Bank of Canada won't rescue banks in crisis (FINALLY!!!)

[mobes]

May 02, 2008

Julian Beltrame

The Canadian Press

OTTAWA (May 2, 2008)
The governor of the Bank of Canada says he will take a tough stand with financial institutions that wind up near bankruptcy because of poor decisions.

Mark Carney says the central bank won't bail out Canadian financial institutions like the U.S. government did when the Bear Stearns brokerage, one of the giants of Wall Street, ran afoul of the subprime mortgage mess.

"If you cannot make a judgment (on the value of an asset), you should not own the security," Carney told a Senate committee yesterday.

"There is very high value, if a situation came about, to ensuring the shareholders and senior managers bear the full consequences of their actions," he said.

"The Bank of Canada has a role to become lender of last resort, but we would do that on the advice of the Superintendent of Financial Institutions that the institution is solvent, not because the institution needed money."

Carney said the central bank would come to the rescue of a chartered bank in the case of a temporary liquidity problem -- if the institution had sufficient capital to be considered viable.

But he added if investors and managers thought there would always be a safety net, they would be encouraged to take inordinate risks in order to maximize profits.

Canada has a relatively small number of chartered banks and there's little chance of bankruptcy at any of the biggest.

However, there are also small, little-known chartered banks, as well as mutual fund companies, investment dealers and other financial services companies without the resources of the Big Six.

Carney's harsh stance yesterday appeared aimed at possible future behaviour by Canadian financial institutions rather than any past transgressions, as he mostly praised the chartered banks for leading the world in moving to meet new disclosure requirements recommended by the Financial Stability Forum last month.

And he repeatedly stressed that tight credit conditions are not as bad in Canada as in the rest of the world, saying while the banks are having some difficulty obtaining financing, the cost of interbank lending is about half that in the U.S. and Europe.

Carney also said that it may be possible that the International Monetary Fund's estimate of total global losses of $945 billion US from the U.S.-originated financial crisis may be overly high, although he gave no estimate himself.

As he did the previous day in testimony before a Commons committee, the bank governor defended his request for new powers to expand the list of assets the Bank of Canada can accept in injecting liquidity during the current tight credit situation.

The change would give the Bank of Canada the same flexibility as other central banks in the industrialized world, he said.

"This is a core recommendation of the Financial Stability report which was endorsed by all G7 finance ministers and governors last month," Carney said. "These are powers (that other central) banks have and use."

http://thespec.com/News/Business/article/363032