Finance Committee on March 3rd, 2009

[Jeremy Rudin]

The Basel agreement, signed onto by Canada and most other countries, deals with needs, or regulations on asset-to-capital ratios based on the risk inherent to those assets.

For example, the risk associated with assets such as a government-insured mortgage would be zero, because there is no underlying risk. In such a case, by specifically choosing assets and risk, a bank may end up with a ratio, or an asset-to-capital ratio that is quite high, even though under the Basel agreement, it is rather low.

In Canada, we have a system that builds in limits on asset-to-capital ratios based on risk, the very straightforward cap on leveraging. It is a system with safeguards and buffers that does not even exist in most other countries of the world, and one which Canada has benefited from.

[Maxime Bernier, Conservative, Beauce, QC]

Do you believe that this system will be emulated by other countries, following this economic crisis?

[Jeremy Rudin]

Mr. Macklem talked about the discussions being held by the G20. Ideas are being circulated. Of course, a cap on leveraging is one of the ideas being considered. This is mainly because Canada has had a relatively better experience than most other industrialized countries.

[Maxime Bernier, Conservative, Beauce, QC]

Thank you.

[The Chair, Conservative, James Rajotte]

Merci.

Mr. Pacetti, please.

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

Thank you, Mr. Chairman.

I just want to continue where I left off last time with Mr. Macklem and Mr. Rubin. Regarding the extraordinary financing framework, Mr. Macklem stated there were about $40 billion put towards lending facilities. I wasn't clear on what that $40 billion was for.

[Jeremy Rudin]

As I recall, you were looking for the last $50 billion of the $200 billion. An extraordinary liquidity provision by the Bank of Canada accounts for $40 billion of this. The $40 billion is a round number; this peaked at $41 billion in the fall and currently stands in the $30 billion range. The additional $10 billion is through the new 10-year Canada mortgage bond.

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

What exactly is that $40 billion? Now you're saying it's at about $30 billion, but what is it?

[Jeremy Rudin]

The Bank of Canada maintains a number of facilities, and it recently announced the creation of a new facility, by which they provide liquidity; so they lend, essentially, on the basis of security posted by financial institutions and other investors. This is done very much on a demand basis. So the bank will say they're willing to lend up to x amount, the rates are established by a competitive auction process, and the amount that goes out the door is a function both of the limit the bank is willing to establish and how much institutions are interested in drawing on these facilities.

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

How much would it have been before the extraordinary framework was available?

[Jeremy Rudin]

Well, before this period of turbulence beginning in August 2007, the Bank of Canada was not providing any extraordinary liquidity. It did provide liquidity on the normal basis, which helps banks essentially settle their cheque clearing and other things, but it wasn't doing anything out of the ordinary. This began after what we called the financial “turbulence” then, “crisis” now, began in August 2007, and has been ramping up and peaked. The usage of these extraordinary facilities by financial institutions peaked in the fall, not long after the failure of Lehman Brothers, and has since been receding to some extent.

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

Is the $30 billion the maximum, or is it $30 billion plus what we gave last year and in 2007? That's what I'm wondering.

[Jeremy Rudin]

These facilities usually have various durations that are relatively short. Some of them say an institution can borrow from the Bank of Canada overnight, sometimes for 30 days, sometimes for 90 days. The $41 billion peak was the total outstanding, which would have had a variety of terms, and some of it has rolled off and then not been renewed at the initiative of the financial institution that had taken advantage of it.

So it's not that the bank is withdrawing access. The limit is there, and financial institutions have been reducing their use of it relative to the peak in the fall.

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

I'm just trying to understand what the Government of Canada is at risk for, because anything can happen. We're not sure. The wheels seem to be falling off the car.

We can look at what happened with AIG, where $60 billion was put in and now another $13 billion or $15 billion seems to be required. We're now talking about billions as if they're quarters or dollar pieces. People are saying that the $60 billion is money that the American government threw away.

[Jeremy Rudin]

Yes.

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

I want to focus on the Canadian government, because I'm seeing here that there may be a need for another round of mortgage backing. If we look at how much we're on the hook for in real estate, we're over a trillion. If the real estate market goes down 10% or 20%, we're going to be on the hook for the exposure to Genmark, AIG, and CMHC. That's going to require a couple of billion dollars. That might seem like chump change, but I think it's quite important to the average Canadian citizen.

There is talk that pension moneys may need to be backed or guaranteed. As for financial institutions, the banks are okay, but I don't think there are just banks out there. There are also other institutions that may need to be boosted.

I'm not sure what else there is out there. There are tons of things. That's one of the reasons we're having these hearings. This is not just about stability now, but future stability. What role is the Government of Canada going to play, and how stable will you maintain the financial market?

Let's talk dollars.

[Jeremy Rudin]

I'm sorry?

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

Let's talk dollars. How much are we potentially on the hook for?

[Jeremy Rudin]

Let's talk dollars? Okay.

[The Chair, Conservative, James Rajotte]

As briefly as you can, Mr. Rudin.

[Jeremy Rudin]

One of the important principles underlying the extraordinary financing framework is that the risk to the taxpayer is to be controlled and minimized. As we were discussing, in the insured mortgage purchase program, there isn't an additional risk posed to the taxpayer other than the risk that is already there through the operation of mortgage insurance, either by Canada Mortgage and Housing Corporation or the private insurers.

As for what protection the taxpayer has, because the taxpayer, as you've pointed out, is exposed as the proprietor of Canada Mortgage and Housing Corporation, it is the underwriting practices of Canada Mortgage and Housing Corporation, it is the fees they receive for insuring, and it is the reserves they have established, all of which are substantial.

The Bank of Canada facilities are secured lending facilities or repurchase facilities, whereby a financial institution can receive cash and post collateral, effectively, although some of them are done on a purchase basis, and they can borrow only a fraction of the value of the collateral posted. The difference between the value of the collateral and the amount you can take away is called the “haircut”, and the haircuts are established so as to protect the bank, and then the Bank of Canada and the taxpayer as the proprietor of the Bank of Canada, against the potential losses through the default of the borrower. If the borrower is unable to repay, the Bank of Canada would take the collateral. The collateral is worth more than the underlying loan, so this is the protection for the taxpayer.

When we--

[The Chair, Conservative, James Rajotte]

I'm sorry, Mr. Rudin, but we're way over time here.

[Jeremy Rudin]

I understand.

[The Chair, Conservative, James Rajotte]

Thank you for that.

We'll go to Mr. Menzies, please.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

Just as a point of clarification, Mr. Rudin, further to your answer to a question from Monsieur Laforest a few moments ago, who was asking about a common securities regulator, I know the sensitivities that the Bloc raise about this, and I remind them that what we're suggesting is voluntary. We're not forcing it down anybody's throat.

On your answer to that question, correct me if I'm wrong, but my understanding is that there is a common securities regulator in the United States, that being the U.S. Securities and Exchange Commission. Could we just clarify that? Also, how do we fit with our other trading partners in the G-7 and G-20 by not having a common securities regulator?