Canada will follow steps taken by other governments around the world by guaranteeing inter-bank loans in an attempt to stimulate lending and boost the slowing economy.
Finance Minister Jim Flaherty told reporters on Thursday that the move was designed to keep Canadian banks competitive.
"The concern is that our financial institution might have more difficulty borrowing in international markets because other countries have gone ahead...to provide guarantees," Flaherty said.
"So this is a backstop, a way of ensuring our Canadian financial institutions are not disadvantaged."
Flaherty said the program -- which will expire in six months unless it is extended -- will support the banks "on commercial terms so there is no expected cost to Canadian taxpayers."
Ultimately, Flaherty said, the move is intended to ensure funds are available for loans to businesses, individuals and for mortgages to breathe new life into the stalled inter-bank lending market and help free up more credit.
The government is guaranteeing the inter-bank loans by creating the Canadian Lenders Assurance Facility -- an agency that would guarantee wholesale term borrowing by the country's banks.
He said the decision was not taken because Canadian banks are in trouble, but because they could be disadvantaged on the international market if Ottawa didn't mimic similar moves by governments in more than a dozen other countries, including the U.K., U.S. and major European nations.
Flaherty said the action is being done at commercial rates and there should be no cost to taxpayers. The rate for banks to buy into the program would be roughly $13.5 million to insure every $1 billion.
Earlier this month the Bank of Canada slashed its key lending rate and the federal government purchased $25 billion of CMHC-insured mortgages from banks to provide them with much-needed cash.
The moves were intended to protect bank deposits in local banks and boost investor confidence.
BNN's Michael Kane said the Thursday announcement is a positive step towards restoring faith between banks.
"What it does is it shows other banks in other countries who lend into the Canadian system and borrow from the Canadian system, that our government has a handle on this and they're not going to let things get out of balance with other banks who have been in more difficulty and were rescued or helped out by their respective governments," Kane told Â鶹´«Ã½net.
Speculation that Flaherty would also announce an increase to deposit guarantee insurance turned out to be unfounded. When asked, Flaherty said he had no plans to take such a step.
Spending commitments review
Flaherty also said Ottawa is taking a second look at its spending commitments to determine whether they are still affordable, given the current economic slowdown.
He said he expects a surplus at the end of this fiscal year in March, but said beyond that it's too early to predict.
"This is obviously a serious situation," Flaherty said, adding that "events are unfolding day by day."
He said only that the government will "have to gauge where we are as we go forward."
Monetary policy report
Flaherty's announcement on Thursday came on the same day the Bank of Canada released its Monetary Policy Report.
It predicted a period of slow growth in the first quarter of next year with improved gains in 2009 and 2010.
Overall the central bank projected average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.
The report pointed out the following three factors as having an impact on the Canadian economy and likely bringing it to the brink of recession:
- The global financial crisis has strained financial markets. As a result, banks will need to reduce leverage, leading to restrained growth.
- The global economy appears to be moving into a recession, led by the U.S. which is already in a recession.
- Falling commodity prices.
