Borrowing costs for Royal Bank of Canada and other lenders have soared as the global credit crisis spreads. Canadian banks have become less willing to lend to each other, let alone to customers. The difference in yield between Canada's three-month treasury bill and the three-month dollar London Interbank Offered Rate rose to the highest since at least 1990 this week.
Canadian banks are "reluctant to lend to any other bank,'' said Ian Nakamoto, director of research at MacDougall & MacTier Inc. in Toronto, which owns bank shares. ``Canada is obviously not an island unto itself. We rely on the funding costs that any other bank in the world would rely on.''
Shares Mixed
The Canadian Bankers Association, speaking for the nation's banks, said today's move is ``a safe, efficient and economic way of facilitating credit markets.''
"It's been difficult for our institutions to raise long- term funding,'' Nancy Hughes Anthony, chief executive officer at the association, said in a telephone interview. ``I don't think there's any silver bullet, but this is one helpful initiative along with many others.''
The mortgage buybacks may allow commercial banks to lower their prime lending rate by about a quarter percentage point, Flaherty said. Canadian Imperial Bank of Commerce and Toronto- Dominion, the No. 2 lender, cut their rates 15 basis points, to 4.35 percent. Bank of Nova Scotia, Royal Bank of Canada and Bank of Montreal cut 25 basis points to 4.25 percent.
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``Our mortgage system is sound,'' Flaherty said. "Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes, than is the case in the United States.''Subprime Mortgages
Canada's stock of residential mortgages is about C$773 billion, according to the finance department. Subprime mortgages represent less than 5 percent of all outstanding mortgages in the country, compared with about 20 percent in the U.S., the finance department said.
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