Canada to buy mortgages in latest step to ease market strain
Canadian policymakers are escalating their efforts to backstop the nation's financial system and ensure banks have plenty of room to continue lending through the coronavirus crisis.
In separate statements on Monday, the federal government and Bank of Canada said they planned to purchase billions of mortgages and mortgage-backed securities to inject liquidity into the financial system.
The moves are the latest in a series of measures by financial authorities, the government and the Bank of Canada to ensure global market turmoil doesn't result in a seizing up of the flow of credit to companies and households.
"Policymakers are pulling out all the stops," Benjamin Reitzes, Canadian rates strategist at Bank of Montreal, said in a note to investors.
In a series of notices on Monday, the Ottawa-based central bank said it will start purchasing about C$500 million ($357 million) a week in mortgage bonds and accept a wider set of securities in its term repo operations. The bank will also allow more non-mortgage loans to be used as collateral in a separate overnight facility.
Separately, the housing agency of Canada's government said it will acquire up to C$50 billion of mortgages to provide stable funding to banks.
These add to a series of liquidity boosting measures announced last week, including a pledge Friday by the Bank of Canada to acquire securities directly linked to corporate credit lines. The central bank also announced it would be increasing the frequency with which it purchases securities to every week, from every two weeks, and widening the terms to include six-month and 12-month operations.
In what may be the most significant change, the country's banking regulator also said last week it would loosen capital requirements to free up C$300 billion of lending capacity.
Here is a list of recent changes:
Insured Mortgage Purchase Program — This is a return of a program the government used during the 2008-2009 financial crisis, with plans now to acquire up to C$50 billion in government insured mortgages through the nation’s housing agency.
Canada Mortgage Bonds — The country's mortgage fund program lets approved financial institutions pool eligible insured mortgages into marketable securities, guaranteed by the country's housing agency. The bank announced today it will target purchases of up to C$500 million per week "as market conditions warrant."
Capital Buffers — The Office of the Superintendent of Financial Institutions lowered the domestic stability buffer for Canada's key banks to 1% of risk-weighted assets from the 2.25% level set for the end of April. The buffer — one of four capital requirements for the biggest banks — will not increase for at least 18 months, the regulator said.
Term Repo Operations — The central bank will accept in its term repo operations the full range of collateral eligible under Standing Liquidity Facility, with the exception of non-mortgage loan portfolios. Last week, the Bank of Canada announced it would extend term repo operations to weekly, instead of every second week, and broaden the maturity of operations.
Standing Liquidity Facility — This is the Bank of Canada's overnight credit facility for the country’s payment system. Bank of Canada said Monday it will allow a greater percentage of collateral to be in the form of non-mortgage loans.
Bankers Acceptance Purchase Facility — This facility was announced on Friday for the purchase of securities linked to credit lines of small and medium-sized businesses. The first operation is planned for March 23.
Bond buyback program — The bank will expand the scope of a bond buyback program in which it sells newer, more liquid bonds for older issues. These buybacks will now take place at least weekly and go beyond the typical 30-year maturity.