The Bank of Canada today announced new measures to bolster market liquidity and U.S. officials announced a bank recapitalization plan, as part of the effort of G7 policymakers to restore confidence to the financial system.

The Bank of Canada said it strongly welcomes the “decisive actions” announced by the U.S. authorities.

U.S. Treasury Secretary Henry Paulson, U.S. Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair today announced a voluntary capital purchase program that will see the U.S. government buy up to US$25 billion in preferred shares from financial institutions, also the FDIC will temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. Regulators will implement an enhanced supervisory framework to assure appropriate use of this new guarantee, they said.

The U.S. regulators reported that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. “By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve homeownership,” they said.

Details of Commercial Paper Funding Facility program revealed

The Fed also announced further details of its Commercial Paper Funding Facility program, which provides a broad backstop for the commercial paper market. Beginning Oct. 27, the CPFF will fund purchases of commercial paper of three month maturity from high-quality issuers.

The Bank of Canada said that these “significant and timely measures” are part of the implementation of the G7 Action Plan agreed last Friday. “Today’s U.S. measures and the actions announced yesterday by the Euro Area countries and the United Kingdom will be pivotal in restoring global financial stability and resuming the flow of credit to support global economic growth,” it said, adding, “Canada’s economy and strong financial system will benefit directly from these initiatives.”

Bank of Canada measures

In Canada, the central bank today announced several iniatives to boost market liquidity:

> to provide significant term liquidity to the financial sector, the amount of the 27-day Term PRA to be auctioned on Oct. 15 has been set at $10 billion;

> to enhance the distribution of liquidity, effective the Oct. 21 auction, term PRAs will be transacted with direct participants in the Large Value Transfer System as well as with primary dealers until further notice;

> to enhance the functioning of money markets, the Bank of Canada will, on a temporary basis, offer a new Term PRA facility for primary dealers on a direct basis, and other money market participants on an indirect basis;

> to give institutions greater flexibility in managing their collateral, effective Oct. 20 for a temporary period, the Bank of Canada will accept an assignment of non-mortgage loan portfolios as eligible collateral for LVTS and standing liquidity facility purposes.

The Bank of Canada also said that as the federal government is to purchase up to $25 billion in National Housing Act Mortgage-Backed Securities insured mortgage pools through Canada Mortgage and Housing Corp., counterparties that have used NHA-MBS in any outstanding Term PRA operations will have the right to substitute other eligible assets for them on Oct. 20, subject to providing notice to the Bank by noon on Oct. 17.

In addition to these exceptional liquidity initiatives, the Bank of Canada, as always, stands ready to provide overnight SPRAs to the extent required to maintain liquidity in the overnight market and to reinforce its target for the overnight interest rate. In addition, the Bank can activate its US$30 billion swap facility with the Federal Reserve, if required.

IE