Canada says bank prime rate policy reflects crunch

OTTAWA, Oct 9 (Reuters) - The failure of Canadian banks on Wednesday to pass on to borrowers all of the Bank of Canada's interest rate cut is of concern but it reflects the realities of the credit crunch, Finance Minister Jim Flaherty said on Thursday.

When the Bank of Canada joined central banks around the world in cutting its target interest rate by half a percentage point to 2.50 percent on Wednesday, major Canadian banks cut their prime rate by just a quarter point to 4.50 percent.

"I'm concerned about that. I know many Canadians are because it affects the cost of mortgages. It affects the cost of car loans. It affects loans to small business, the ability of business to invest and reinvest," Flaherty told a news conference.

"I can't say I'm surprised though because we have an international credit crisis. The cost of credit is very difficult to price these days internationally and banks lend and banks borrow," he added.

"So what I've said to the banks is do as much as possible in the present circumstances. My concern, again, is less with the cost of credit, that is the price, but the availability of credit."

He cited severe restrictions that have developed on longer-term funding in Canada.

"We have to ensure that credit continues to be available and not just short-term credit but longer-term credit in Canada," he said. (Reporting by Randall Palmer; Editing by Peter Galloway)