Full text of District Notices (Federal Reserve Bank of Dallas) : [Canadian Finance Ministry Requests Canadian Banks to Reduce Lending Involved in the Finance of Foreign Takeovers], Circular No. 81-165

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F ederal R eserve Ba n k o f D allas
DALLAS, TE X A S

75222

Circular No. 81-165
August 17, 1981

TO THE CHIEF EXECUTIVE OFFICER
OF THE BANK ADDRESSED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Bank of Canada has requested that the Federal Reserve bring to your
attention the following release from the Canadian Finance Ministry:
Deputy Prime Minister and Finance Minister Allan J.
MacEachen announced today th at he has requested a number of
the larger Canadian banks to reduce substantially the amount
of their lending in which the proceeds are converted to foreign
currency and used to finance takeovers. He included those
takeovers financed originally through the foreign currency
facilities of the banks which also ultimately demand Canadian
dollar servicing of these loans.
These types of transactions have contributed to the
recent downward pressure on the exchange value of the
Canadian dollar. This threatens to aggravate the inflationary
situation to which Canadians are already subject, and to add to
the upward pressures on the level of short-term interest rates
in Canada.
In discussing the various aspects of this takeover ac­
tivity, the Minister specifically exempted those loans that
serve the objectives of Canadianization embodied in the
National Energy Program which remain a central element in
the Government's policies.
He noted, however, that the
process of Canadianization was proceeding rapidly and some
slowing of this pace would therefore be quite consistent with
the energy policies of the Government. He emphasized as
well that the Government had no intention of extending the
Canadianization aspects of energy policy to other sectors of
the economy.

Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

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In recent weeks the level of takeover activity of all
types has been very high.
Bank lending to finance such
transactions has contributed to rapid growth of the assets of
the banking system, despite the policies of restraint being
pursued by the Bank of Canada. The Minister expressed
concern that this was adding unnecessarily to the upward
pressures on interest rates. He also noted this rapid growth
was putting downward pressure on the capital-asset ratio of
the Canadian banks, and expressed concern that if recent rates
of takeover financing were to continue the amount of bank
credit available to other Canadian borrowers, including lending
to support more productive investment by small and medium­
sized Canadian businesses, might have to be constrained.
The Minister recognized th at Canadian firms could
circumvent his request of the Canadian banks by borrowing for
takeover purposes from foreign banks. He, therefore, ad­
dressed his request that the pace of takeover activity diminish
to Canadian industry generally, as well as to foreign banks
that might consider taking on such business.
Additional copies of this circular may be obtained by calling the
Department of Communications, Financial and Community Affairs, Ext. 6289.
Sincerelv vours.

President