Governor of the Bank of Canada Stephen Poloz leaves after speaking at a press conference on Parliament Hill in Ottawa, on Wednesday, March 18, 2020. Over the past week, the Bank of Canada has moved rapidly to inject liquidity into systemically important markets.Justin Tang/The Canadian Press
Ottawa will allow uninsured mortgages to be bundled up by financial institutions and sold to Canada Mortgage and Housing Corp., in an attempt to free up room on bank balance sheets and encourage them to keep lending amid rising credit concerns.
The move, announced by the Department of Finance on Friday, is the latest in a string of measures taken by the federal government and the Bank of Canada to patch up cracks emerging in key parts of the financial system.
Banks will be allowed to place certain uninsured mortgages in pools alongside insured mortgages and sell them to Crown corporation CMHC as part of a $50-billion insured mortgage purchase program announced this week. (Home buyers with less than a 20-per-cent down payment must purchase mortgage insurance, while mortgages with more than a 20-per-cent down are not insured.)
“As a result of this measure, banks and lenders will have more liquidity – which, in turn, will enable them to work on a case-by-case basis with Canadian businesses and individuals who face hardship at this time,” Finance Minister Bill Morneau said in a statement.
Over the past week, the Bank of Canada has moved rapidly to inject liquidity into systemically important markets – such as the market for bankers’ acceptances and Canada mortgage bonds – where trading has become harder and spreads have widened. Regulators have cut capital buffer requirements to free up lending capacity and the bank has expanded what it will accept as collateral for short-term loans.
Bank of Canada Governor Stephen Poloz described the actions, conducted alongside more traditional rate cuts, as a kind of financial plumbing. “This is all aimed at keeping credit channels open,” he said at a Wednesday news conference.
Some of the measures appear to be gaining traction. On Tuesday, the bank conducted its first purchase of Canada mortgage bonds on the secondary market. Spreads on 10-year CMBs dropped by around 20 basis points after the purchases, Mr. Poloz said.
Yield spreads for many fixed-income products have been shooting up in recent weeks because of liquidity or credit concerns. As spreads increase, financing becomes more expensive.
"That’s a really significant move in the markets, and it’s an indicator that that action is helping to ease tensions out there,” Mr. Poloz said, referring to the recent decline in the CMB spread.
Many of the initiatives come from the policy toolkit developed during the 2008-09 financial crisis. The insured mortgage purchase program was particularly important, said Mark Chandler, RBC Dominion Securities’ head of Canadian rate strategy. During the Great Recession, CMHC bought $69-billion worth of insured mortgage pools.
“That proved very useful because it’s not just a short-term repo, but it actually serves to really liquefy bank balance sheets,” Mr. Chandler said, referring to repurchase agreements, whereby central banks buy securities from commercial banks on a short-term basis, with an agreement to sell them back.
The Bank of Canada has also stepped up its co-ordinated efforts with other central banks to maintain liquidity in global funding markets.
On Friday, six major central banks – the Bank of Canada, the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank – announced they would increase the frequency of their U.S. dollar liquidity swap operations to daily from the usual weekly, beginning next Monday and continuing at least through the end of April.
Bond traders said the action should help keep potential global pressures off U.S.-denominated debt, which is the dominant currency throughout the global credit system.
Despite the moves, it is still unclear how much monetary policy can do to stimulate the economy amid a massive demand shock, said Andrew Kelvin, chief Canada strategist at TD Securities.
“They might have all the tools in place to keep banks functioning well through this crisis, but these tools don’t do a whole lot to boost demand, beyond what normal monetary policy would do. And normal monetary policy is a six- to eight-quarter tool," Mr. Kelvin said, referring to rate cuts.
"Really what this crisis calls for is direct spending from government, as fast and as hard as possible,” he said.
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