In a sign that the financial crisis may be easing for Canadian banks, they have stopped taking all of the emergency government funding available to them.

Since October 2008, the Canadian federal government has provided a special liquidity facility to the banking sector through its Insured Mortgage Purchase Program (IMPP). Under the programme, the government periodically announces an amount of funding it intends to make available in an upcoming auction, together with a reserve "cost of funds" bid. Bidding banks then indicate the rate of interest they are prepared to pay by offering to sell pools of insured mortgages at prices that will yield the offered rate, and the Canada Mortgage and Housing Corporation (CMHC) (a federal agency) accepts the highest bids in turn until all of the available funds have been spent.

The Minister of Finance initially committed Cnd$25 billion for the programme, which was increased several times and now stands at Cnd$125 billion under the federal government's last budget. The programme has easily attracted political support as it is profitable to the government and does not increase the national debt.

However, while the first six auctions up to 23 January 2009 were fully taken up, the last four have been undersubscribed, and the take-up rate is trending downward. In the auction held on 11 March 2009, banks sold Cnd$2.1 billion in mortgages when up to Cnd$4 billion in funding was available. And in the subsequent auction held 17 March, only Cnd$1.57 billion of mortgages were sold out of the Cnd$4 billion available.

A key factor in the banks' declining participation, ironically, may be the shaky equity markets and other features of the ongoing crisis. As investors pull savings from the stock market and mutual funds and invest in term deposits and guaranteed investment contracts (GICs), banks' deposits, and corresponding capital available for loans, increases. One bank recently announced that deposits in chequing and savings accounts had increased 14% over the previous year (The Financial Post, 24 March 2009). In addition, the falling housing market has dramatically decreased demand for new mortgage financing.

In another sign of boosted confidence, investors have shown some greater appetite for risk by responding enthusiastically to recent bank preferred share offerings, whose yields are generous in comparison with government bonds.

Interestingly, government aid programmes have now started competing with each other as well as the private sector. On 17 March, the same day that CMHC held an auction for up to Cnd$4 billion in mortgages, the Bank of Canada (the Canadian central bank) offered Cnd$1 billion in short-term funding. The Bank of Canada's funding was available to a wider group of participants, and investment grade debt in addition to government securities could be used as collateral. It lent Cnd$750 million of that amount at an average monthly yield of 0.773%.

What has been the impact on homeowners? The government would no doubt say that its policies are working. According to the Bank of Canada, five-year mortgage rates have declined from 7.2% at the start of the crisis to 5.79% as of 18 March 2009.