Finance Committee on March 10th, 2009

[The Chair, Conservative, James Rajotte]

I call to order the thirteenth meeting of the Standing Committee on Finance. Pursuant to Standing Order 108(2), today we're doing a study on measures to enhance credit availability and the stability of the Canadian financial system.

This morning we welcome four organizations.

First of all, we have the Office of the Superintendent of Financial Institutions of Canada, with the superintendent, Ms. Julie Dickson.

We have Export Development Canada, with the president and CEO, Mr. Eric Siegel.

The third organization is the Canadian Centre for Policy Alternatives, with the Honourable Douglas D. Peters. As a former secretary of state for financial institutions, he should know the subject very well. We also have with us an economist with that organization, Mr. Arthur Donner.

The fourth organization we have with us is the Canadian Automobile Dealers Association, with the president and the CEO, Mr. Richard Gauthier, and their chief economist, Mr. Michael Hatch.

If you have an opening statement, it would be helpful if we can keep it as close to five minutes as possible, but I will allow you some leeway today.

We'll start with Ms. Dickson and work our way down.

[Julie Dickson, Superintendent, Office of the Superintendent of Financial Institutions Canada]

Thank you very much for inviting me.

The Office of the Superintendent of Financial Institutions is the main agency responsible for supervising and regulating deposit-taking institutions, insurance companies and federally regulated private pension plans.

The current economic situation will challenge all financial institutions, both around the world and here in Canada. As has often been noted, the Canadian financial system went into the economic turmoil very well capitalized, and this has helped it deal with the first wave of global financial market turmoil relatively well compared to many of its global counterparts.

The second wave, a serious economic downturn, is hitting while global financial market turmoil remains ongoing. This will affect both capital levels and profits at our banks.

The extent and severity of the impact on our financial institutions is hard to predict, but the Canadian banking system is better positioned than most other systems to deal with this second wave. The system is very well capitalized and has avoided the need for government injections of capital, unlike most advanced systems in the world. We have also seen that Canadian institutions have been successful in tapping the markets for additional capital.

Many past policy and regulatory decisions made in Canada have served the system well, including having robust capital targets, paying attention to the quality of capital, such as requiring a high percentage of common shares in the capital base, and having a prudent leverage ratio in the banking industry. At the same time, the ground continues to shift in ways that are hard to predict.

Initiatives by the government and the Bank of Canada are expected to be positive for the Canadian economy. While this is good news, our message to institutions is that it is also prudent to incorporate adverse outcomes in their planning, even if they think the economy will recover quickly. They need to consider a variety of outcomes that reflect their own unique situations and they need to stay on top of risk as it evolves.

OSFI continues to do its own analysis of the condition of financial institutions and of the overall financial sector. Such efforts are necessary, as Canadian financial institutions are entrusted with the life savings of many Canadians.

Canada is not alone, as you know, in this economic turmoil. It is a global problem and there are a host of issues being worked on by the Financial Stability Forum, the G-20, the Basel committee, and other international bodies. OSFI is involved with all of these efforts to identify what went wrong and what changes should be made to avoid a repeat of global market turmoil in the future. The international work also provides an effective means to stay on top of what is going on in other systems so that we are better placed to assess the Canadian financial system.

I would be pleased to answer any questions the committee might have.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Dickson.

We'll go to Mr. Siegel, please.

[Eric Siegel, President & Chief Executive Officer, International Trade, Export Development Canada]

Mr. Chair, ladies and gentlemen of the committee, thank you for the opportunity you've given me to speak to you here today. Your examination is timely and important, particularly in the current economic situation.

Access to credit is vital for companies of all sizes. As a crown corporation, Export Development Canada plays an important role in helping Canadian companies access credit and protect themselves against a variety of risks. This is our mandate. It is what the Government of Canada created us to do nearly 65 years ago.

Briefly, EDC provides: loans to foreign companies looking to buy goods and services from Canada; working capital loans to Canadian companies to help them fulfill their export contracts; loans and insurance to help Canadian companies invest abroad; guarantees to banks, making it easier for them to lend; insurance to protect Canadian companies against a variety of risks, notably non-payment; bonding services to help Canadian companies guarantee their performance; and finally, equity solutions. We do all of this directly and in partnership with Canadian and international financial institutions, and we do it on commercial terms without annual appropriations from Parliament.

As you may be aware, EDC has just come through a year of record performance, and here are some of the highlights.

