Record-breaking and severe global stock market swings followed the announcement of new tax breaks and deposit insurance protection resulting from the historic bailout of the US financial market, approved on October 3 by the US House of Representatives. The package was designed to kick start the flow of credit by US banks who backed impaired assets, like mortgages on homes which values have plummeted. What is the impact of these developments for Canadians?
In this special report, we interpret Finance Minister Jim Flaherty's October 6 news release outlining Canada's relative fundamental strength as a means to comfort Canadians rattled by the volatility in the financial markets. Read in conjunction with the Bank of Canada Governor Mark Carney's message to the Canadian Club of Montreal on September 25, it appears that this correction should eventually be "cathartic" and "stabilizing" in restoring order to global financial markets.
October 6 News Release: Finance Minister Jim Flaherty
Financial Minister Jim Flaherty issued a news release today to comment on the severe shocks gripping the global credit system, in particular the US and now Europe, and to provide comfort to Canadians about their own financial institutions, which he described as "sound and well-capitalized, and less leveraged than their international peers."
Mr. Flaherty explained: "The structure of our financial institutions continues to benefit Canadiansólarge Canadian investment dealers have been bank-owned since the late 1980s, and as a result are regulated on a consolidated basis by the Office of the Superintendent of Financial Institutions."
"Canadian capital requirements for financial institutions are well above minimum international standards and higher than in other jurisdictions. Canadian institutions have met, and continue to meet, their capital requirements. The IMF has concluded that Canada's financial system is mature, sophisticated and well-managed, and able to withstand sizeable shocks."
When it comes to real estate, our mortgage scene is also in better shape: smaller mortgages relative to home values, a small subprime component and sound economic factors, such as low interest rates, rising incomes and a growing population all make our housing finance model supportable.
That's the good news. The bad news is that Canada's financial system will see the effects of the credit squeeze too, with the result that longer term credit extended to Canadian businesses and households will likely be affected.
In response, the Bank of Canada has increased the availability of "term liquidity" to the tune of $20 Billion. As well the range of credit to be accepted for this liquidity has been widened, in an effort to keep credit affordable for Canadians.
This announcement should provide comfort to Canadians panicking during the current ìtsunamiî of financial concerns.
However, both Governor Carney and Finance Minister Flaherty cautioned that global markets are now at a critical juncture as many foreign financial institutions need to raise capital for lending purposes, but their ability to do so has been reduced. This affects all those who rely on credit for their future, particularly businesses and consumers. Without credit, business operations cannot be financed in advance, mortgages and auto loans cannot be provided to consumers. Survival depends for many on cutting costs in an attempt to shore up balance sheets.
Knowledge Bureau faculty members spoke with President Evelyn Jacks to comment on these recent developments and their potential impact on Canadian, in this Special Report After the Bailout: The Impact on Canadians