Finance Committee on March 3rd, 2009

[Jean-René Halde]

Since the securitization market has disappeared, these people can no longer lease cars, since they know they can no longer securitize. This is a problem.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Laforest.

We'll go to Mr. Menzies, please.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair, and thank you as well to the gentlemen who have presented here this morning.

Just to put this all in context, I think this is a very important study that we've taken on, a very timely study on measures to enhance credit availability and the stability of our Canadian financial institutions, and I think you're our lead witnesses in this, so this will frame a lot of our discussions as we go forward meeting with OSFI and the banks and all of the other institutions that impact our financial system.

Mr. Macklem, I would like to ask you some questions about our role and your comment in here in your second to last paragraph that “we are making an important contribution to the global financial system”. Through consecutive governments.... I'm not going to take all the credit for this for our government, but all of our consecutive governments have recognized the need for regulation. I think Canadians need to hear that more often and more soundly as to why we're recognized internationally, why our financial institutions are in the good position they're in.

With regard to this role you're playing as co-chair with India in this G-20 leaders action plan, why was Canada chosen for that? Is it just our financial system? Are people looking at us with envy at the fact that we've kept regulations in place, necessary regulations in place? Can you explain a little bit of that role and perhaps just highlight what you expect out of the London G-20 coming up?

[Tiff Macklem]

Sure. I guess there are a few thoughts.

As we listen to the global discussion, there is clearly a wide range of opinion out there. There's no question that things need to change. This is a very serious crisis. There have clearly been regulatory failures.

Some players are looking for a very high degree of regulation. Some are looking for a grand global regulator. I think Canada is an example of a country that is market based and very open to trade. It has yielded tremendous benefits from trade and open financial markets, but has not had the kinds of problems we're seeing in the United States, the United Kingdom, and a number of countries in Europe.

I think that reflects a better balance in Canada between efficiency and stability. I think the Canadian experience is demonstrating that you can achieve the benefits of a dynamic, open, and market-based economy. Provided you keep a sufficient balance between stability and efficiency, you can avoid the worst of these financial crises.

As I mentioned in my opening remarks, a number of features of the Canadian system have served it very well. We have higher capital standards and our banks hold healthy buffers above those capital standards. I think the cap on leverage has been enormously important in preventing some of the worst excesses from building up in Canada. As I mentioned, Canada has a cap on leverage of 20 to 1, so this has prevented leverage from going up as you've seen in a number of other countries. The world is currently going through a very abrupt and painful de-leveraging financially. Many global banks are trying to get down to about the Canadian standards of leverage.

This is an opportunity for Canada to punch above its weight internationally. We have learned, as have many others in this crisis, that even if we get our own house right, we are being side-swiped by the failures of other countries. We all have globally a responsibility and an imperative to get the global system of regulation right, and Canada I think has a good message. Sound regulation starts at home. There needs to be international oversight to ensure that others are living up to their responsibility. There are some changes that need to be made and people are looking to Canada to draw on that experience.

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

Monsieur Halde, we talked about this business credit availability program. Mr. Macklem has given us the world perspective. We, as members of Parliament--and Mr. McCallum had the same thing--are getting calls from our constituents about how to get the same availability of credit they had 12 months ago. That's a concern. We don't have the answers. I realize that part of it is that we still don't have this budget through and I guess that's why some of the money isn't out. We're working with our colleagues across there to try to get this through as quickly as possible so you can react.

On this business credit availability program, the $5 billion, how does that work? How is that shared through multiple levels: EDC, BDC, and the banking system? Are the changes to your structure meant to be competitive to the banks to encourage the commercial banks to lend more? Is that going to actually encourage them to lend more? Can you give us a little insight into that, please?

[Jean-René Halde]

The answer is that the role of BDC is to be complementary to other financial institutions. It's to help out.

Let me try to focus on the key issues. In terms of helping the banks deal quickly with issues, we'll share deals with them so that it helps them preserve capital and thus lend more. We will purchase some of their existing participation in commercial mortgages. I say existing, but it's new ones, going back maybe a month or so. Again, that's in an effort to provide them with some liquidity.

We're developing with them as we speak--and we'll launch it within two weeks, or three at the most--an operating line guarantee for exactly the situation you're describing, where an entrepreneur will see his line of credit reduced so that it's no longer 75¢ on the receivables or whatever on the inventory. For the portion that's been reduced, we'll step in and provide an operating line guarantee to bring the entrepreneur back to where he used to be.

This is all happening as we speak.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Menzies.

We'll go to Mr. McKay, please.

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

Thank you, Chair, and thank you, witnesses.

You know that they say there are lies, there are damn lies, and there are statistics. I'm looking at the second page of your presentation, Mr. Macklem. It says here that the banks provided 13.2% above the level of one year earlier; for business lending by financial institutions, it's up 11.5%; banks' traditional business is up 11.2%; household lending is up 10.7%; total consumer credit is up 9.1%. You look at that and ask, well, what's the problem? Yet simultaneously you're shovelling money over to Mr. Halde to the point that he has a gag reaction. He can barely get the money out the door quickly enough.

We know that's not true anecdotally, because every one of us around here has heard from constituents who tell us that the banks are choking off credit. Mr. Halde's bank is generally regarded as the lender of last resort. So those three paragraphs don't live in the same universe with what we know to be anecdotally true and what we suspect is actually true.

Can you give us a reconciliation between the bank's propaganda line and what appears to be the reality?

[Tiff Macklem]

Yes, I would agree that those statistics are surprising. I certainly don't want to pretend that there isn't a difficult situation out there. As you pointed out, government is taking very extraordinary actions, and there must be a reason.

