Finance Committee on June 16th, 2008

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Within the framework of your role, and in light of what has happened and what is still happening, do you have any recommendations for us, or do you think you will have recommendations for us on how to improve, widen or change the scope of your mandate?

[Julie Dickson]

We need all the facts first before we talk about making my mandate broader, because other regulators are still doing their work. We need to see what the Investment Dealers Association, now IIROC, come up with. They said they will tell people what the findings are. We need to see what the securities commissions do with the exempt market and its definition. Once we have all of that, we will have more of a basis to see whether there was any regulatory gap at all.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Has anyone received the mandate to conduct a global overview of the situation, or is everyone putting forth their own recommendations? No one seems to have received the mandate to compile all the recommendations which have been made to see what exactly needs to be changed. In your opinion, do you feel that each organization is currently working in a silo, including your own?

[Julie Dickson]

We do work together. We each have our own role, but we do meet together as a group. The Bank of Canada chairs meetings, and we meet with the securities commissions and the Department of Finance. We will, on occasion, invite the IDA, now IIROC, and talk about what each regulator is doing and how we're addressing these problems. And of course we do the same thing internationally, because this is not a unique problem to have. So a lot is being done.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Menzies, the floor is yours for seven minutes.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

I will try to get in a few quick questions and then pass the microphone to Mr. Del Mastro.

Thank you for coming, Ms. Dickson.

I think you will find this a very non-partisan issue around this table, unlike many others. Everyone is here trying to find out what went wrong. Our role, as parliamentarians, is to make sure our investors, both large and small, are protected.

I'm sure you're aware that we started out with some witnesses from a variety of sizes of investors who were frankly very critical of you and some of the others. I think they were looking at the role the Minister of Finance played in this, which was nothing other than encouraging everybody to sit down and get together.

But a lot of them suggested they didn't know what they were buying. That, to us, is very troubling. Maybe you can comment on that, whether or not you can play any role in that.

One accusation was that we've abandoned seniors, and that seniors were allowed to invest in these unprotected, which has hurt their future savings, if you will.

The other major accusation was that international banks should not be permitted to operate schemes in Canada that expose billions of Canadian dollars.

I don't know if that's your role, but can you comment on those accusations to at least get the record straight on that?

[Julie Dickson]

On the first one, concerning investors, in my role we're interested in depositors. If you put your money in a bank deposit--an RRSP, a GIC--and the institution is a member of CDIC, and all banks must be members, then you're protected up to $100,000. That's where my role ends.

But it is obviously an important issue, particularly when unsophisticated people end up with something they perhaps shouldn't have. I think that is where the work that's being done now by the IDA to look at exactly how the product was sold and what might have been said is so important, and we won't have the answer until that work is done.

In terms of foreign banks, any company in Canada is free to seek out a foreign bank for loans or for services, and that is what we saw with the non-banks--Coventree, etc. We think they dealt primarily with foreign banks, which OSFI does not oversee. We think 90% of the liquidity lines were negotiated with foreign banks.

The way the legislation works is that if a foreign bank comes to Canada and wants to take your money and put it in a bank deposit here, then we oversee that. But if a corporation wants to borrow money, it can go anywhere. That is probably a good thing, that they're able to seek out a source of funding from any bank in the world.

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Ms. Dickson.

I have a couple of questions. To begin with, as Mr. Menzies indicated, some people came forward who were critical of OSFI's role. That said, I think that may be somewhat misdirected.

My greater concern is on Canada's patchwork system of securities regulatory bodies. I'm just curious, does OSFI have a position? I know it's been the position of our government that Canada needs a single or national securities regulator. Does OSFI have a position on that?

[Julie Dickson]

We usually don't go out and talk about that at great length. That's something a lot of parties obviously talk about. From where I sit, I usually just talk about my own experience.

Certainly I am one person sitting here, not 13 people. So I think there is probably more accountability with one regulator than with 13.

I also think that internationally, when we sit at the Basel table or in other forums, it's easier if you're dealing with one regulator. But that's been my experience.

I do work with the securities commissions on a regular basis, and it's easier with one.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

We seem to stand alone in that regard, so I certainly would support your personal view on that. It seems to me that if there really is a major failure on this, certainly a single regulator would hold those accountable to the failure.

But if there's a failure on this, it comes back to the rating service. The DBRS basically rated this asset equivalent to T-bills, with a slightly higher yield. In fact, we had a number of witnesses who came forward and said that when they were buying this they were told that for this type of asset to fail, the banking system in Canada would have to fail, and that's because it was rated in that fashion.

