Thank you.
Evidence of meeting #37 for Finance in the 39th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was bank.
A recording is available from Parliament.
Evidence of meeting #37 for Finance in the 39th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was bank.
A recording is available from Parliament.
4:50 p.m.
Conservative
The Chair Conservative Rob Merrifield
He actually had more time. It's very rare for that to happen, but it's so close that we will call it.
We'll now move on to Mr. McKay. I hope you have some good questions. You have five minutes.
4:50 p.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
I always have good questions.
Mr. Rudin, what is a financial instrument that's not a security?
4:50 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
What is a financial instrument that's not a security?
4:50 p.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Yes. I'm directing you to amendments to subclause 146(1). It says “securities and any other financial instruments”, and then it goes on to something about “instruments that evidence an ownership interest or right in or to an entity”.
I don't understand that. But what is a financial instrument that's not a security?
4:50 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
That's a question of legal drafting. I'm afraid I don't know the answer.
4:50 p.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
It strikes me as a rather important question, because the way you describe the expansion of the bank's authorities here has been--how should we say?--largely unexamined in public. For example, is asset-backed commercial paper something the bank could buy under this authority?
4:50 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
Yes, if it were on the list that had been established by the governor.
4:50 p.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Is it on the list established by the governor? Is that something the governor could purchase today?
4:55 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
Can the governor purchase asset-backed commercial paper today? I don't believe so. The bank can accept it as collateral for a loan; I don't believe the bank could purchase it today. I'd have to check.
4:55 p.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
If the governor decides that asset-backed commercial paper is a good buy for the bank and puts it on his list, is that the end of it? Can he buy it?
4:55 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
I would say two things in this regard.
First of all, the intent is for the governor to be able to establish the appropriate list. There are two types of restraints on the use of that power. One is the purpose test: these purchases and sales have to be made either for the purpose of implementing monetary policy or of supporting the stability of the financial system. Furthermore, this list has to be published in the Canada Gazette and a certain length of time has to pass, so there's transparency and accountability.
4:55 p.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
But in some respects, that's like talking to yourself. If he decides that the financial system is destabilized, then he puts whatever he needs up on the list and he publishes it. It's hardly a check and a balance. It's hardly something where the public of Canada, in right of the minister, for instance, or in right of Parliament, really has any say on what the governor decides goes on the list. It's an appearance of a check, but it just doesn't strike me as one.
4:55 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
The legal restraint on the use of it is the purpose test. That is to say these transactions have to be done with one of those two purposes as the motivation. The transparency and accountability is a sunshine aspect.
4:55 p.m.
Liberal
4:55 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
In what sense?
4:55 p.m.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
In the sense that if he decides that his financial system is not stable, then that's the only test that counts.
4:55 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
For what would become subparagraph (g.1), this is not unlike what will become subparagraph (g.2). It's not a situation test. It's not if the governor is of the opinion that the financial system is unstable, but rather that these transactions must be done with the purpose of supporting the stability of the financial system or the implementation of monetary policy.
4:55 p.m.
General Director, Economic and Fiscal Policy Branch, Department of Finance
The other point I would make in this regard is a bit of a technical one, but nonetheless it's potentially important. The bank already has a broad power to make loans backed by collateral. There is a popular form of transaction in financial markets called the “repo”. This is a transaction that is essentially lending, but it is technically a sale. This is a transaction where the two institutions agree, or the two parties agree, that one will purchase a security and then sell it back to the other at a prearranged price, a higher price. The difference between the purchase price and the resale price is the embedded interest rate in the transaction. So the purchase and then the subsequent sale are linked. It's a way of doing secured lending because the security resides with the purchaser if the counterparty isn't around--because they go bankrupt--to make the repurchase.
This is the sort of transaction that having this list allows the bank to do. So it would allow it, for example, to make repurchase transactions in the same set of instruments for which it can make what is legally a loan, using those instruments as collateral.
4:55 p.m.
Conservative
4:55 p.m.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
Thank you, Mr. Chairman.
I'd like to come back to the question my colleague, Mr. Crête, asked earlier. It had to do with the employment insurance plan and the $2 billion reserve. I want to make sure I understand how it works.
Correct me if I'm wrong. It's anticipated that the plan will continue to work like it did before, with premiums from workers and companies, and those amounts will cover benefit payments to the unemployed for one year. During that year, the $2 billion reserve won't be touched. If there are any surpluses at the end of the fiscal year, they will enrich the $2 billion reserve, but then they will be used to lower premiums, so that the reserve always remains $2 billion.
Is that right?
5 p.m.
Director General, Employment Insurance Policy, Department of Human Resources and Social Development
The goal is to match revenue with spending over the years so that spending and revenue are equal when the new plan comes into force. Every year, there may be deficits or surpluses. In that situation, the surpluses will temporarily be sent to the organization until rates are lowered, so that the amount can be transferred and spent on benefits. In that way, any premium overpayment will be equal to benefits.
5 p.m.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
However, what would happen if the reverse were to occur? Suppose in any given year with a lot of job losses, $1.5 billion from the $2 billion reserve was used up and there was only $500 million left in the reserve. Would that $1.5 billion be recovered through premiums? Would that happen over the course of one year, or in ways that would not penalize all workers and companies?
5 p.m.
Director General, Employment Insurance Policy, Department of Human Resources and Social Development
That's an important question. The act contains limits on how rates are decreased or increased from year to year.
Under the act, rates can't vary by more than 15¢ per year. That will ensure some stability for companies and workers.