Finance Committee on March 10th, 2009

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

Thank you, witnesses.

So many good witnesses, so little time, and so many questions.

I want to acknowledge the presence of my predecessor here, the Honourable Dr. Peters.

As you can see, Mr. Chair, the people of East Scarborough have been well served for many years.

[Mike Wallace, Conservative, Burlington, ON]

They were better served in the past. Is that what you're saying?

[John McKay, Liberal, Scarborough—Guildwood, ON]

Well, that may be arguable, and I certainly wouldn't dispute it.

I wanted to reference Dr. Peters' comment in the second to last paragraph, where he says that credit interest rate spreads in Canada are unhealthily wide, suggesting that our financial system is also under severe strain. I contrast that with Ms. Dickson's comments that OSFI continues to do its own analysis of the condition of financial institutions, of the overall financial sector.

It seems that you paint a rather healthier, rosier picture of our system than do Dr. Peters and Dr. Donner. I'd be interested in your comments on that.

[Julie Dickson]

My comments are designed to talk about the fact that Canadian banks today continue to function in the way that banks are supposed to function, whereas their international counterparts do not.

Now, it is clear that we are not out of the woods yet, and there continue to be stresses in the system. We do look at the cost of funds for Canadian banks versus the costs of funds that other banks are facing around the world in various spreads, and what we've seen is that the spreads have come down. They're still high, though.

So the system is performing well vis-à-vis other systems in the world, but it is still under strain.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Have the spreads come down for all banks or have they just come down for Canadian banks?

[Julie Dickson]

You can look at it week by week. They've come down for Canadian banks and a bit for all banks, but it does change from week to week.

[John McKay, Liberal, Scarborough—Guildwood, ON]

But that begs the logical question. If they are in fact getting cheaper money, which is just the narrowing of the spread, then presumably their credit granting would be more aggressive. Yet we're loading up EDC and loading up BDC, and you guys got 12 billion bucks of new fresh money for credit, so those two thoughts don't seem to live in the same universe. Can you give me an explanation?

[Julie Dickson]

There are two things that banks look at when deciding to make a loan. They're looking at the cost of funds and they're looking at the risk to the borrower. Both of those elements are being affected by your view of risk. Investors are risk averse now: when they lend money to a bank, they want a high rate for it. When banks lend money, they tend to be more risk averse, too, because we're in a recession and they have to worry about getting paid back when they make the loan.

[John McKay, Liberal, Scarborough—Guildwood, ON]

There is a resplendent irony going on here. As money is getting cheaper, it's also getting more expensive. It's quite strange.

I'll just shift that response to Doctors Donner and Peters and ask them to comment on Ms. Dickson's observations.

Also, I wanted your comments with respect to a second, rather startling statement in your paper:

That paper analyzes the new conditions in the US and poses the clear possibility the tax cut may cause a contraction in the economy, that is, they might actually reduce GDP and worsen the recession.

I know that on this side of the House we've argued that there are smart tax cuts and stupid ones. This government seems particularly prone to stupid ones. Can you expand both on what Dr. Dickson said and on that statement as well?

[The Chair, Conservative, James Rajotte]

You have about 45 seconds.

[Douglas Peters]

I will be very brief, then, thank you, Mr. Chairman.

We're going to have to call Ms. Dickson “Rosy”, I guess, for her forecasts.

We were talking about different things, not just the banks, but the whole market, and the market for medium- and long-term bonds and things like that. That's really the basic difference.

On your second question, it would take me at least 15 or 20 minutes to go through this, but let me put it this way. When the central bank's interest rate is zero and you have a deflationary environment, if you have a tax cut, particularly one of those tax cuts that affect the costs of businesses, then the consumer will see that the businesses will be lowering their prices and the consumer will say, “Look, prices are going to fall”. If they do, they will postpone spending.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Okay.

[Douglas Peters]

So that's the question...sorry.

[The Chair, Conservative, James Rajotte]

Monsieur Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Good morning, ladies and gentlemen.

I'll address my questions first to Ms. Dickson. We are currently going through an economic crisis. As you are the superintendant of financial institutions, I suppose I can expect a lot from you.

At the beginning of your presentation, you mentioned that Office of the Superintendent of Financial Institutions was the main agency responsible for supervising and regulating deposit-taking institutions, insurance companies and federally regulated private pension plans. More specifically, you say that in the past Canada has made a good number of regulatory decisions. Your agency seems to have taken part in them indirectly. But your presentation disappoints me somewhat. I'd like you to clarify the role that you played mainly last year, because that does not appear anywhere in your text. Did you issue any corrective notices on the credit scheme or the value of private investments? There have been a lot of problems with asset-backed commercial papers, at least in Quebec, where I am more familiar with the situation. Did you issue any warnings to the financial institutions?

