Wednesday, April 01, 2009

Canadian Banks Don’t Need Government Debt Plan, RBC's Nixon Says

Bloomberg, Doug Alexander and David Scanlan, 1 April 2009

Canada’s biggest banks probably won’t need to tap a C$218 billion ($173 billion) debt backstop program set up by the federal government because their finances are sound, Royal Bank of Canada’s top executive said.

“I think it would be very unlikely that you’d see utilization of that program,” Gordon Nixon, 52, said in an interview in New York. “But it’s important to have it there as a signal to the global markets that it’s there if necessary.”

The Canadian government announced in October it would provide guarantees on as much as C$218 billion of commercial bank debt to revive lending and match bank bailouts offered by other governments.

The lenders haven’t tapped the credit yet under the Canadian Lenders Assurance Facility. The government in January extended the deadline for the program to Dec. 31, while opening up a similar plan for insurers.

“I would love to see us manage through this without any of the financial institutions having to access that program,” Nixon said.

Nixon said the credit is expensive, and the lenders have been able to use a mortgage buyback program offered by the government to ease the credit crunch. The government in October said it would charge banks fees of as much as 1.85 percentage points of the face value of Canadian-dollar debt for the insurance, depending on the bank’s credit rating.

Mortgage Buybacks

The government also offered to buy back as much as C$125 billion in mortgage loans to free up more cash for lending, through the Canada Mortgage and Housing Corporation. The government has bought back about C$55 billion in mortgages since the program began.

“We’ve had access to the CMHC program, which has basically provided us with term funding to some degree,” Nixon said.

Canadian lenders, most of whom are profitable and haven’t required government bailouts to stay afloat, are competing with banks that have been issued government funds to bolster their balance sheets. More than 520 U.S. financial companies have received about $287 billion in TARP funds, according to Bloomberg data.

Nixon said he expects the Bank of Canada to be “measured” in its use of alternative policies, known as “quantitative easing” to revive the economy.

Bank of Canada Governor Mark Carney has said the central bank is preparing to use policies beyond interest rate moves as borrowing costs approach zero. These policies could include purchases of corporate or government securities. The Bank of Canada said at its March 3 interest rate announcement that it will outline how it would implement such measures on April 23.

“I think it’s a good thing, as long as it’s measured,” Nixon said. The policies will be “very much geared towards insuring that the capital markets work effectively.”