Canada set to announce aid for domestic banks

OTTAWA, Oct 20 (Reuters) - Canadian Finance Minister Jim Flaherty is set to announce measures this week to help domestic banks keep up with their foreign competitors, which are benefiting from government bailouts and guarantees.

Flaherty was en route to Ottawa on Monday to discuss a series of options with officials in his department, a source familiar with the situation told Reuters.

An announcement should be made "sooner rather than later," he said, when asked if an announcement would come this week.

Flaherty spokesman Chisholm Pothier said no announcement was planned for Monday. "My only caveat is that this is a fluid situation and could change. I don't expect it to, however," he told Reuters.

Flaherty and Prime Minister Stephen Harper have already hinted there is a plan in the works to help ensure Canadian banks have a level playing field with their global counterparts when they carry out wholesale lending. They said that domestic banks, while relatively strong, are hurt by the "unintended consequences" of massive government bailouts in Europe and the United States.

Flaherty repeated similar concerns on Sunday. "We have the soundest banking system in the world but we're not an island. We get buffeted by what's going on in other places and we're in the midst of that now," he told television network CTV.

Analysts expect that to be done through a government guarantee of bank-to-bank loans, made to fund retail lending and other day-to-day operations.

The Globe and Mail newspaper reported on Monday that Flaherty could announce such a guarantee by mid-week.

Pothier said talk of specific measures to aid banks was "all speculation, and I can't comment on speculation."

The Globe said that while the guarantee may never have to be used, it might help keep the cost of loans down by ensuring Canada's banks have access to cash at the same rates as their global competitors.

Governments in the United States and Europe have promised billions of dollars to backstop lending in a bid to restore confidence in the financial system. Banks have been reluctant to lend to one another because they don't know whether other banks will be able to repay debts.

While the strains on Canadian banks have been less severe, some observers worry that financial institutions will be more likely to lend to banks in countries with government guarantees, the Globe and Mail said. (Reporting by Louise Egan and John McCrank; editing by Rob Wilson)