Finance Committee on March 3rd, 2009

[Jean-René Halde]

Correct.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

And one of the simplest reasons, of course, is not because they're not there, but they need a willing partner, and traditional financing is not available to rural areas. So we have a bit of a box here. Does that mean you are not going to participate, or you're not able to go as a stand-alone yourself?

[Jean-René Halde]

We can certainly go stand-alone ourselves.

Let me try to respond. We have 100 branches across Canada, quite candidly, most of them in relatively large or medium-sized urban centres, very few in the more remote community. What we do have, though, is an alliance with the SADCs--the community futures, CFDCs in English. We have about 262, I believe, alliances with them. So we try as best we can to extend the reach to those smaller communities through the CFDCs; they bring us the bigger ones that honestly they don't feel comfortable doing, and that certainly helps.

As far as rural areas are concerned, as you well know, a lot of that is being handled by Farm Credit Corporation. That's much more their balliwick than ours.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I have two thoughts.

You mentioned the CFDCs, which I'm pleased you did, as a willing partner. When we were talking about default rates, you mentioned that BDC, obviously, has a higher default rate, where in reality the CFDCs have a lower default rate than even the chartered banks. For most cases it is because, of course, they're naturally volunteer-driven at the local level. They can make intelligent decisions based on facts they have right in front of them on a consistent basis.

Would it not then make sense to saddle up your responsibility even more to the CFDCs than some of the chartered banks in a lot of these rural areas?

[Jean-René Halde]

We're working very hard with the CFDCs. We're trying to really work in harmony with them, so they can refer as many as they possibly can to us and we'll be happy to help.

As I said earlier, we are working with the financial institutions, so if they're not comfortable with something and they think we should be participating, we'll be more than happy to do that. That's our role.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

You mentioned the situation, of course, we have with departing lenders. This is anecdotal evidence once again from a number of constituents. We have particular corporate clients who are losing their traditional funding, be it foreign banks or hedge funds or whatever. Already a client with BDC and other partners, they are viable, solid, working along, and when requested to participate obviously in relieving some of the pain from the departure of funds, they have been told, “It's not a question of whether or not you're viable; we don't have the portfolio fund to be able to do that.” Now, is that correct?

[Jean-René Halde]

That certainly is not correct. We'll be happy to help if we think it's an appropriate file.

I'll give you a very simple example. We're in the midst of financing three fish-processing vessels that were being worked on by Glitnir Bank of Iceland in Newfoundland. Glitnir Bank basically disappeared. We're stepping in to finance the three vessels. As well as we can, when there is a gap, we try to step in.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you. I'd like to ask Mr. Macklem a question related to the soundness of the banking system in Canada, with which I agree, at least in relative terms. My question has to do with the proposed merger ten years ago. I've heard the theory that turning down the merger, arguably--I'm not putting this, but I've heard the view--contributed to this financial stability. As you may know, ten years ago, when the merger was proposed, I was the chief economist for the Royal Bank and at the time was in favour of the merger. But I remember, thinking back, that there was language about going global, kicking butt, growing up to be like Citibank--and we all know what happened to Citibank.

My question to you--and I realize it's speculative and can't be answered definitively--is with the benefit of ten years of hindsight, do you think that in terms of maintaining a low risk profile for the Canadian banking system it was perhaps a prudent move for the government to turn down those mergers and thereby perhaps reduce the overall risk to the system?

[Tiff Macklem]

It's certainly true that if you go back a few years, the Canadian financial system was criticized: it wasn't sufficiently dynamic and innovative; it wasn't keeping up or leading-edge; size was critical to success on the global front; if you looked at the relative rankings of Canadian banks, there were no Canadian banks in the top 25 banks in the world.

I think certainly with the benefit of hindsight, Canada, as I mentioned in my opening remarks, did a better job of balancing stability and efficiency. When you look at that over the cycle, that has allowed our system to perform better.

A recent Financial Times article called Canada boring, and said the world needs more boring. I think there is a lesson there. If you look at Canadian banks now, it changes every day, but the last time I looked we had at least two banks in the top 25 in the world. This is on the basis of market capitalization. Obviously our own banks' market capitalization has shrunk quite a bit, but others in the world have shrunk a lot more. So our banks are now actually quite large in the world.

[John McCallum, Liberal, Markham—Unionville, ON]

Working around that language, it seems to be a qualified yes to the idea that it might have been....

[Tiff Macklem]

I'll let you decide on where I am. I think the message is clear that the Canadian example of putting more weight on stability has served this country well.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McCallum.

Mr. Macklem, I have a note that you have to leave at 10:15, but Mr. Rudin will be staying. Is that correct?

[Tiff Macklem]

Yes, I'm sorry, I do have to leave. I can take one more question.

[The Chair, Conservative, James Rajotte]

Before I go to Mr. Dechert, I want to ask one brief question. On the bottom of page 3 you say the “Canadian housing finance market does not have a large sub-prime component that led to the recent problems experienced in the U.S.” Are you concerned at all about the banks' liabilities in the U.S. that are owned by Canadian banks?

[Tiff Macklem]

Your question is about Canadian banks that have activities in the U.S.? That certainly is something that OSFI has been looking at closely. I think we're satisfied that they've managed those risks. Obviously it's been a more dynamic market, and the banks do need to manage that. I think we're quite confident that our banks are sound.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Dechert.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair.

I want to thank both of you gentlemen for your presentations today. A lot of people have spoken very favourably about the Canadian secured credit facility that was proposed in the budget. I think it bears repeating that none of that money will be spent until the budget is passed, something that all of us here at Parliament have to proceed with as soon as possible.

You both mentioned that you are in the process of consultations right now with the public on the structure and the criteria for that facility. I'm wondering if you could give us a summary of some of the things that are being considered, and some of the submissions that you've heard on both the structure and the criteria for how the funds, as you might see them, will flow?

[Tiff Macklem]

I'll let Jeremy speak to that, as he's on the front lines of that one.

I'm afraid I'm going to have to leave. Thank you very much. I appreciated the opportunity to be here.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Rudin.

[Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance]

Thank you. I'd be glad to respond. And perhaps Mr. Halde, who is participating in the consultations at least as much as I am, will add something. We'll see.

The organizing principle of the facility is that it's going to purchase securities. They are called term asset-backed securities. These are pools of loans or leases secured by vehicles or equipment.

We want the facility to have a near term and significant impact on access to credit in the market—on which we had a question earlier. These will be loans or leases where the underlying clients will potentially be households, and potentially firms as well.

We also want to design the facility in such a way that it will help, if at all possible, to restart the securitization market and to return financing from this area more to the private sector than the public sector. And to the extent possible, we want to design the facility in a way that it reduces the likelihood of a future episode like this, where the government is obliged to step in to reduce the severity of these episodes. We don't want these considerations to slow down the facility unnecessarily, but want it to have a significant impact in the near term.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Which institutions do you see as selling these portfolios to the government?

[Jeremy Rudin]

The institutions that have spoken to us and have the most interest are the financing arms of the automakers, both Detroit-based and others. There's also interest from leasing companies, more generally, who do automotive leasing. There is also interest from equipment leasing companies as well.

[Jean-René Halde]

Just so you understand the discussions, the challenge for us is to buy triple-A paper, so there's no risk for the Canadian taxpayer. The challenge is how do you make some of that paper triple-A, given the uncertainty of the various automobile manufacturers? That's what we're trying to address as we speak.