EDC served over 8,300 Canadian companies, an 11% increase over 2007. EDC facilitated $85.8 billion in exports and investments, a 23% increase over 2007, and this includes $22 billion in emerging markets. It also includes $14 billion in business, in partnership with Canadian and foreign banks and with surety companies. So all told, in 2008 EDC added nearly $16 billion in new commercial support for Canadian companies.

In facilitating this business, we remained focused on our public policy mandate and how our activities provide benefits to Canada. In 2008 EDC helped generate 4.4% of Canada's GDP and supported some 572,000 Canadian jobs. That was 2008, and what we saw over the course of the year is that as conditions grew more challenging and risks increased, we were needed more. However, by working closely with our customers and financial partners, we were able to respond, taking on risk, adding capacity, and filling gaps for companies of all sizes. These results were achieved under EDC's traditional export-focused mandate, within its established limits, and through its existing financial capacity.

What I would like to do now is take a moment to describe how the measures introduced in Budget 2009 will help us do even more. As you know, the government has proposed a two-year temporary expansion of EDC's mandate. With this additional flexibility, EDC will bring capacity to domestic transactions that are creditworthy and supported by a viable business model. Importantly, all of this will be done in a manner that is complementary to the services provided by both the private sector and the BDC. Through the business credit availability program, or BCAP for short, the banks, EDC, and BDC will be able to consult, collaborate, and bring capacity to the market. At the same time, EDC is working with the private sector insurers to ensure its activities support and complement those already offered. To help us deploy this enhanced capacity, the government has proposed raising EDC's contingent liability limit and shared capital limits, and, if necessary, its borrowing limits. These measures build on the recent $350 million capital infusion that was announced in the November economic and fiscal update.

EDC's recent work in the automotive sector is a good example of how this additional capital can help EDC expand its service offering, and I would be pleased to elaborate on how we are working in the automotive sector with companies in this important area.

As we move through 2009 we will continue to identify opportunities to provide companies with the credit and insurance coverage they need to survive, to compete, and to succeed. This is what we're doing right now. Although EDC does not yet have the new powers proposed in the budget, we are certainly not standing still. The corporation and its employees are stepping up in response to the needs of our customers.

Let me close by providing you with a snapshot of our activity in the first two months of this year. Already this year, BDC has undertaken $9.4 billion in new business, an average of $230 million of new business every single business day. EDC has already added 419 new customers to its existing customer base and we have facilitated over 500 transactions in partnership with banks and surety companies. As I said in my introduction, our job is to provide credit and protect against risks.

This is the mandate entrusted to us by Parliament, which with every passing day we do our best to fulfill.

Thank you. I will now answer your questions.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Siegel.

We'll go now to Mr. Peters, please.

[Douglas Peters, Canadian Centre for Policy Alternatives]

Thank you, Mr. Chairman, members.

Dr. Donner and I are pleased to be asked for our views on the very important subjects under review by your committee at this time. We do not need to emphasize the extremely fragile world economic situation, about which all are aware. That world situation impinges on the lives of all Canadians, as I'm sure all of you hear daily from your constituents and from the media.

Dr. Donner and I have recently published two papers, which were accepted for publication by the Canadian Centre for Policy Alternatives. We're not here representing them but rather as two individual economists.

Our first paper concerns the effect of monetary policies when the central bank interest rate is zero or close to zero. Our second paper, which we have made available to you today and which will be published later this week, concerns the effect of central bank zero interest rate policy on fiscal policy. The fiscal policy paper particularly analyzes the different effects on the economy of programs of government spending as compared to tax cuts.

The recent central bank situation in both the United States and Canada is unique to North America. Both countries have serious recessions, price deflation, and central bank interest rates at or near zero. In these circumstances, both monetary and fiscal policy must work under very different parameters. It is the objective of our papers to examine those new relationships.

Our paper begins with the simple idea that in this deep recession both monetary and fiscal policies are needed to stimulate the economy out of this recession and to prevent the deflation from getting worse. The U.S. Federal Reserve has not only taken interest rates to zero but instituted a policy of quantitative easing. That means the purchase of large quantities of assets from financial institutions in order to maintain and improve the working of financial markets. In Canada the central bank has now reached the limit, largely, of its policy, with the rate at almost zero, and as the bank has recently stated, it must now consider other policy moves such as quantitative easing.

In our second paper we examine the effect on GDP of the two major types of stimulus proposals. The recent budget supplies the expected results of budget measures, as does the U.S. Congressional Budget Office. Both indicate a clear preference for expenditure measures over tax cuts as the best way to spur the economy to recovery.

