On May 5th, the Bank of Canada released a consultation paper on changes that it is considering making to its Emergency Lending Assistance (ELA) program. Under the ELA program, the Bank may make loans for up to six months to members of the Canadian Payments Association that are facing serious funding or liquidity problems. In these situations, the Bank is often referred to as the “lender of last resort” as other sources of funding are generally not available to the institution. The ELA program is not meant to address problems arising from general market illiqudity. That is dealt with through other programs run by the Bank.

The proposed changes to the ELA program include:

  • Eliminating the requirement that the borrower be solvent at the time of the loan and replacing it with a requirement that there be a credible recovery and resolution plan.
  • Adding additional requirements if the borrower is a provincially regulated credit union or caisse populaire, including a requirement that the relevant provincial government provide an indemnity for any losses suffered by the Bank and that ELA be necessary to support the stability of the Candian financial system.
  • Allowing private-label mortgage-backed securities or, as a last resort, mortgages themselves to serve as collateral for ELA.

Solvency requirement

Currently, the intent of the ELA program is for the Bank to provide liquidity assistance to firms that are suffering an unusual liquidity problem but otherwise have a viable business. As the Bank itself has no means of assessing the viability of a borrower, the Bank looks to the Office of the Superintendent of Financial Institutions (OSFI) for assistances in assessing this requirement. However, viability can be difficult to assess, particularly when a liquidity issue has already been identified. Further, with the upcoming repeal of Part XVI of the Cooperative Credit Associations Act not all CPA members will necessarily be supervised by OSFI. Finally, the requirement could limit the ability of the Bank to lend once an institution moves from “recovery” to “resolution”.

By replacing the requirement for a solvency opinion with a requirement for a credible recovery and resolution plan, the Bank would no longer be reliant on OSFI for advice. The Bank would also be able to continue funding as an institution moves from recovery and into resolution, something that may not have been possible with the current solvency requirement. One question that the paper does not address is who will decide if an institution has a “credible” recovery and resolution plan. Cuurently, jurisdiction over recovery and resolution plans is shared by OSFI and the CDIC.  However, there is no public list of the banks that have been required to prepare a plan. Through various government statements, it is clear that the large banks are required to have plans. Does this mean that ELA is restricted to the large bank?

Credit Unions and Caisse Populaires

The repeal of Part XVI of the CCAA and the elimination of OSFI supervision continues to have implications for the credit union movement. The new requirements provide that ELA will only be available if the Bank believes that it is important for the stability of the broader Canadian financial system. Perhaps the national scope of the large banks makes this self-evident should one of them encounter liquidity issues. However, the Bank has chosen not to make this a specific requirement for the banks. Further, as the CDIC does not have jurisdiction over the credit unions or their centrals, which authority would determine if the recovery and resolution plan is credible?

Comments on the proposals are requested by July 4, 2015. For a copy of the consultation paper, click here.