The population has to have trust in its financial institutions; this is our main bulwark against the economy. It is proven that the population in general doesn't understand a whole lot about the financial and monetary systems. So we put our trust in the financial institutions that are well regulated by agencies like yours. What role did you play last year with regard to the deteriorating situation in respect of which you could have asked for some corrective action to be taken?

I'll let you answer the question.

[Julie Dickson]

Thank you for your question.

First it's important to understand what OSFI's mandate is. We are responsible for assessing the safety and soundness of Canadian banks and federally incorporated life companies and trust companies and private pension plans.

For Canadians, a strong banking system is incredibly important. You need a strong banking system in order to ensure your banks are in a position to continue to lend and to ensure that people do not lose when they put their money into banks and insurance companies. That's what we do.

There are other parts of the financial system that we do not oversee. So when speaking about OSFI, I think we have to focus on what our mandate is.

In terms of what we've done in the last year, we've been relatively fortunate compared to other regulators around the world who have had to deal with failing banks and governments taking over banks, etc. Our role in Canada has been to continue to examine the banks, and given the amount of turmoil, we've increased that substantially.

But as I say, we have been very fortunate in the sense that we have not had to take the kinds of measures that other regulators around the world have had to take.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

To hear you describe your role, you were more an observer than an initiator or investigator as far as our systems were concerned to ensure things were running smoothly for us. You say we were lucky that you didn't have to take very serious measures.

In light of the current situation, what do you propose to do, as superintendant of financial institutions? Your title in itself is comforting, but what do you expect to do in the future to correct the situation?

[The Chair, Conservative, James Rajotte]

Just briefly, Ms. Dickson.

[Julie Dickson]

It's business as usual for us. We will continue to do what we've done in the past, which I think has paid dividends for Canada.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Kramp.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Mr. Chair.

The fact is, right now, sadly, in the Senate the official opposition is insisting on significant amendments to the budget, which is potentially going to put a lengthy and undetermined delay into this entire process.

Mr. Gauthier, if there is significant delay with these significant proposed amendments that are taking place in the Senate as we speak, what impact would this have on the Canadian secured credit facility for your dealers?

[Richard Gauthier]

Any delay in making the $12 billion trickle into the real economy would have devastating effects on the dealer network in the country for a couple of reasons. Number one, there is definitely a credit drought right now, so dealers are unable to finance their operations. The timing of this is particularly crucial, because since November and running right through until early spring we have been in the period of the year where vehicles are typically not sold even at the best of times.

We are a highly leveraged industry that cannot survive with the kinds of declines we are seeing. The average dealer in Canada right now has about $7.5 million worth of debt. That's a wholesale inventory primarily, parts and so on. When you're looking at the kinds of numbers we're looking at now, where the bottom has literally fallen out of the market, with a 53% decline for General Motors, a 43% decline in sales for Honda, no one can restructure fast enough to be able to keep up with that. It would be devastating, and I fear we will lose large numbers of dealers. That will impact communities across the country.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you very much.

As well, Mr. Siegel, I'm truly impressed by the accomplishment of EDC and the dramatic growth you've experienced through this particular period. It's quite rewarding to know that we have--because, as Mr. McCallum said, this is in contrast to the anecdotal evidence we've heard on behalf of BDC at the same time. We thank you for your work on this.

In Budget 2009 significant stimulus will be going into your organization as a delivery vehicle. Once again, if that is delayed by this impending blockade in the Senate, what significance would that have for customers whom you are doing business with or planning to do business with as a result of the extra capital infusion in Budget 2009?

[Eric Siegel]

I thank the member for the question.

The effect could be in a number of areas. The budget introduces new legislation for EDC and a temporary reprieve from the regulations that would restrict us in the domestic market. Our core business would continue to operate provided we had sufficient capital. Right now we do, but we're in an environment where we're expecting that credit downgrades and defaults will continue. We're only about a third of the way through what we would expect to see, so we use more and more of EDC's capital. In the budget there is a provision that would allow us to draw more capital from the government if we needed it. If the legislation didn't pass, we would have to work with the capital we have. We're okay for the moment, but that could become problematic in 2009.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

It could limit your options.