A recent and provocative discussion paper from a New York Federal Reserve economist states that with central bank rates at zero, we are in a very different ball game. The paper analyzes the new conditions in the United States and poses the clear possibility that tax cuts may cause a contraction in the economy; that is, they might actually reduce GDP and worsen a recession. The reason is that in a deflationary environment, tax cuts may reduce inflationary expectations, thus raising real interest rates. Higher real interest rates would tend to postpone spending and reduce GDP. The much greater effectiveness of infrastructure spending will likely be the key to a rapid shift out of this deep recession. If new initiatives are needed, as is likely, then they should be in the area of federal spending on infrastructure programs.

Our papers conclude that both quantitative easing and substantial fiscal stimuli are absolutely necessary in current circumstances. The depth and duration of the global recession combined with the financial credit crisis mean that governments and central banks should risk providing too much stimulus rather than risk providing too little stimulus.

Despite the fact that Canada's financial system, especially the major banks, is in better condition than many around the world, our system is inextricably linked to the world financial system, and Canada cannot risk being less concerned about our financial institutions than are other countries. Credit interest rate spreads in Canada are unhealthily wide, suggesting that our financial system is also under strain. These are difficult times for policy-makers, and their decisions need to be made with great care.

We would be glad to answer any questions you have.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Peters.

We'll go to Mr. Gauthier.

[Richard Gauthier, President and Chief Executive Officer, Canadian Automobile Dealers Association]

Thank you, Mr. Chairman.

My name is Richard Gauthier. I am the President and Chief Executive Officer of the Canadian Automobile Dealers Association, commonly known as CADA.

CADA is the national association for franchise automobile dealerships that sell new cars and trucks. Our 3,500 dealers represent a vital sector of Canada's economy. Through our dealers, we are represented in nearly every community in Canada. When you think of our members in your riding, visualize the franchise Ford dealership or the local Honda store. Our members represent all 21 manufacturer brands available in this country.

With me this morning is our chief economist, Michael Hatch. This morning we will outline the key credit issues facing our dealer network in these most challenging times.

The retail automotive sector employs over 140,000 people in Canada and directly contributes a huge portion of its gross domestic product. It might be helpful for me to underline for you as MPs that it is important to know that dealerships are not company stores. Dealers are independent businesses that make significant investments in land, buildings, equipment, and personnel, and provide manufacturers a retail presence in thousands of communities across the country. Dealers do not take vehicles or parts on consignment from their manufacturers. In fact, dealers assume the risk of financing inventory. No manufacturer has the resources to internalize the costs that dealers bear in this regard.

It will come as a shock to no one in this room today that given the huge costs of financing dealer floor plans and operations, which can run into the tens of millions of dollars per store, predictable and accessible credit is the oil in the retail auto industry's motor. In my daily contact with dealers these days from one end of the country to the other, without a doubt the number one problem facing their businesses is deteriorating credit conditions. Our office speaks to literally hundreds of dealers every week, and not a conversation goes by when this issue, above all others, is not raised. This is not only happening to dealers on the brink. It is happening to sound, solvent businesses, often with decades-long relationships with their financial institutions and the very communities represented at this table.

Given what's been happening in credit markets in the past year, I'd like to congratulate the government on the $12 billion Canadian secured credit facility announced in January's budget. CADA communicated the need for just such a facility in the prebudget period, and the government delivered. As parliamentarians, you will know that the easiest part of any program is announcing it. Dealers across the country are still facing tight and unpredictable credit conditions from captive finance companies and chartered banks.

While we recognize the need for diligence in designing any program that allocates tax dollars, we must stress the urgent nature of the problems facing Canada's auto dealers. The government has to find a way to get credit flowing again as soon as possible and get this $12 billion into the real economy now. This program was designed as an economic stimulus, and unlike expenditure measures, the credit facility will provide a profit for taxpayers.

I'd like to thank this committee for its time this morning. I will now cede the floor to Michael Hatch, our economist.

[Michael Hatch, Chief Economist, Canadian Automobile Dealers Association]

Thank you.

Let me start by addressing some consumer issues. We must not let current market conditions facing manufacturers and dealers distract consumers from the fact that it's a very good time to buy a car in Canada. In fact, the two sides of the situation are closely related. Cars have not been as affordable in a generation as they are today. Statistics Canada has reported that the price to buy or lease a car has declined to its lowest point in 24 years in its ratio to personal disposable income.

