Finance Committee on March 5th, 2009

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

--what's the reality of the source of capital for our financial institutions, our big five charter banks? There's a perception that they get all of their money from the Bank of Canada at next to zero and then they're getting a massive infusion of government money, and yet they're charging exorbitant rates. Could you allay that perception for the general public?

[Pierre Duguay]

Yes. The money that the financial institutions are getting from the Bank of Canada is about $35 billion. The assets of the banking system, I don't have the figure with me, but they're in the trillions. So that's a very small part of their money.

Banks basically raise money by raising deposits, they make loans, they issue short-term and longer-term debt. The longer-term debt that they're issuing, of course, is more expensive because markets are not very receptive.

However, Canadian banks have been able to raise capital, they've been able to raise preferred shares, and they've been able to raise five-year money on the markets. And another source of money of course is through the IMPP, the insured mortgage purchase program, which so far is about $40 billion, but there is potentially $225 billion. Again, that is a small proportion of their total assets. Their big funding is that they borrow money and it costs them something.

[The Chair, Conservative, James Rajotte]

Thank you.

I just want to remind members—and it was a very good question—when I say 20 seconds, if you ask a very good question that takes longer than that to answer, it puts the chair in a bit of a bind. So I appreciate the question, but 20 seconds means 20 seconds, unfortunately. But we may come back to that in later rounds.

Mr. Pacetti, please.

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

Thank you, Mr. Chair.

Thank you, Mr. Duguay.

Just a couple of quick questions.

Deterioration is obviously going on in different sectors at different times. We seem to be following what's happening in the United States, so we see they've had trouble in their financial sector, with the banks and insurance companies in particular, and real estate. In Canada, we haven't had the effects of the real estate sector.

I notice the last round of liquidity did not include any transfers for mortgage loans. Is the Bank of Canada going to be involved in mortgage loans? I understand there's some involvement when in your presentation you talk about securing some of the CMHC.... Can you just explain how that works, how you treat the different sectors, whether it's real estate or non-real-estate securities?

[Pierre Duguay]

Right now, in terms of our purchase and resale agreement facilities, if we start with the Bank of Canada facility, we take a large number of assets that are eligible to get this financing. That includes government securities, of course. We allow the bank-sponsored ABCP, especially the ones that meet our standards of transparency. That's a small way in which we try to help that market. We also accept mortgage-backed securities. At times banks would provide us with mortgage-backed securities against these loans, but that really is a decision of the banks themselves or the financial institution. I say banks, but more than banks are involved. It's the decision of financial institutions to decide what they pledge as assets against the liquidity they're getting from us.

The insured mortgage purchase program is more specific to the mortgage. The issue here is it is really a way of providing liquidity to the banks, reducing their cost of funding generally by taking an asset, which does not add to the government risk, because the government is already guaranteeing these residential mortgages through CMHC. It's a vehicle to provide liquidity, and by providing liquidity, by reducing the cost of funds of banks, we're making room for banks to do some lending. Now, where they do their lending in a sense—

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

That's the question, the liquidity. What is going to happen if there's a deterioration in the real estate market and if there are some problems with some of the companies going under and there is going to have to be some pension support, whether it be private pensions or public pensions?

Mr. McKay brought up the Caisse. How is that going to affect the liquidity of the market and affect the way the Bank of Canada operates?

There are other sectors. I understand you're also backing the loans and leases on vehicles and equipment. But if you look at what's happening in the States with the insurance companies, huge amounts of money are being invested, and some of the fallback, or some of what is being said, is that when you're throwing $60 billion to support AIG, and a couple of months later people are saying it was a waste of money, and they need another $15 billion, it has to affect the way the Government of Canada operates.

We had the officials from the Department of Finance. My understanding was they don't really have a plan if something were to happen. Now I'm asking the Bank of Canada if you have a plan. You must have a feeling for which sector is going to deteriorate and is going to need some help, whether it be from the Bank of Canada or the Government of Canada, and how you're going to help so the markets don't get affected in a worse fashion than they are already being affected.

[Pierre Duguay]

Thank you.

Yes, we are in a recession. There will be losses. There will be difficulties, and obviously a larger number of sectors will be in difficulties, in a sense.

To the extent that there are losses that have to be absorbed, that will have an effect on confidence and an effect on markets. The markets may be more reluctant to lend. Typically, yes, risk premium—

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

Do we have a magic number, if the real estate is going to go down 15% or 20% or 25%, and you know, if we have a certain number of dollars, where pensions are going to need to be supported? Do we have any of those numbers available?

[Pierre Duguay]

No, not to my knowledge. We have looked at the Bank of Canada in our December financial system review. We have looked at the household sector. As you know, the household sector is very indebted or has increased its debt considerably. Most of that, of course, is mortgage debt and most of that is insured debt but we have looked at the implication of a very bad outcome for the household sector, what the implication of that would be on the banks, and you can look at the report.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Duguay. I'm sorry, Mr. Pacetti is out of time.

We'll go to Mr. Dechert, please.

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

Thank you, Chair.

Thank you, Mr. Duguay, for your presentation today. I just want to take a moment to recognize the very important work you and your colleagues do at the Bank of Canada. I think the relative strength of the Canadian economy and the Canadian financial system is due in no small part to your guidance and that of your colleagues over the years. So I want to acknowledge that.

