The federal government will purchase up to an additional $50 billion of insured mortgage pools by the end of the fiscal year as part of its ongoing efforts to maintain the availability of longer-term credit in Canada, Finance Minister Jim Flaherty announced Wednesday.

This action will increase to $75 billion the maximum value of securities purchased through Canada Mortgage and Housing Corp. (CMHC) under this program.

“At a time of considerable uncertainty in global financial markets, this action will provide Canada’s financial institutions with significant and stable access to longer-term funding,” Flaherty said in a release.

“This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy.”

The program will earn a modest rate of return for the government with no additional risk to the taxpayer, Flaherty added.

The federal government will reduce the base commercial pricing of the Canadian Lenders Assurance Facility by 25 basis points. It will also waive the 25 basis point across-the-board surcharge for insurance provided under the facility until further notice. This will make the facility more competitive with similar programs offered in other countries, the government said.

The Office of the Superintendent of Financial Institutions (OSFI) announced Tuesday an increase in the allowable limit of innovative and preferred shares in Tier 1 capital. This will provide Canadian financial institutions with more sources of funds to support lending in Canada and will ensure that similar decisions in other countries do not place Canadian institutions at a competitive disadvantage, the government said.

“The Government of Canada is prepared to take whatever steps are necessary to ensure that Canada’s strong financial system is not put at a competitive disadvantage by developments in other countries. The government will not allow Canada’s financial system, which has been ranked as the soundest in the world, to be put at risk by global events,” said Flaherty concluded.

Analysts applauded the latest government efforts to shore up the Canadian banking system.

In a research note National Bank Financial said that “it seems that Ottawa is determined to keep our banking industry in good shape.” This observation comes following the news that OSFI will increase the maximum share of Tier­ 1 capital that can consist of outstanding preferred shares and innovative instruments to 40% from 30%. “This will result in higher Tier-1 capital ratios and reduce the need for banks to dilute their shareholder base through additional equity financing,” NBF said.

Commenting on the federal government’s plant to acquire an additional $50 billion in mortgages from banks to maintain the availability of longer-term credit in Canada, NBF said “We consider these strong actions justified. The banking system is an essential part of an economic recovery because it acts as a transmission belt between monetary policy and the economy.”

Rating agency DBRS said it “views positively Wednesday’s announcements from the federal government. “While the Canadian banking industry remains strong, today’s announcement further reinforces DBRS’s assessment that the largest six Canadian banks would be expected to receive external support, given their importance to the Canadian financial system, if these institutions were to become distressed,” it said.

In addition to the change to capital rules and the plan to expand mortgage securites purchases, DBRS points out that the pricing for the Canadian Lenders Assurance Facility has also been reduced to 110 basis points from 135 bps, and the waiver of the surcharge of 25 bps for eligible institutions. DBRS views the pricing change as positive, and continues to believe that providing this facility, instead of a government guarantee, will help avoid the unintended consequence of flight of capital into government-guaranteed bank paper.

“In none of the last five U.S. business cycles have equities rebounded from a recession without a strong contribution from the financial sector,” NBF said. “We note that in the past five U.S. recessions, Canadian banks outperformed the rest of the market in end-of-recession rallies.”

IE