Investors in Canada’s big banks are getting a second chance to rescue them from financial collapse, with the government guaranteeing billions in capital to them.
The banks are being bailed out with a $20 billion line of credit and the government is guaranteeing the same amount for a further $20.5 billion, a source close to the discussions said.
The new guarantee of billions in new capital from Ottawa will be announced in the coming days and will be part of a $4.5-billion package that includes $4 billion in direct aid from the federal and provincial governments, plus $200 million in loans from the International Monetary Fund.
Finance Minister Bill Morneau said Wednesday the government will be “taking all available measures to support our most vulnerable banks, including ensuring that they have the support they need to support their operations and meet their obligations.”
He said the new guarantees will “not only ensure that banks are able to continue their efforts to improve the stability of their businesses and to maintain their independence, but will also help ensure that our financial institutions are able, as they have for many years, to recover from the global financial crisis.”
Morneau did not say how the money will be used.
Bank of Montreal CEO Dominique Strauss-Kahn, whose bank has been under federal investigation for possible ties to organized crime, has been among those getting a bailout.
“I think the Government of Canada has made a good first step to support the financial institutions in Canada,” Morneau told reporters.
“We will continue to work with the banks to ensure they have appropriate funding for the ongoing financial stability of the Canadian economy.”
Banks are expected to receive another $1 billion in federal funding and $250 million from provincial governments in addition to the guarantee from Ottawa.
The money comes as Canada is facing a global financial meltdown that is forcing some banks to seek bankruptcy protection.
But the country has not had a global banking collapse for a decade and has not yet suffered a major financial crisis.
The government has also committed $3.8 billion to the Global Financial Stability Fund to help small and medium-sized banks and the U.S. Federal Reserve will give another $3 billion in lending to banks.
Bank officials say they are still assessing the guarantees, but that they are expecting them to be paid out in the next few months.
“It’s going to be a very long time before we get our full support, and I think it’s fair to say that’s something we’re excited about,” said Robert Dreyfus, a former banker and now chief investment officer at a major U.K. bank.
The Canadian banking system is “very much in good shape,” he added.
Canada’s biggest banks have faced criticism for being too big to manage and for having too much leverage over consumers and investors.
The National Bank of Canada is now the largest bank in Canada, with a market capitalization of $2.5 trillion, but the government has said it will not bail it out unless it has assurances that it will be able to meet its obligations.
The U.M.F. said last month it was putting $300 million into the UBS bank in a fund to support other banks.
Morneau also promised to support smaller Canadian banks and said the federal government would “make it a priority to make sure that our national banking system remains strong.”
Moralez said the government also would support Canadian banks through loans and investments.
But he did not specify how it would provide financial support.
“What we will be doing is working with all of the big banks, which will provide loans, investments and other kinds of support to our institutions in a way that is appropriate for them,” Moralez told reporters on Wednesday.
Moralez also said the money was being used for the purposes of supporting the banks in a crisis.
“The fact is, we’re doing it to help our banks,” he said.
“That’s the way the system works.
It’s the law.”