More Aid to Canadian Banks

Canadian lenders are asking for help.  That's according to the National Post, who says the Finance Department is "ready to step in and guarantee new borrowing" among banks.

The pledge was made "behind closed doors" according to the Post. 

This announcement essentially means that Canada's government may stand behind billions of dollars in loans that banks make to each other. 

With this backing, the supply of money will hopefully improve in the mortgage market.  Without this guarantee, Canada will purportedly be at a big capital-raising disadvantage to other countries--whose banks have received their own government's backing.

The National Post also says the Canadian government is prepared to dramatically increase the amount of mortgages they agreed to buy back last week. The number is apparently rising from $25 billion to as much as $225 billion.  That buyback starts this Thursday.

Inevitably, all of this will smell like a bank bailout to some.  However, Finance Minister Jim Flaherty says it's simply not so.

"We are not looking at a rescue package for banks" or "any additional risk for taxpayers," said Flaherty, who was quoted in the Globe. The buyback entails solid assets that are already guaranteed by the government (because the mortgages being purchased are insured). 

In a nutshell, these moves are a strategy to increase the availability of Canadian lending--availability that has suffered considerably in recent months thanks to severe credit tightening worldwide.