Finance Committee on June 16th, 2008

[Julie Dickson]

Well, my job is to protect bank depositors. Those are life savings; I treat it quite seriously.

[Thomas Mulcair, NDP, Outremont, QC]

No one's suggesting you're not. But we're asking you specific questions and you're not answering them--you're skating. I'd like a clear answer.

[Julie Dickson]

I wanted to note that protecting bank depositors is a very important job, as is protecting investors. There are securities commissions whose job it is to protect investors. I think that is where my mandate ends and where theirs begins. I know they are taking it very seriously as well.

[Thomas Mulcair, NDP, Outremont, QC]

When you saw this happening, did you sound the alarm--yes or no?

[Julie Dickson]

There was no alarm to be sounded around the world or in Canada because the market was functioning. We did, as regulators, talk about the complexity we were seeing and the fact that triple-A-rated instruments were being created out of other things. We were questioning whether that was appropriate, but we were focusing on risk to banks. I think when it comes to the banking sector we have a good story to tell, compared to some other countries in terms of the solidity of banks.

[Thomas Mulcair, NDP, Outremont, QC]

You said you were questioning. When and with whom?

[The Chair, Conservative, Rob Merrifield]

I'll allow a quick answer there and that will be it.

[Thomas Mulcair, NDP, Outremont, QC]

It's a very clear question and it requires a quick answer, but it requires an answer.

[Julie Dickson]

Could you ask the question again?

[Thomas Mulcair, NDP, Outremont, QC]

You just said to us, “We were questioning....” When did you raise those questions and with whom?

[Julie Dickson]

In 2005 a report went out in great detail on issues with complex products. That was on every regulatory website in the world. I had a speech out in April, which is on our website, that talked about the complex products being bought and the fact that triple-A-rated securities were being created out of other products. It was primarily from the perspective of a bank regulator and the impact on bank solvency.

This is something that I certainly did talk about, as did other bank regulators. I can't say more about that than what I know from a bank regulator's perspective.

[The Chair, Conservative, Rob Merrifield]

Thank you.

I have a couple of quick questions.

You had mentioned the rating agencies earlier, talking about going forward and how perhaps we should be raising some alarm bells if one rating agency should rate a certain product but others refused to. Then you suggested in your testimony that this had happened here recently, where two had rated, but others refused to or hadn't rated the same way, and it raised alarm bells.

Going backwards over the 17 years, has there been a situation where we've had rating agencies rate to that extreme and not had any complications of any kind? Can you think of any others?

[Julie Dickson]

I'm not aware of any. I don't know if there are others.

[The Chair, Conservative, Rob Merrifield]

That would raise an alarm bell to me, if it's never been done before and you see rating agencies rate so differently.

Have there been other cases of it in the last year, other than that one?

[Julie Dickson]

I don't think in Canada, but in other markets, yes.

[The Chair, Conservative, Rob Merrifield]

Thank you.

I want to thank you for coming in. I know your time is tight.

There was nobody else on my list. There is a little time, if there are still questions.

Go ahead.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you.

Thank you, Ms. Dickson, for being here.

You have recommended that the zero capital charges to market disruption liquidity lines be removed. That is obviously something in the right direction.

We've had discussions about this issue and the anomaly of Canada's not having that--and you talked also about making these global lines. Is it true that Canada was alone, or virtually alone, in not having that already in place, and that there was a distinction between what Canada was allowing and the rest of the world was not?

[Julie Dickson]

I would put it in a different way. The whole world agreed to zero for any liquidity line of less than one year. As a bank regulator, we started to get very worried about that. You have to have capital if you're taking risk. We went to our international colleagues and said that there must be capital; banks are taking risks in providing these liquidity lines without any restriction to conduits. Our international colleagues agreed. They said that, yes, there must be a capital charge.

[Martha Hall Findlay, Liberal, Willowdale, ON]

I'm sorry to interrupt, but I'm actually looking backwards at when this was happening, and the incentive to in fact move the Canadian approach as well to be all global lines.

We've had other conversations with people saying Canada was a bit of a target for this because of the situation in Canada being different from that in other parts of the world. Can you comment on that?

[Julie Dickson]

Both regulatory organizations in Canada and the U.S. in 2004 implemented an additional capital charge because we saw a risk being taken, and that was for the global-style lines.

Our OSFI rules applied to our banks no matter where they operated. When they operated in the U.S., they offered global lines, because that was the only line that investors and rating agencies would accept in the U.S. I know one of the large banks had converted to global lines in Canada as well. They just decided to do it.

What we're trying to say is that our capital rules did not apply to Coventree. Our capital rules applied to Canadian banks, and when they operated in the U.S. or Europe, they offered global lines, not general market disruption. Again, that's because that's what investors demanded and that's what rating agencies demanded.

I think, if anything, from a capital perspective, the OSFI rules stand up to scrutiny. Other factors drove the marketplace.

[Martha Hall Findlay, Liberal, Willowdale, ON]

But if they do, then what was the reason for moving to global lines if in fact we were fine beforehand?

[Julie Dickson]

What we saw was that instead of transferring the risk to investors, banks stepped in and supported the conduits, and when you do that, you cannot justify a zero percent charge. The zero percent charge made sense when banks had transferred risk to investors. It did not make sense when banks, for the first time ever, stepped in to support these conduits.

[Martha Hall Findlay, Liberal, Willowdale, ON]

I would just like to solidify my understanding of this.

My understanding was that Canada was relatively alone, as a jurisdiction, in allowing banks to decline making emergency funding payments to commercial paper conduits should they seize up, and that was one of the reasons there was a focus on Canada as opposed to other jurisdictions. If you're moving in the right direction, well done; that's terrific. But I just want to have a better understanding of whether that was in fact the situation, that Canada was a bit of an anomaly that aggravated this situation.

[Julie Dickson]

Ninety percent of the banks we're talking about were foreign. Ninety percent of the banks--Coventree, etc., the non-banks--typically dealt with foreign banks that are not subject to my rules. It was those foreign banks that had the bulk of the liquidity lines. It was those foreign banks that declined to provide the bulk of liquidity, according to the agreements they had with Coventree, and Coventree was free to choose any liquidity line.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you.