How do you square the circle? Well, it's bit of what Jean-René was indicating earlier. The banks are very much at the core of the financial system, but depending on how you measure it, they're about a quarter to a third of the financial markets in Canada now. Our banks have been very resilient through this crisis, and as those numbers show, lending is continuing to grow. However, it is certainly growing more slowly, and the year-over-year numbers do mask the fact that the growth more recently is slowing, so the year-over-year numbers are coming down. If you looked at the month-over-month or quarter-over-quarter numbers, they would be weaker recently, certainly. That is part of what is showing up in the anecdotal evidence.

I think the main thing that is showing up in the other anecdotal evidence is that parts of the financial system--the non-bank parts--are what are really scaling back. Jean-René mentioned securitization markets. They have scaled back dramatically, and in some cases they are virtually closed. That's an important reason that we've introduced this secured facility that Jean-René is setting up.

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

Just let me interrupt you, because I have a very short period of time.

So for our purposes, should we be therefore focusing more on the non-bank sector than the bank sector?

[Tiff Macklem]

I think you want to focus on both, because the banks are certainly very much at the core of the system, and even if they aren't the core of the problem, they could be a bigger part of the solution. That's why they're working more closely with EDC and BDC, and that's why we have given them access to funding to ensure that they have the access they need so they can make loans.

Having said that, a lot of them are serious. The most dramatic problems are outside the Canadian banks. You've seen foreign banks pull back. Some foreign banks have closed; they've pulled out. Securitization markets are scaling back. That's bringing a lot of people who were dealing with non-banks, foreign banks, or in securitized markets into the banks.

The other thing to keep in mind is that it's not just the amount of credit; it's the cost. There's no question the cost has gone up. The conditions, the covenants on firms, have tightened dramatically, and a lot of what you're hearing reflects that.

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

I agree with that.

I'm very comforted to know that the banks are actually producing profits these days. What gives me somewhat less comfort is that they're producing profits on the backs of Canadian taxpayers, because the Bank of Canada is lending.... Governor Carney has gone about as low as he can go, as of today. The concern has been among many that this money is not being passed on to consumers. In fact, the banks are borrowing cheaply and lending expensively. I wonder how your jaw-boning of the banks is working in terms of getting the full half point passed on so the central bank prime and the bank prime are the same.

[The Chair, Conservative, James Rajotte]

Very briefly, please.

[Tiff Macklem]

Obviously, the bank just made its announcement. There's typically a delay before the private banks react, so we'll see what they do. Certainly through this crisis, with I think only one exception, they have matched the cuts in the bank rate in terms of their prime rate. This is a private sector decision.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chair.

Good morning, gentlemen, I listened to Mr. Macklem's presentation. As my colleague who spoke before me said, the Canadian financial system is highly spoken of. We are always comparing ourselves to our American neighbours. You talked about the reasons why our performance is better, here in Canada. I believe that you are right.

However, at the very end of your presentation, without any warning, you mentioned the fact that the government seeks to establish a pan-Canadian single securities commission. You did not provide any explanation for that statement. This is a major change that has not garnered any consensus among Canadians. This is certainly not the case in Quebec. We are, indeed, committed to preserving the Quebec Securities Commission so that we can determine our own priorities. To my knowledge, the system works very well. In fact, you provided the proof yourself.

How can you support the government's decision in such an indirect way? You did not provide any argument in support of the creation of a single regulator, and yet, this is a major change that the Government of Quebec stands against. In fact, the National Assembly of Quebec unanimously decided to oppose the creation of a single commission for the entire country. How can you say that the government is going to achieve this, as though everything will remain the same?

[Tiff Macklem]

This crisis began in the United States, and then spread to England, and then to other European countries. A major lesson to draw from this crisis is that fragmentation within the financial regulatory system will create shortfalls in many of the components of this system. In the United States, the problem began in the subprime market. The highly fragmented nature of the U.S. regulatory system is a major cause of the problem. Therefore, there was no overriding regulatory organization that had full oversight of all of the dimensions of the problem.

As I mentioned, our system performs much better. However, we must draw important lessons from this crisis, among them the fact that we must adopt a much more systematic overview of the financial system. We should have an overview of all markets, be they banks, other financial institutions, or financial markets. In Canada, the most fragmented system is the securities regulatory system. As Mr. Hockin pointed out in his report, there are many reasons underpinning our financial markets' efficiency, but it is important to maintain financial stability.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Did you carry out any study that proves that a unified pan-Canadian system will be more effective? In your presentation, you only dedicated a short paragraph to this issue.

Could you share with us some of the studies that show that some of the failures of the current system are caused by the existence of different commissions from one province to the next? We also have the passport system, which works very well.

[Tiff Macklem]

There are many studies. Mr. Hockin produced a report recently. In addition to that, there were expert studies that we submitted to Mr. Hockin's panel of experts. Many well-informed people have produced reports. Canada has a long history in the area.

[The Chair, Conservative, James Rajotte]

Thank you.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Could you send the clerk of the committee a serious report so that we can become familiar with the arguments?

[Tiff Macklem]

I believe that there are already many serious reports.

[The Chair, Conservative, James Rajotte]

Okay. Merci.

Mr. Wallace, please.

[Tiff Macklem]

To get back to Mr. McKay's question, I have one bit of information.

The Bank of Montreal, as well as CIBC and RBC, have already matched the bank's 50 basis point cut.

[The Chair, Conservative, James Rajotte]

John McKay is moving the financial markets as we speak here.

Thank you.

Mr. Wallace, please.