Canada's banking system kept high and dry by strict regulation: Flaherty

By David Friend, The Canadian Press

TORONTO - High banking standards have kept Canada's financial institutions afloat and out of the kind of trouble that has sunk many of their international peers, Finance Minister Jim Flaherty said Wednesday.

Flaherty, who will meet Friday in Washington with finance ministers from industrial countries to co-ordinate efforts to deal with the global economic crisis, said Canadian banks have been bolstered by strict government monitoring of their capital.

"We've had a couple of financial institutions in Canada that ran the risk of falling outside the capitalization requirements," he said during a news conference on Wednesday.

"We required them... to maintain the appropriate capital requirements and raise capital as necessary, which was done months ago."

Flaherty declined to say which banks were involved in shoring up capital to meet the government's standards. However, CIBC (TSX: CM.TO), which has had to write off billions of dollars linked to the sub-prime and battered debt market in the U.S., raised $2.75 billion earlier this year by selling stock at a sharp discount.

Flaherty added that the government is prepared to do "whatever we have to do" to protect Canada's financial system - among the most robust in the world - though he declined to outline any plans.

"I'm not going to talk about what they might be," he responded when pressed for more detail.

He did, however, emphasize that the government will not run even a small deficit even as it raises planned spending to help some parts of the economy.

Over the past two years, the Conservatives have implemented a review of the Bank Act and given more power to the Bank of Canada as the global credit crisis unfolded, leading to bank failures in the United States, Europe and Asia, mainly because of bad real estate loans.

Among its many recent moves, the Bank of Canada joined other central banks Wednesday in cutting interest rates by half a percentage point in a co-ordinated effort to stimulate lending and economic growth around the world.

Some of the fundamentals credited with keeping Canada's banks in the safe zone were put in place nearly a decade ago by the former Liberal government of Jean Chretien, including a refusal to approve any merger of Canada's big banks.

About a decade ago, former finance minister Paul Martin rejected planned mergers by Royal Bank and Bank of Montreal and TD with CIBC, saying such transactions would hurt financial services choices for consumers and businesses across the country.

While Flaherty said government regulation has helped make Canada's banking industry more secure than financial sectors in the United States and many other countries, Canada has also benefited from a strong housing market and more conservative lending practices.

"We're a relative rock of stability in this situation, but of course we're vulnerable to spillovers from what's happening elsewhere," he said.

So-called subprime mortgages to risky borrowers, which were at the heart of the U.S. financial collapse, were only a tiny part of the Canadian mortgage industry and are non-existent today.

Also, Canadian borrowers must put down at least five per cent of the cost of a home and the maximum payback period on federally insured mortgages has been reduced to 35 years from 40 years, lowering the risk of defaults.

"Some Canadian banks have experienced far more stress than others, but collectively the strong banks are carrying the less strong banks through," said Brad Smith of Blackmont Capital.

But, he said, for "domestic financial institutions to continue to outperform, you have to assume the economic environment here will continue to outperform - because if it doesn't you're going to get deterioration here as well."

Economies around the world have been battered by a banking crisis, a crumbling housing market and a credit crunch that has dried up borrowing. Canada has not been hit nearly as hard as others, Flaherty said, citing an International Monetary Fund report that shows Canada will lead G-7 economies in 2009, with growth of 1.2 per cent, though overall global growth will slow down.

Meanwhile, the U.S. is forecast to grow only 0.1 per cent and Europe 0.2 per cent.

The finance minister said in order for the international crisis to subside the G-7 countries will need to work together on a solution.

"One of the key things to resolving the financial crisis is for financial institutions to have confidence in each other so they feel comfortable lending to each other," he suggested.

The minister's comments suggest he's ready to participate in any international policy changes designed to help bring the global financial community in sync, said Craig Fehr, a financial services analyst with the Edward Jones brokerage in St. Louis.

"As far as any dramatic moves, I wouldn't expect Canada to be in the forefront of having to make those dramatic policy changes," Fehr said.

Flaherty said Canada is in a strong position to deal with the global crisis, with a strong banking system, a stable housing market and a federal budget surplus.

"Other countries have been increasing their deposit standards, but they're still for the most part below the high Canadian standard," he said.

Flaherty said he doesn't have plans to boost the bank deposit insurance limit because he says the current level is among the highest in the world.

"Other countries have been increasing their deposit standards. But they are still for the most part below the high Canadian standard of $100,000," he said.

The US$700 billion bailout package approved last week in the United States included increasing deposit coverage to $250,000 from $100,000 until 2010.

The Canada Deposit Insurance Corp. echoed Flaherty's confidence, when its head Guy Saint-Pierre said earlier this week that Canada's financial system is "resilient" and has no reason to raise its deposit insurance caps in stride with the U.S.