This morning you described in your remarks the many things the Bank of Canada has been doing over the last few years to stabilize and increase liquidity in Canada for business and consumer lending. You pointed out there has been strong growth, in fact, in total household credit and there has been limited deceleration in the growth of total business credit. But business and consumers are not borrowing and consuming as much as our economy needs to spark a recovery at this point in time. So psychology is obviously very important.

As you pointed out, the 2009 budget contains a number of stimulus measures designed to encourage consumer and business spending. This morning I heard Mayor Francis of Windsor, Ontario, commenting that his community needs stimulus now, in regard to layoffs at Chrysler. They need it immediately, as soon as possible. Could you comment on the timing of the injection of the stimulus by the government, the non-monetary stimulus measures in the budget, and the effects of waiting too long to put that stimulus into the economy?

[Pierre Duguay]

Thank you.

Yes, the recession is now, and obviously the sooner the stimulus comes, the better, because in part when people hear bad news, that does affect confidence and the effect on confidence can certainly amplify the problems. When consumers are nervous about their employment prospects, they stop spending. At that point, it doesn't matter much whether credit is available or not; they prefer not to go into debt.

So it's very important to get the stimulus now, to cut this off at the pass, if you wish, so that the people can see that the recovery is coming, that the recession is going to be temporary, and that they don't need to worry excessively about the future. That is important. As I said, it's the confidence-boosting effect of fiscal policy, and monetary policy for that matter, that is helpful here.

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

Thank you very much. Obviously you would agree it's important for those of us here in Parliament to do everything in our power to move this stimulus into the economy as soon as possible. I can give you my personal assurance that I'm going to do everything I can to make sure that happens.

You also mentioned the Canadian secured credit facility that is proposed in the budget. I'm very interested in that. I'd like you to comment on how it should be structured and how important that facility is to our economy in terms of enabling business and consumer consumption that will drive the recovery of our economy. Again, how quickly do we need to move on that facility?

[Pierre Duguay]

The importance to the economy is that, as you know, leasing companies are having difficulties; they cannot raise capital easily on the market, and leasing is an important part. Business owners, if they cannot buy equipment, would lease it. Many consumers prefer to lease a car instead of buying. To ensure that the system functions, it is important that leasing be available. That's the part of it.

In terms of how that is restructured, as Tiff or Jeremy mentioned yesterday, they are currently in the process of consulting with the industry, with the major stakeholders. I know the Bank of Canada is involved in that. It's not me personally, but we are providing some advice.

I cannot give you more details. I'm sorry.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Dechert.

We'll go to Mr. McKay, please.

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

Thank you, Mr. Chairman.

The assets of the Bank of Canada have basically flipped in the last year. If you looked at your asset portfolio last year, it was mainly government bonds, T-bills, stuff like that, rock solid. Now you've flipped it and it's much less government bills and T-bills and now it's a bunch of arguably still half-decent stuff.

In the process of that we all get poor, and certainly the quality is not there. In the provision of liquidity into the market, are you anticipating that the quality of your asset portfolio will maintain that trend of being other than T-bills, Government of Canada bills, things of that nature?

[Pierre Duguay]

Thank you for that question.

Yes, our assets have changed considerably. For the committee I'll mention that our assets are normally about $50 billion, about $20 billion in treasury bills, $30 billion in bonds. With the last operations we've done we've increased our lending through PRA to financial institutes by $35 billion. To make room for that we sold about $10 billion to $12 billion of our treasury bills. The government has sold treasury bills and put some deposits in the bank for the rest. Our total balance sheet has gone up from $50 billion to a little less than $80 billion.

The quality of our assets is still very high. In terms of the purchase and resale agreement, yes, we are purchasing less liquid assets than the government. So banks are pledging that to us. It's not a purchase per se, it's a term purchase and resale. So the institution that is pledging that asset to us has an obligation to come and buy it back from us. In a sense, we can look at this as kind of a loan, if you wish.

Secondly, the assets we accept are longer-term government securities, some commercial papers, bankers' acceptances, mortgage-backed securities. The assets that we accept are still very high-quality assets. And we are having our cut on that, so the lending is less than the value of the assets.

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

Did you say you're losing money on that part of your portfolio?

[Pierre Duguay]

No, we're not losing money on that. In fact, we're earning money on that part of the portfolio because the rate at which we lend to the bank is larger than the rate we would have gotten on treasury bills, and the rate the government has on treasury bills.

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

So you're dealing with banks, insurance companies, pension plans...?

[Pierre Duguay]

At this point, no. We're dealing with investment dealers, the primary dealers. We're dealing with the members of the payment system, the large-value transfer system--the banks and large deposit-taking financial institutions.

Now, the facility that we announced last week will be dealing with insurance companies, with—

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

So who are you dealing with this year that you weren't dealing with last year?

[Pierre Duguay]

The term PRAs were done with the primary dealers only before, and now they're done with every member of the large-value transfer system. So that's a key point, in terms of extension.

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

I don't understand the difference between a primary dealer and a secondary dealer. What's the difference?