Do you have any comment on how these were rated then versus how they will be rated in the future?

[Julie Dickson]

Well, internationally, this is not the only product that failed to perform. Many products that were rated by various rating agencies failed to perform. That's point number one.

Second, what I've certainly learned is that whenever you see rating agencies disagreeing, it's time to pay attention. If you have rating agencies with very different views...and in the last month I've seen another case of that with a different product, primarily in the U.S., where four rating agencies were involved. Two were agreeing on a high rating and two were saying it didn't deserve that high rating. It's a huge red flag that I think, going forward, people need to pay more attention to.

So plenty of improvement is called for on a number of fronts, and rating agencies are the focus of a lot of review and study internationally. The SEC announced last week certain changes that it wants to see, and of course DBRS would be paying close attention to that.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

I have nothing further, Mr. Chair.

[The Chair, Conservative, Rob Merrifield]

I appreciate that.

Mr. McKay, you have five minutes.

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

Thank you, Chair.

Thank you, Ms. Dickson.

You're charged with the safety and soundness of the banking system. Mr. Clark, who was formerly with the Department of Finance in a senior position, then president of Canada Trust, now president of TD Bank, and by all measures a pretty sophisticated individual, said that he didn't understand the priorities in the event of difficulties. And indeed, when others have tried to explain it, it's sort of like a “Where's Waldo?” cartoon. You go here, you go there, you go everywhere else, but if you try to follow the chain of priorities and liabilities, it's virtually impossible.

Is there anyone in your shop who actually has sat down and charted out the priorities in the event that these securities are called upon?

[Julie Dickson]

Could you elaborate on what you mean by priorities?

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

It seems to me you determine the liquidity requirements of a bank based upon your analysis of the risk of the securities they present, and it seems to me that if you're charged with the safety and soundness of the banking system, if Bank X puts forward this $100 million worth of securities, then there should be someone in your shop who says, “This is the risk analysis of this particular security.”

The question is relatively simple. Is there someone in your shop who is charged with that? If so, what was their analysis of these kinds of securities?

[Julie Dickson]

We're talking about complex products in general and the fact that some banks didn't have these products and didn't have these problems--like TD?

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

Well, we're talking about a complex product, and presumably at some point that complex product is presented to you for the purposes of its liquidity. You're charged with safety and soundness, and presumably you have to have an independent analysis of whether this is an asset that generates more or less liquidity.

[Julie Dickson]

The way it works is as follows.

We set the capital requirements and liquidity rules--but capital requirements primarily. If you're going to get involved in complex products, if you're going to be investing in complex products, the focus is capital. There was a lot of discussion, not only in Canada but around the world, about complex products, because these were evolving quite quickly. There were studies done internationally by regulators, and OSFI participated.

A number of questions were asked. Do investors understand what they're buying? Do banks understand what they're doing? Do rating agencies understand what they're doing? Do regulators understand what's going on?

So regulators had done a fair bit of work and had identified risks. We would have gone into all the institutions and talked to them about the risks that we were seeing, delving further and trying to see whether they had the staff who understand the risk because it's primarily their responsibility. We are not in there on a day-to-day basis to see what they're doing.

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

But if you're in charge of safety and soundness, isn't it also your responsibility to know what happens to this particular product when there is a default? If a person like Mr. Clark is saying he doesn't understand this, I'm a little confused as to how OSFI could say, in full conscience, that it understood the product.

[Julie Dickson]

First of all, it's the institutions that have to say whether they're understanding it or not. One institution can say they don't understand it and another can say they understand it completely. But it is our prerogative. This is what institutions are doing around the world. We need to be able to compete. We would see the boards of directors, we would do reviews of what we were seeing, and we would be explaining to the boards that it is their responsibility to know what they're doing. And I think the record in Canada has been fairly good.

When you look at--

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

Wouldn't you be able to say, if you want to invest in these products, you can do what you want, but for our purposes, our analysis as OSFI, you have to put up x capital for this, and if you have to go and borrow it from GICs and put it up, that's another thing?

[Julie Dickson]

Yes, and we set those rules internationally. Those capital rules were based on complexity, and they're going up again. That was in the backgrounder I issued in April. The Basel Accord is going to be amended again because as regulators we have seen there is still not enough capital for some of these complex products. As a result, that will be going up again.

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

Thank you.