Finance Committee on Oct. 27th, 2009

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

So, it is a translation error?

[Mark Carney]

No, it is not the translation.

The Bank of Canada has a strong preference for principles-based regulation and reliance on the judgment of people rather than blind faith in the security blanket of excess capital, but against the backdrop of a new regulatory framework for institutions, an increase in tier 1 capital and the creation of a macroprudential buffer for banks.

The creation of a new macroprudential or countercyclical buffer will be key in preventing future crises and reducing bubbles. That is a critical part of OSFI's work. A number of factors are at play, but against the backdrop of a new regulatory framework, the G20 framework, we must rely on the judgment of individuals, regulators and companies.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

What I understand from your answer is that you agree with me that a lot of people showed a lack of judgment.

[Mark Carney]

Before the crisis and during the crisis, yes, absolutely.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Surely, you have reserve funds. Is there still a lot of money in the foreign exchange account, which is one, if not the main, reserve of the Bank of Canada? When was the last time you used the account? Do you expect to use it to bring down the value of the loonie, if it gets too close to the American dollar?

[Mark Carney]

The exchange fund account is the reserves of the Government of Canada. The bank acts as an agent for the Government of Canada in the management of those reserves. Those reserves have built up gradually in recent years. Part of the increase in reserves has been a result of some recent reforms to the IMF, the International Monetary Fund. Just for clarity in answering the question, I refer the committee to previous answers on the issue of the exchange.

For clarity in answering the question, in the case of intervention to slow the appreciation of the currency, it is not an issue of using reserves; it is an issue of adding to reserves. Intervention in that form would add to the reserves of the country, as opposed to using them. They're not bound by the level of those reserves.

That is no more than a direct factual response to the question.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you.

[The Chair, Conservative, James Rajotte]

Merci, Monsieur Laforest.

We'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

I'd like to thank the governor and the deputy governor for coming and joining us. This is your semi-annual visit to be held with us. I appreciate the answers you've been giving over the last hour and half.

I only have a couple of issues, and there are hopefully no politics involved in them.

On your estimate, for example, of the 3% growth for next year, and I think 3.3% or something like that for the year after, is that strictly based on your modelling? We heard--as a member of the finance committee--from another organization this week that talked about the fact that there's a variety of opinions out there. Some organizations look at what they're doing and we take an average.

Is it strictly your modelling, and you're not paying much attention to what everybody else is doing?

[Mark Carney]

It is much more than just economic modelling. We discussed in the past that we have a series of economic models, over twenty economic models, that we use to form our judgments about the outlook for growth in Canada. Those judgments, though, are informed by meetings with all the major sectors in our economy, from energy, through manufacturing, through the retail sectors, etc. It's the work our regional offices do on the field--a lot of work--the formal surveys that we do, and we have published our most recent one. Then it's the responsibility of the governing council, very much informed by the institution. From all this information, all this technical modelling, it is the responsibility of the senior deputy governor, myself, and the four deputy governors on the governing council to form the judgment of the projection for the global and Canadian economy. We are responsible for that projection, and it is a mixture, Mr. Wallace, of technical, of survey, face-to-face meetings, and judgment.

[Mike Wallace, Conservative, Burlington, ON]

I appreciate that. I'm understanding that.

On page 24 there's a chart that says the recovery in Canada should be more modest than in previous cycles. It's an interesting chart. Is it really fair to compare this recovery, this cycle, to other cycles? I think it goes all the way back to 1961. The economics of the day, the variables, the conditions are so vastly different from what was happening in 1961, from what was happening in the seventies, eighties, or nineties. What's the use of that chart, to be perfectly honest with you?

[Mark Carney]

I think there are a couple of uses of it. The reason we put it in is to compare it to page 10, which is the American outlook, which is the slowest recovery in the United States since the Great Depression. If you could see, for example, their build-up for this, it's not in the report.... For example, consumption in the United States is very weak relative to previous recoveries. The reason we go back to the 1930s for the U.S. and only back to 1961 for Canada is a question of data. Statistics Canada didn't start to have the quarterly data, so you can't reconstruct this chart.

I think it's because we thought that it was important, first for comparison, but then secondly, to give some context to what is a recovery. We get as many people telling us that they think the recovery is going to be too fast as people who tell us that they think it's going to be too slow. Certainly the recovery over our horizon, in the next two years, will not be as strong relative to previous ones. It's an important element relative to the amount of excess capacity slack we have in the economy, and therefore how much time it takes to use that up, and therefore what the pressures are on inflation and where our policy is.

[Mike Wallace, Conservative, Burlington, ON]

Wouldn't it be better for us to have a chart showing the recovery of let's say the G-7 and how we compare against our competitors, in the current timeframe, based on the relatively similar conditions they're facing at the time? Does that chart actually exist?

[Mark Carney]

We can construct that chart. It won't be perfect on a quarterly basis for the other comparatives, but we are happy to construct that chart and circulate it to the committee.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Wallace.

We'll go to Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chair.

The committee was in Washington in the month of June. We met with senators, congressmen, and regulators. There was a consensus that regulatory reform was needed, but there didn't seem to be a consensus on how that was going to be conducted. There's been a lot of speculation. There have been a lot of things written. I'm just wondering what is going on in the international scene, and how is that going to affect Canada?

[Mark Carney]

Thank you, Mr. Pacetti.

This is quite important. It is imperative that the various reforms we've talked about this morning be consistent with the G-20 agreement, that they are agreed to at an international level. The crisis came from abroad and had a severe impact on Canada. So we need others to get their houses in order. That's the first point.

A related point is that we don't want to disadvantage our system by putting in place rules that others haven't put in place. Let's put it this way. That's a discrete decision that needs to be taken by the relevant Canadian authorities, but it would be far better if these were agreed to and implemented at an international level.

There is a long list of reforms. A key issue, just to give you a feel, is the work that's being done on bank capital--what's the new minimum going to be? What will this countercyclical buffer look like? Is there going to be a leverage ratio as an agreement by leaders and by the relevant committee in Basel? What will it look like?

Canada has higher minimums. Canada has a leverage ratio. We are starting from the right position on this, but we need to get others to agree to reduce the risk.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

What's the holdup?

[Mark Carney]

These are major decisions. Part of the issue is that a number of other economies are short of capital, and these regulations will accelerate the need to increase capital. So we have to calibrate the new impact studies.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Can't you ask that it be ramped up progressively or for a number of years?

[Mark Carney]

Yes. We have to get the transition right. We have to agree on that. We're on an accelerated basis. We've agreed to main principles. We're going to do the right impact studies over the course of the next six or nine months of 2010. The target, explicitly, and this was agreed to and publicly announced, is to have the pin put in--the actual numbers for these levels--and the formulae by the end of 2010. So it's coming soon.

The second thing, if I may, which is very important internationally and is difficult to implement, is moving standardized over-the-counter derivatives onto public platforms, such as clearing houses or exchanges. I talked earlier about repo, which is short-term funding, but these are credit derivatives and interest rate swaps. It is tens and trillions of dollars

—billions of dollars, in French.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

That's what I was going to get to as well. Is there a holdup in North American countries or European countries, or is there just a general fall behind--I'm looking for the proper word--in countries across the G-20?

[Mark Carney]

We are working hard to ensure....

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Can we name somebody?

[Mark Carney]

We're working hard to ensure that there is no holdup, and I would say that in the last week a number of central bank governors have commented on the urgency of these reforms and their implementation.