Finance Committee on March 3rd, 2009

[Jeremy Rudin]

Canada is the only country I'm aware of, and certainly the only industrialized country, that does not have a common securities regulator nationally. One of the issues that this raises, as we discussed, is the fragmentation in Canada and the inability, even with the best will and the best people if they're available, to come to quick decisions and to respond quickly to events as they develop, because of the need to coordinate across 13 jurisdictions.

The other thing it does is that it makes it impossible for Canada to speak with one voice in the international fora that look at securities regulation, in particular IOSCO, which is the international association of securities regulators, where no one is speaking for Canada at present.

[Ted Menzies, Conservative, Macleod, AB]

Just to clarify then, the U.S. does have a common securities regulator, that being the SEC?

[Jeremy Rudin]

Indeed.

[Ted Menzies, Conservative, Macleod, AB]

I think I have another minute here.

One of the reasons that I see and that I support is what we've heard in many different areas about lack of prosecutions for those who get outside the law, if you will, with people's investments. I think that's why we're pushing this forward--to protect investors. I think there's quite a difference between actual prosecutions in Canada and those in the U.S.

[Jeremy Rudin]

As I was saying to Mr. Laforest, the government's position in favour of the common securities regulator, as he pointed out, predates the financial crisis. The financial crisis certainly adds some impetus to this, in the government's view. Among the other advantages of the common securities regulator, in the government's view, is making enforcement more effective by having a single national set of laws and regulations that can be acted upon more effectively.

[Ted Menzies, Conservative, Macleod, AB]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Menzies.

We'll go to Ms. Hall Findlay, please.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you.

Thank you very much for your time today.

I had to step out, so if I'm repeating anything, my apologies.

I did have a question. There was a discussion earlier with Mr. Macklem, so maybe, Mr. Rudin, you can help answer it.

The material we received talks about the success of the banking system here in Canada, of which we are all immensely proud. There is a piece about the banks experiencing profits greater than expected or predicted, and yet at the same time there is a comment that it's not the amount of credit so much as the cost. Certainly, anecdotally, that is what we're hearing. So this morning I've already heard some inconsistencies in saying yes, there's a lot of lending happening, but we're pulling back on the securitization aspects of it--which I think is a good thing, given everything we've seen. Then we have banks seeing higher profits than expected, and yet we're also hearing that the cost of lending has gone up.

I would like it if maybe both you and Monsieur Halde could comment on that, because I have yet to really hear an answer as to why that is.

[Jeremy Rudin]

I'll see what I can do.

If we're speaking about lending to business--let's start there--businesses can get credit from banks, from non-bank lenders, and directly from financial markets. We've seen a sharp reduction in credit available to businesses directly from financial markets, of which the securitization channel is the most dramatic.

Lending to businesses by banks is still increasing, measured on a year-over-year basis. Total business credit is still rising, but still more slowly. It's not as if the banks, even though they have increased lending, have stepped in and completely offset declines in other areas.

At the same time as the volume of credit extended by banks continues to rise, the terms and conditions under which it is being extended, especially at renewal, are definitely becoming tighter. You see this in the senior loan officer survey conducted by the Bank of Canada, where every quarter the majority--a large majority--of the banks' senior loan officers say they're tightening credit conditions, even relative to the previous quarter. We know this to be happening, and of course the people who are on the receiving end of it, whether they be households or businesses, are not happy about it. So it is certainly possible that--and indeed it's what's happening--the volume of credit is continuing to grow, but the terms and conditions are tightening at the same time.

[Martha Hall Findlay, Liberal, Willowdale, ON]

That was the premise of my question. I haven't heard an answer as to why. So I might understand that, and I might understand why the securitization piece is diminishing, but I think part of our job is to be able to tell Mr. Smith out there, who's going to get a loan and either can't get it because the conditions are tighter, or could, but the cost of it is significantly higher, why that's happening. Why is it tougher for him to get a loan, and why is it more expensive?

[Jeremy Rudin]

Certainly one reason that it's becoming more expensive is that what banks and other financial institutions have to pay in order to raise the funds that they lend has gone up. It's certainly gone up relative to the riskless credit, which is the government. Then this gets reflected in the price that banks and other lenders charge to their borrowers.

To give a very simple example, before the crisis began, more appropriately during the credit boom, it was possible to get a floating rate mortgage at below the prime rate. So prime minus 100 basis points, one full percentage point, or prime minus 80 basis points was a very common price. Now--

[Martha Hall Findlay, Liberal, Willowdale, ON]

I don't mean to interrupt, but I'm going to run out of time.

