Canada’s Mortgages System More Secure and Regulated Than the US
Today, Bank of Canada governor Mark Carney endorsed the U.S. government’s $700 billion bail-out proposal to remove bad mortgage debt from U.S. banks and restore liquidity. Mark Carney said, “The size and breadth of support provided by this measure will help firms ‘right-size’ their balance sheets, re-liquefy closed markets and establish market prices for these distressed assets.”
The U.S. mortgage recovery is hampered because international banks are now reluctant to lend each other money, and do so only at very high rates of interest. Banks are hoarding cash while they await Congress’ decision on the proposed bail-out, which is expected imminently. Mr. Carney showed Canada’s support for the U.S. by arranging a $10 billion reciprocal currency-swap with the U.S. Federal Reserve, and by announcing five term purchase and resale agreements (PRAs). The PRAs will add $2 billion in liquidity to markets in October 2008, and another $1 billion up to January 2009. Mr. Carney assured Canadians that the Bank of Canada will “continue to
provide additional term liquidity as long as conditions in financial markets warrant”. Market watchers expect that if the U.S. banks are relieved of their bad mortgage debt by government intervention, and get a fresh infusion of capital, then they can resume lending for homes. The Bank of Canada’s move may help minimize the effects of the U.S. mortgage crunch on Canada. Mr. Carney’s support for the U.S. is a sharp contrast to the criticism offered by the German Finance Minister, Peer Steinbruck.
Mark Chandler, a fixed-income strategist at RBC Capital Markets, pointed out there is another way for the U.S. Federal Reserve to fix the American mortgage crisis besides “going up to Congress to champion the bill” Mr. Chandler suggests the Federal Reserve “can work on the broader liquidity measures” to avert recession if Congress does not approve the bill to increase the U.S. Treasury’s borrowing limits so it has more resources to help money markets.
Earlier this week, Canadian finance minister Jim Flaherty told the National Post that a mortgage bail-out similar to the U.S. government proposal is unnecessary in Canada, because our mortgage system is more secure and regulated.