In 2008 it took on average 18.2 weeks of pre-tax income to purchase a new vehicle in Canada, versus 21.5 weeks in the United States. Add this to the fact that all manufacturers are aggressively seeking new business and the end result is a very favourable set of conditions for consumers in the marketplace. Quite simply, there has never been a better time for consumers to enter the market.

That said, it was during the fall of last year that we first started hearing on an almost daily basis that tighter credit was becoming a serious threat to the retail car business in Canada. Not coincidentally, this is when sales started to drop.

We understand that the deterioration in credit conditions is not the only thing putting downward pressure on sales. There are also the forces of increased unemployment and depressed consumer confidence. However, a tightening of the finance screws is putting in doubt the ability of hundreds of our members to finance future sales. Dealers are being held hostage and are being forced to deal, with little or no warning, with unjustified hikes in their rates that are counted in the hundreds of basis points, while at the same time the Bank of Canada rate is approaching zero.

On credit lines often worth tens of millions of dollars, these hikes can mean the difference between survival and the closing of doors in times like these. As Mr. Gauthier said, this is happening to dealers who are solvent and have rock-solid repayment histories and long-standing relationships with their communities and financiers.

The dual effect of tighter credit and decreased sales is a devastating combination for our dealers. As you all know, we need a way to stimulate the economy and improve consumer confidence. There is no better way to do this than to provide incentives for new car sales. The most powerful way to do this is to design a robust vehicle scrappage program. The current one, worth just $300 per vehicle, does not provide enough incentive to get any old cars off the road other than those that would be retired through natural attrition.

We believe a scrappage program worth no less than $3,000 for the replacement of very old cars with new ones would provide a powerful kickstart to sales when it is needed most and would help achieve important environmental objectives.

Thank you very much. We'll now take your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, gentlemen.

We'll start with Mr. McCallum, please, for seven minutes.

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

Thank you, Mr. Chair.

Perhaps I could ask Mr. Siegel a question. Last week I asked questions to BDC. I mentioned at the beginning that I had heard anecdotal evidence from the business community that they were not acting very quickly, and that certain people had said they needn't apply if they were not already customers. Just to clarify, let me say that I have heard no such comments from the business community on EDC.

But I'd like to still ask you the same general question. When the government commits funding, we want to know how fast that money gets out the door, whether it's for infrastructure or for credit. I thought your statistics were impressive; EDC already this year has undertaken $9.4 billion in new business. But my question is, if the government has committed what I am told is something on the order of $12 billion in new credit for EDC and BDC combined, is there some way of identifying whether the particular new money related to the budget is out the door, already lent? And is there anything you can say about the speed with which you think that may happen, such as that it will be six months, twelve months, three months—that kind of thing?

[Eric Siegel]

Mr. Chairman, I thank the honourable member for his question.

Let me talk about how EDC is stepping up in this and how that stepping up will continue through 2009 and will continue to unfold when and if the new legislation is passed, thereby broadening EDC's powers further.

Go back to 2008. Our forecast was for an economic slowdown based on a global slowdown, and we expected exports to drop. We actually projected that our business volumes would be lower than they were in 2007, not higher. So as I already indicated, we obviously saw a huge surge in our business, particularly in the third and fourth quarters of the year, and that resulted in record business volumes and record jumps in customers, and so on.

Just to put some colour on that, look at things like EDC's receivables insurance program. We saw a 50% increase in the number of applications to EDC for credit insurance. There was a 62% jump in the fourth quarter alone. We saw a 19% increase in the number of credit approvals we actually issued, and again, a 31% jump in the fourth quarter. That extended to things like our relationship with the banks, which, through their confirmation business, are really confirming the letters of credit that are the payment mechanism for exporters. So they play a very important role. Last year we saw an 80% increase in the number of transactions we did with banks in that area, and in volume terms, that was more than a doubling of the volume of activity, taking us to over $5 billion in documentary credits we were covering or supporting.

Obviously, we saw at the same time that as the risk increased, so too did the risk to EDC. Not only were they riskier transactions we were taking on, but the rating of those transactions was lower, and that continued to lower through the year. The number of claims EDC began to face began to rise. We had a 13% increase last year in our claims but a 45% jump in the fourth quarter. I could go on. But the first thing to say is that really, before we received any capital infusion from the government, we were using our existing capital base to step up and write more business as it became riskier and as others basically vacated the field or didn't have the capacity.

