Bank of Canada primes the pump again
September 24, 2008
OTTAWA and TORONTO -- The
Bank of Canada joined the global effort to unclog credit markets yesterday,
pledging to make $4-billion available to banks struggling to secure funding
amid the worst financial crisis since the Great Depression.
It's a relatively paltry commitment compared with the tens
of billions of emergency liquidity the U.S. Federal Reserve, the European
Central Bank and the Bank of England have injected into markets in the past
week alone.
The smaller pledge, half of which will be auctioned today, reflects the assertions
by the central bank and Finance Minister Jim Flaherty that Canada is well
protected from the turmoil ravaging Wall Street because the country's banks are
adequately capitalized.
Still, just like a hurricane that destroys homes in
"
The Bank of Canada will disperse a total of $2-billion today in the form of
84-day loans, or term purchase and resale agreements, to any of the primary
dealers of government securities that choose to participate in the auction.
Next month, on Oct. 16, the central bank said it will auction $2-billion of
27-day loans, which would essentially roll over the $2-billion of 28-day term
purchase and resale agreements that the Bank of Canada auctioned last week at
an average yield of 3.06 per cent.
The cost of borrowing Canadian dollars was a little higher yesterday than a
week ago.
One measure of the price of short-term money is the gap, or spread, between
the cost of borrowing dollars on the overnight market and the cost of
derivatives linked to expectations of what the benchmark interest rate will be
in three months.
That spread was about 53 basis points at the time of the Bank of Canada's
announcement, compared with about 50 basis points last week, according to Mr.
Chandler.
The comparative spread in the
Bank of Canada Governor Mark Carney might also be trying to put some force
behind a pledge by the Group of Seven industrial powers this week to do
whatever it takes to free up credit markets.
Finance ministers and central bank heads from the G7 issued a statement
yesterday after a conference call. It is unusual for the G7 to do so outside of
a full-blown meeting.
After a conference call, the ministers and central bank chiefs said they
"are ready to take whatever actions that may be necessary, individually
and collectively, to ensure the stability of the international financial
system."
The G7 includes the
"We've seen a deepening campaign around the world to break the logjam
in the money markets since the Lehman bankruptcy," said Douglas Porter,
assistant chief economist at BMO Nesbitt Burns in
The Bank of Canada's decision to offer loans that won't have to be repaid
until mid-October suggests banks are at least somewhat anxious that they could
end up short of cash as they seek to settle their year-end accounts.
As their quarter-ends approach and banks prepare to report their financial
condition to investors, they tend to hoard cash, which drives up interbank
lending rates and threatens to freeze an already tight market for credit. The
Bank of Canada's latest infusion will cover a period in which
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