Canada bolsters its banks amid recession concerns

10/23/2008

TORONTO Canada s finance minister announced Thursday that the government will guarantee loans between banks, while the central bank acknowledged the country is on the brink of recession.

Finance Minister Jim Flaherty said the measure to guarantee interbank borrowing was taken so Canadian banks won t be at a competitive disadvantage with other banks that already receive guarantees from their governments.

There is this concern that our institutions could be disadvantaged competitively, Mr. Flaherty said.

Two weeks ago, Mr. Flaherty announced the government would buy $20 billion in mortgages from the banks to help free up money for loans.

He said Canada s banks are sound, well capitalized, and less leveraged than their international peers but the government must be proactive.

Concerns about the ailing economy have left lenders nervous, and Canada s private banks initially declined to pass on to consumers the full half-percentage-point cut in interest rates announced by central banks around the world on Oct. 8.

But most banks cut interest rates by a full half-point after the Canadian government announced the $20 billion bailout. And all of Canada s big banks have since passed on central bank interest cuts to consumers.

Canada s central bank cut interest rates by a quarter-point Tuesday, and Bank of Canada Governor Mark Carney said further monetary stimulus will likely be required.

Mr. Carney said the credit crisis, a slowing global economy, led by a U.S. economy already in recession and a sharp sell off commodities, are having a profound impact on Canada s economy.

Mr. Carney said the country s economy will contract by 0.4 percent in the October-December quarter and post zero growth in the first quarter of 2009.