David Friend, THE CANADIAN PRESS

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TORONTO - Canada's big banks are passing on more interest rate cuts to consumers and companies in the wake of Ottawa's promise to help them obtain billions of dollars in additional money by freeing up frozen credit markets.

TD Canada Trust (TSX:TD) and CIBC (TSX:CM) said Friday they will lower their prime lending rate by 15-hundredths of a percentage point to 4.35 per cent, effective next Tuesday.

The other big banks, the Royal, Bank of Nova Scotia (TSX:BNS) and Bank of Montreal (TSX:BMO) announced shortly afterward that they would cut their prime even further, by a quarter-point to 4.25 per cent.

The banks had come under fire earlier this week after they passed on only half of the half-point cut in the Bank of Canada's key rate, which was part of a co-ordinated global effort by major central banks to ease credit markets.

At the time, the Canadian banks said the money markets were too volatile and raising money too costly to pass on the full Bank of Canada cut.

Financial markets have been frozen around the world because hundreds of billions of dollars of toxic mortgage assets remain on banks' balance sheets, wiping out their capital reserves and their ability to make loans.

Friday's additional reduction of the banks' prime rates was credited to a morning move by Finance Minister Jim Flaherty to allow the banks to unload as much as $25 billion of mortgages from their balance sheets to the Canada Mortgage and Housing Corp.

That move freed up extra capital the banks could use for consumer and corporate loans and lines of credit.

Chris Hodgson, Scotiabank's head of domestic personal banking, stated that: "At a challenging time in world financial markets, this reduction in interest rates reflects actions initiated by the Bank of Canada and the federal government."

TD - a major mortgage lender and often the first Canadian bank to adjust its consumer lending rates - said the government's move allowed the banks to trim the price of loans, though .

"It's a very competitive marketplace and so we said let's get ahead," Tim Hockey, president of TD Canada Trust, the retail arm of TD Bank, said in a phone interview.

"The days of the Bank of Canada rate being lockstep are not true, especially right now. The cost of funds for all banks, globally, has risen dramatically," he added.

"When the Bank of Canada rate changed it didn't really affect the cost of funds to our benefit. The change announced by the minister today will."

A Bank of Montreal statement echoed the sentiment.

"We are pleased to pass on these savings to our customers. We believe this will benefit Canadians and their businesses," said Frank Techar, head of BMO's personal and commercial banking in Canada.

Banks made the more gutsy move after "testing the waters" earlier this week with a quarter point cut, said Craig Fehr, a financial services analyst with the Edward Jones brokerage in St. Louis.

The cautious moves are part of a balance between marketshare and profitability, where the banks are watching their costs but also looking to attract reluctant borrowers, he said.

"If you're the bank that cuts its prime rate lower than everybody else, you'll probably get more business. However, you're going to earn less on all of those loans you make because margins are going to be thinner," Fehr said.

"Partly they're (the banks are) competing amongst themselves and partly they're competing against the environment we're in."

More lending will provide a badly needed shot in the arm for the economy, which appears headed towards recession and has been affected by tight credit that has squeezed companies in many industries.

Early Friday, Flaherty said the federal government will buy up to $25 billion in residential mortgages from the banks and shift them to CMHC.

"This is going to make loans and mortgages more available and more affordable for ordinary Canadians and businesses," said the finance minister.

The Canadian Bankers Association applauded the decision as an important effort to make credit more available in the consumer marketplace.

"This is a safe, efficient and economic way of facilitating credit markets," the association said in a release.

Sonia Baxendale, CIBC's chief of retail markets, called the government's action "positive."

Flaherty's move "helps to enhance the long-term funding capacity of our banks at a time when private credit markets have seized up," commented Sherry Cooper, global economic strategist at BMO Financial Group.

"Canadian banks are the healthiest in the world, but they too have been hit by the global credit crisis, reducing the availability and increasing the cost of funds for banks as well as for all other market participants."