The federal government made a move to strengthen Canadian access to international credit markets on Thursday, by announcing the creation of the Canadian Lenders Assurance Facility.

The facility will offer insurance on wholesale term borrowing of federally regulated deposit-taking institutions, the Department of Finance said in a release. This will help secure access to longer-term funds so that Canadian financial institutions can continue lending to consumers, homebuyers and businesses.

The temporary program will expire six months after its start date, which is anticipated to be the beginning of November. Insurance extended under the facility will be issued until April 30, 2009.

It is designed to prevent Canadian financial institutions from facing a disadvantage in raising funds for lending, given similar actions by more than a dozen other countries including the United States, Britain and major European governments.

“I welcome the decisive and far-reaching actions that many countries are taking, which will provide critical support to financial stability,” said Finance Minister Jim Flaherty. “The Government of Canada is acting today to ensure that financial institutions in this country are not put at a competitive disadvantage.”

He said the announcement is part of Canada’s implementation of the G7 Plan of Action to stabilize financial markets, restore the flow of credit and support global economic growth.

“The Government of Canada will never allow Canada’s financial system, which has been ranked as the soundest in the world, to be put at risk by global events,” he said.

Flaherty said the program would offer funds to lenders on commercial terms, so there is no expected cost to Canadian taxpayers.

Under the program, insurance will be available for new issues of certain senior unsecured marketable wholesale debt instruments with a term to maturity of at least three months. The insurance will apply to the principal and interest payments for up to three years from the issue date of the instrument.

The lending is not meant to replace other wholesale funding options for banks, the government said, but to act as a “backstop” in case global credit market conditions disrupt Canadian banks’ access to funds to continue lending.

The program is voluntary, so it will be up to lenders themselves whether they pay the premium to insure their debt.

The Canadian Bankers Association welcomed the announcement. “Governments around the world have guaranteed loans between banks and our federal government has recognized that, without a similar move in Canada, our strong banks could find it more difficult to compete for loans on the international market, which ultimately could affect borrowing for consumers and businesses,” said Nancy Hughes Anthony, president and CEO of the Canadian Bankers Association.

The program follows the government’s previously announced initiative to purchase up to $25-billion of insured mortgages. On Oct. 16, the Canadian Housing and Mortgage Corporation held the first auction as part of this process and purchased $5-billion in insured mortgage pools from Canadian lenders. A second auction of up to $7 billion is scheduled for Thursday.

Flaherty stressed that Canada’s lending institutions are solid and the Canadian housing market is sound. “The underlying strengths of the Canadian system have been especially evident during the profound disruption in global credit markets we have witnessed since September,” he said.

IE