It's just a fundamental question of understanding the interbank lending rate challenge. Four of the major banks showed higher than expected profits, so there's a disconnect there between being able to say that their costs have gone up because of those costs internally and they therefore must charge more, when at the same time the four major banks are showing higher than expected profits. It's that reconciliation we're having trouble with.

[The Chair, Conservative, James Rajotte]

Okay, on the question.

[Jeremy Rudin]

I'm not sure how profits relative to expectations are relevant here. Bank profits are not rising; the banks have done better than analysts were expecting them to. This improvement in expectations may well be because bank credit losses were lower than expected. I would have to look into it.

There isn't any question that the costs for lenders to raise funds to lend has gone up relative to before. I would hesitate to say that we have returned to what will be normal conditions, but I think it's broadly agreed that the new normal will not be as advantageous as the old normal. The days of a household's being able to borrow well below the prime rate may not be coming back. That may have been the exception, rather than the norm.

[The Chair, Conservative, James Rajotte]

Thank you.

I do want to follow up on that. I think you're hearing from committee members, and all of us are hearing the same concerns across the country. I'm certainly getting people coming into the office, people who have not contacted me in eight years, so these are not people who chronically complain. They say they have a business and fair-sized assets, and they say exactly what was said in the presentation: that business lending continues to rise, but the terms and conditions available to borrowers have tightened, so the issue is the cost, not the availability of credit.

You've answered some of the questions there, but in terms of what the government is proposing—the lenders assurance facility, the insured mortgage purchase program—which of these measures will help the most? When you talk about the items in the budget, which I very strongly support, it's hard to relate what's happening there to the person who comes in, like the small or medium-sized business owner. The follow-up question they ask is that while it's fantastic that you're doing this, they want to know how that relates to them, so that their cost of credit will not continue to rise.

[Jeremy Rudin]

I'll go briefly over some of the facilities. The insured mortgage purchase program is one that, as we discussed, purchases mortgages from lenders, which then gives them funds that they can on-lend. I think we see the evidence of that in rates in a couple of ways. First of all, five-year mortgage rates in Canada have declined since the beginning of the financial crisis. This is not true in the United States, where the long-term mortgage rates have gone up. I feel that the insured mortgage purchase program has been an important aspect of that. This has also been cited by a number of lenders as an important aspect.

The Canadian secured credit facility, which we are working very hard to get operational as soon as possible, will provide additional credit in the automotive sector, and there will certainly be some people who are now unable to get credit who, once the facility becomes operational, will have access to credit. I would expect to see more in terms of an expansion of overall credit, perhaps, than necessarily in terms of rates.

What's common especially for the vehicle financing arms of auto companies is to post a fixed rate but then ration who is able to get it on the basis of their assessment of credit quality. The higher the quantity of financing they have available, the more they'll be able to bring people in. They will all be high quality, but they'll still be able to not concentrate on only the most creditworthy of borrowers.

The business credit availability program will also add quantity to the amount that's available to businesses. To the extent that much of it will be on a participation basis with financial institutions, it's not going to have a direct impact on terms and conditions, but it certainly will on the amount that's available.

[The Chair, Conservative, James Rajotte]

That's helpful, but I would say for the small or medium-sized business owner who comes into our office we need to have a way of explaining to them that these are the measures that are being put in place and how they are going to impact them at their level so that their cost of credit is not going to continue to go up.

I see that I'm out of time, and I'm strict with others, so I'll move on to Mr. Pacetti.

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

Thank you.

Again, I'm trying to assess the exposure to the Canadian citizen. We were talking about the extraordinary financing framework that's available, but what's going to happen in the next two weeks? What is your forecast if things were to happen? Where will we see the most exposure?

I'll try to make the question easy so the answer can come easy. Do you see exposure in the real estate or credit markets? Where do you see the exposure coming?

[Jeremy Rudin]

I'm sorry, is it the exposure to taxpayers?

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

Exposure where the Canadian government is going to have to intervene.

[Jeremy Rudin]

I think you're asking me what the government's contingency plans are for additional facilities.

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

Yes.

[Jeremy Rudin]

We look at what's going on in credit markets all the time. We certainly do consider various options. Right now I think we're preoccupied with rolling out what was in the budget. We do consider what other possible areas of intervention there would be, and the government has stated that it stands ready to take the action that's necessary.

As far as the position of the government goes, that's all I have.

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

I think the credit market seems to be stable, but do you see any exposure in the real estate market? All of the articles coming out in the last week or so are saying that the crisis is going to happen in the real estate market in Canada; we're just a little behind.

[Jeremy Rudin]

I'm sorry, that prices are...?