Oct. 23 (Bloomberg) -- The Canadian government will provide guarantees on as much as C$218 billion ($173 billion) of commercial bank debt to revive lending and match bank bailouts offered by other governments.

Canada offered to insure interbank debt with maturities of three months or more, Finance Minister Jim Flaherty told reporters today in Ottawa. He said there's no need to increase protection on bank deposits, and that the plan won't cost taxpayers anything.

The backstop is the second measure this month to support Canadian banks after Flaherty agreed to buy as much as C$25 billion in mortgages from lenders. The moves are aimed at keeping the country's financial institutions competitive following bailouts in the U.S. and Europe.

``We are being proactive,'' Flaherty said. ``The potential downside could be a reality and could happen fairly quickly.''

Flaherty didn't say how much insurance the banks will acquire, adding it could be anything from ``zero to a lot.''

Most bank stocks climbed, led by Bank of Montreal, which jumped $3.08, or 7.5 percent, to C$44.24 at 4:23 p.m. trading on the Toronto Stock Exchange. The dollar advanced to C$1.2480 per U.S. dollar, from C$1.2539 yesterday. The Canadian dollar earlier fell to a four-year low as oil and metals prices dropped.

The government will charge banks fees of as much as 1.85 percentage points of the face value of Canadian-dollar debt for the insurance, depending on the bank's credit rating.

Backstop

``It does provide a backstop, in case any of our banks find themselves at a competitive disadvantage while borrowing,'' Canadian Bankers Association Chief Executive Officer Nancy Hughes Anthony said in a telephone interview. ``I think it's a very positive signal.''

Canadians banks can find cheaper funding in the market without this backstop, said Darko Mihelic, a bank analyst at CIBC World Markets in Toronto.

``This is a measure that probably won't get used and is there purely if the world gets much worse,'' Mihelic said in an interview. ``Canadian banks are in good shape and they can probably borrow without it.''

The insurance will cover the principal and interest payments on the debt for up to three years. The window for banks to buy insurance expires in six months, Flaherty said.

Total Deposits

The finance department said banks will be eligible to acquire coverage equal to at least 20 percent of their deposits, or 125 percent of their wholesale debt after Nov. 1. Canada's banks had deposits of C$1.09 trillion as of August, according to the Canadian Bankers Association, meaning the insurance would cover as much as C$218 billion.

Jack Aubry, a spokesman for the department, declined to comment on the calculations.

Though Canadian banks have held up better than most of their global peers amid the crisis, borrowing costs in the wholesale market soared earlier this month as banks became more reluctant to lend to each other.

The so-called Canadian TED Spread, an indicator of credit risk that shows the difference between Canada's three-month Treasury yield and the three-month London interbank offered rate, or Libor, has almost doubled over the past year. The rate has since slipped to 1.25 percent today, after peaking at 3.5 percent on Oct. 8.

The difference between the 3-month Canada Bankers Acceptance rate and the 3-month overnight index swap rate, the so-called CDOR-OIS spread, jumped as much as six-fold over the past year to 128 basis points on Oct. 6, before falling over the past two weeks. A basis point is 0.01 percentage points.

Showing Leadership

``The minister of finance has shown leadership in the context of global market events by putting in place a prudential program to benefit all Canadians,'' Bank of Montreal CEO William Downe said in an e-mailed statement.

Canadian banks, rated the soundest in the world this month by the World Economic Forum, have reported combined writedowns of C$11.6 billion since the third quarter of last year on debt investments linked to U.S. subprime loans, compared with $662 billion of losses and credit writedowns by banks worldwide.

Royal Bank of Canada, Toronto-Dominion Bank and other lenders haven't suffered as much as their U.S. rivals because subprime mortgages are less common in Canada and the economy has been bolstered by rising commodity prices over the past few years.

``We don't need this type of assistance, but we recognize that these proactive actions by the government are being taken to ensure Canadian banks can continue to compete in global financial markets,'' said Simon Townsend, a spokesman for Toronto-Dominion, Canada's No. 2 lender.

U.S. Plan

Flaherty said the move was part of Canada's commitment to the ``plan of action'' adopted by finance ministers from the Group of Seven countries earlier this month. The finance chiefs, meeting in Washington on Oct. 10, vowed to prevent the collapse of major banks by taking ``all necessary steps'' to unblock money markets.

``It's about as little he could do commensurate with the obligations that were entered into during the recent meeting of the finance ministers,'' said David Baskin, president of Baskin Financial Services in Toronto, which manages about C$350 million. ``He couldn't really do anything less than that.''

The U.S. Congress on Oct. 3 passed a $700 billion financial-market rescue plan designed to restore confidence in that nation's banking system and thaw credit markets. Treasury Secretary Henry Paulson said the first $250 billion would go into the balance sheets of financial companies in exchange for non-voting, preferred equity.

Other countries including the U.K. and Germany have followed suit, offering funds to shore up banks and loan guarantees.

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net.

Last Updated: October 23, 2008 16:40 EDT