Although the priority in Tuesday’s federal budget is providing fiscal stimulus to a flagging economy, the government showed that it is also worried about ensuring future financial system stability.

The looming recession is obviously dominating the government’s attention, but this global downturn has its roots in tremendous turmoil afflicting the financial system worldwide. To prevent a repeat of this situation, the budget also includes measures that would give the government added powers to shore up the financial system in the future.

Governments in several other countries have found themselves bailing out their financial services industries by taking stakes in their biggest financial services institutions. Banks in Canada have held up better so far, and the government hasn’t been called on to take such drastic action here. Nevertheless, the federal government announced that it will propose a host of new powers to fight future systemic turmoil in Tuesday’s budget.

It plans to propose an authority that would allow the government to inject capital into federally-regulated financial services institutions, if necessary. And, it is seeking to strengthen the regulatory framework of financial services institutions, largely by providing the Canada Deposit Insurance Corp. with broader powers to ensure financial system stability.

Specifically, the budget proposes to give the finance minister the power to order the CDIC to take action to prevent damage to financial stability; that the CDIC be allowed to own shares in its member institutions; that it be given a broader range of options to respond to systemic concerns, including the ability to resolve a financial institution failure in a way that may not be the cheapest option; and that the CDIC be allowed to establish a bridge institution to preserve critical functions and help maintain stability if one of its members failed.

It also proposes to increase CDIC’s borrowing limit to $15 billion from $6 billion to reflect the growth of insured deposits since the last increase in 1992, and to gear this limit to future deposit growth.

The budget notes that these proposals are in keeping with Canada’s commitments to the plan agreed among the G7 countries to stabilize financial markets. It stresses that Canada’s financial system is stable and well capitalized, yet it says that the recent turmoil demonstrates that it is wise to be prepared: “While the Canadian financial system has been among the most resilient in the world, it is important that the tools available in Canada keep up with new powers across the G7.”

IE