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Tag Archives: subprime lending

Flaherty to fight for mortgage market

Opposes bank tax

Paul Vieira, Financial Post

Canada stepped up its fight against overzealous bank regulation, with Finance Minister Jim Flaherty pledging to fight against new rules that could unravel the country’s unique mortgage market — one of the few to come out of the global financial crisis relatively unscathed.

Further, he has written a letter to his Group of 20 colleagues to reiterate Canada’s stern opposition to a global bank tax advocated by Britain and France and that appears to be gaining support in the United States. Instead, he threw his support behind a Canadian compromise that would be more market-oriented but ensure lenders would have access to capital in the event they run into trouble.

“We are not going o have Canadian banks disadvantaged because they performed well, and [because] we have solid system in this country — whereby systems in other countries didn’t work as well,” Mr. Flaherty told reporters yesterday.

The forceful talk from Mr. Flaherty indicates Canada plans to use its influence as a home to a well-functioning financial system in trying to shape the new global rules aimed at preventing another credit crisis that threw the global economy into a deep recession. The hardening of Canada’s opposition also reflects growing uneasiness among Canadian banks about the reforms.

Last week, two chief executives from big Canadian banks warned of changes under consideration that would alter the country’s mortgage market and encourage behaviour seen in the United States that led to the subprime crisis.

Gordon Nixon, chief executive of Royal Bank of Canada, described the provision as “absurd.”

The new standards, being developed by the so-called Basel committee, fail to take into account that insured Canadian mortgages are guaranteed by the federal government.

If adopted, Canadian banks would be forced to have the same amount of capital against their mortgages as a bank in another country operating in a riskier environment with no state backing. As a result, Canadian lenders may have to package more of their mortgages and sell them to investors, like U.S. banks did to great detriment, or issue fewer mortgages.

“This is another item we need to discuss in terms of global financial reform,” Mr. Flaherty said, adding he would be advocating for an “appropriate” calculation for capital so Canadian banks aren’t penalized.

“The Canadian mortgage situation is rather different than in the United States,” he said, in reference to how Canadian banks didn’t engage, for the most part, in the type of subprime lending that led to the U.S. housing collapse once financial conditions turned sour.

Countries that had to bail out its banks with direct cash infusions have warmed to the idea of a bank tax, to ensure governments recoup the monies used to keep their financial systems afloat. But Mr. Flaherty reiterated yesterday Ottawa’s official opposition, as first reported in February by the Financial Post.

He suggested many of the countries supporting the bank tax happen to be “running substantial deficits,” and expressed concern money raised by the bank tax might be used to pay down fiscal debt as opposed to being set aside for times of trouble.

“The principle,” he said, “is that banks that contributed to the financial crisis, they should bear the cost–not taxpayers.”

The International Monetary Fund, in a paper this week, warned that slapping a surcharge on banks could reduce lending banks conduct at a time when the global economy needs credit the most.

In his letter to his G20 peers, he asked them to consider an alternative put forth recently by Julie Dickson, Canada’s chief bank regulator, whereby financial institutions insure themselves against failure by issuing debt that can be converted into equity at times of trouble. Ms. Dickson called the scheme “embedded capital.”

“I think we are taking a leadership position on this because we are putting forward an alternative to a bank tax or levy,” Mr. Flaherty said, hinting that a number of G20 countries might side with Canada in its fight.

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