Full text of Federal Reserve Bank of New York Circulars : [Letter Regarding Lending by Canadian Banks]

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FEDERAL RESERVE BANK
OF NEW YORK

■‘fusty
August 14, 1981

To all Banks with Assets of $1 Billion or More
in the Second 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 (August 10) that 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 activity, 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.
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 that Canadian firms could circumvent his request of the Canadian banks by borrowing
for takeover purposes from foreign banks. He therefore addressed 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.




R o n a ld B. G r a y ,

Senior Vice President.