Financial Update

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Ottawa seeks more influence over banks

Eoin Callan, Financial Post

The Conservative government Friday sought the power to take stakes in the country's banks and to seize control of troubled financial institutions, in the most radical and far-reaching response yet to the crisis in the global financial system.

The new authority would allow the government to inject capital into private institutions or to take over a failing lender and split it into a "good bank" and "bad bank."

The radical measures would empower Ottawa to follow the example of Washington and London and other western capitals that have bought shares in banks and gained influence over their affairs.

The steps are "in keeping with the action plans we agreed to with our international counterparts at the G7 and G20 meetings," Jim Flaherty, the Minister of Finance, said Friday in his autumn economic statement.

The minister said he was seeking: "The legal ability to inject capital into a federally regulated financial institution to support financial stability, on terms that would protect taxpayers."

The measures mean the Conservatives are setting aside free-market ideological principles and internal party resistance, taking what they view as a pragmatic approach that borrows from the experience of other countries in battling the credit crisis.

While government officials do not anticipate using the new powers, they feared being caught with their hands tied if the credit crisis continued to drain capital from the country's banking system and intervention was required to save a bank or insurer.

Bay Street was cautiously welcoming of the moves, though executives and senior government officials had previously argued these new powers were not required.

"It is probably a prudent thing to do," said one person in the industry.

A senior industry figure said the government was "updating its toolkit to give it similar authorities to what is available to other governments around the world."

A bank official stressed that "these are tools that we hope they never have to use."

Mr. Flaherty warned that the country was "far from finished confronting unheard-of global economic and financial threats."

"Canada has not faced such severe economic tests in a generation," he added.

The legislation gives Mr. Flaherty similar powers to those used by Hank Paulson, United States' Treasury Secretary, to top inject capital into Wall Street institutions and bail out banks.

There were signs that the Conservatives were preparing to fight a pitched battle over a range of economic and emergency measures to depict opposition parties as threatening market stability if they voted against the government, with comparisons being made with the initial rejection of the $700-billion Washington bail out by Congress.

The legislation will also give new powers to the Canada Deposit Insurance Corporation to follow the example of its U.S. counterpart and seize and operate distressed lenders.

This would allow the federal agency to split up an institution into a "good bank" and "bad bank", hiving off crippling debts and continuing to make loans and operate the company until it can be wound down or sold.

The Conservatives are also seeking "the power to direct CDIC" to carry out emergency rescues and shotgun weddings like those carried out over in intense weekend negotiating sessions by U.S. authorities to avert failure by Citigroup, Washington Mutual, and Wachovia.

The CDIC is also being given a new borrowing limit of $15-billion to help fund these tasks.

The steps were agreed to following consultations between the Department of Finance, Bank of Canada and the Office of Superintendent of Financial Institutions.

The overall package reflects private advice given by central bankers and regulators who pressed the Conservatives to bring Canada into line with other leading industrialized nations.