stated intention of the initiative is to ensure that Canadian financial institutions "are not put at a competitive disadvantage when raising funds in wholesale markets given similar actions recently announced by other countries."

Update:

Canada offers guarantee of bank debt

The Canadian government today announced a temporary program to guarantee mid to longer term debt issued by Canadian banks and other federally-regulated deposit-taking institutions. The Canadian Lenders Assurance Facility will insure certain categories of senior unsecured wholesale debt with a term to maturity of at least three months. This insurance will cover principal and interest payments on eligible debt instruments for up to three years from the date of issue. Debt denominated in Canadian dollars, US dollars, Euros, Sterling or Yen is eligible for the program.

The facility will charge a base annualized premium of 135 basis points, with surcharges depending on the credit rating of the issuing institution and an additional surcharge for debt that is not denominated in Canadian dollars. Insurance will be available beginning in early November and will be issued until April 30, 2009. There is a limit on the amount of insurance available to each institution, based on the amount of wholesale debt of the institution maturing in the next six months, and on the amount of deposits held by the institution.

The Canadian Lenders Assurance Facility is a response to the government guarantees of interbank lending that have been introduced in many foreign jurisdictions. There was concern that Canadian institutions, although fundamentally sound, would be at a disadvantage when competing for debt capital with foreign institutions who have the benefit of a government guarantee.

This is the second major Canadian initiative in implementing the G7 plan of action to stabilize global financial markets. The first, announced on October 10th, was a program to provide additional liquidity to Canadian financial institutions through the purchase of up to $25 billion of mortgage-backed securities. Banks, trust companies, insurance companies, credit unions, loan companies and caisses populaires who issue mortgage-backed securities under the National Housing Act MBS program are eligible to participate. Since the underlying mortgages already carry guarantees backed by the Canadian government, there is no incremental risk to the government in the purchase of these securities. The purchases are being undertaken through a series of competitive auctions, with $5 billion purchased in the first auction on October 16th, and up to $7 billion in additional purchases taking place today.

These programs are modest compared to those in some other countries. However, Canadian banks are well-capitalized by international standards, and have not suffered the domestic mortgage losses experienced by their counterparts in other jurisdictions. Public statements by the federal Minister of Finance suggest that no further assistance to Canadian financial institutions is contemplated at this time. For example, it appears that there are no plans to raise the deposit insurance limit above its current level of $100,000. If Canada’s banks continue to be the most sound in the world, as shown in the World Economic Forum’s Global Competitiveness Report released earlier this month, then the present initiatives may well be sufficient to see them through the current global liquidity squeeze.

For more, see the Department of Finance's Backgrounder on the Canadian Lenders Assurance Facility