So as we move now into--

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

I'm sorry to interrupt, but my time is limited. I am impressed with all the statistics of growth you've given, and I'm not in any way trying to criticize EDC. It sounds as if you're doing a very good job. My question is a narrower one, because our job is to monitor the government in the implementation of its budget. The narrower question is, in terms of the incremental capacity you have as a consequence of the budget, whether this committee can monitor the speed with which EDC takes up that additional capacity. And would you have any projections on that subject?

[Eric Siegel]

Yes, I think the committee can monitor it in a few ways. One, once the legislation is passed, EDC will be able to enter into the domestic market in three ways. One will be by way of re-insurance that we bring to the domestic credit insurance market. We will be tracking both the number of transactions, or the number of exporters that are supported by that, and the volume of support. That will be information we will report.

Similarly, we will be entering into re-insurance arrangements with the Canadian surety industry to provide re-insurance capacity to them. There, again, we can measure the amount of insurance written as a result of EDC's additional capacity and the number of players.

Finally, the legislation would give us relief from regulations in terms of participating as a domestic lending party. There we will be doing two things: guaranteeing banks to provide lending, and lending directly ourselves. As I mentioned before, the business credit availability program, the BCAP, actually has an obligation to measure and record the amount of lending, the activity, and the type of lending that's going to be done and to report that up to Parliament. So EDC's reporting will be both in parallel to that and part of that.

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

Thank you very much.

I think I have one minute. This is to Ms. Dickson.

Ms. Dickson, I'm not sure that it's been explicit, but it's certainly been implicit that there's a certain tension between the Bank of Canada, which wants the banks to lend more, and OSFI, which focuses more on maintaining high capital ratios for the sake of prudence.

My question to you is whether, at this time of credit scarcity, there might not be such a thing as capital ratios that are too high. Do you see a tension or a conflict there, or competition, between, on the one hand, your desire to have very high capital ratios, and on the other hand, the desire to get the money out?

[Julie Dickson]

I think the governor and I are on the same page. We have different mandates. The Bank of Canada obviously has a broader mandate over the whole economy. Our mandate is safety and soundness of financial institutions, banks, and insurance companies.

The interesting feature we have seen is that the market has really been pushing up capital levels, not regulators. Regulators have agreed around the world that this is not the time to increase capital ratios, as that could make the situation worse.

I think Canada has benefited because we went into this with higher capital ratios than other countries. That has left our banks in a position to continue to lend, whereas I don't think banks in other countries have been able to lend to the same degree.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. McCallum.

Monsieur Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chair.

Good morning, everyone.

Mr. Siegel, you listed the services you offer companies. You said that you provide commercial financing and insurance to help Canadian companies export and invest abroad. Later you said you provide loans to help Canadian companies invest abroad.

When you grant loans to companies investing abroad in order to produce goods, do you make sure that this does not result in a loss in the same sort of jobs in Canada? Foreign investment stimulates a business, but does it do so at the expense of jobs held in Canada?

[Eric Siegel]

Thank you for your question. I'm going to answer in English.

Global trade today, globalization, means that markets have become very integrated, and this is a concept that EDC has talked about: integrative trade. So in addition to export, for companies to be successful in their international endeavours, in many cases they have to invest abroad. That investment may be a result of gaining access to a country where you have to be in that country in order to be able to sell. It may be a question of being part of a global supply chain, where the principal owner of that global supply chain insists that you locate regionally with them in order to be a supplier. It may be that there are barriers to being able to gain entry into particular markets for which investment abroad is insisted. Finally, there may be cost factors associated with the overall cost of competing in a global supply chain for which a portion of one's overall product base is achieved through importation, as opposed to 100% being done in Canada.

So EDC's support for Canadian direct investment abroad is really with the intent of improving the competitiveness of Canadian companies, always with a view to looking at what benefit is derived back here in Canada. In fact, we have a Canadian benefits policy that governs all of our activities, so we evaluate transactions and determine the benefits that will ultimately be derived here in Canada.

On content, what is manufactured right here in Canada is an important part of that, but there are other aspects that can contribute to it. It could be research and development that's being done here; it could be gaining a world product mandate or helping a small business get into that market. So we are very concerned with not depleting jobs in Canada, but we also recognize that the way to grow jobs and competitiveness here in Canada is to have Canadian companies invested internationally so they have maximum access to markets, particularly emerging markets. These are the highest-growth markets.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

I am going to clarify. By helping a manufacturing company from Quebec or another province to export and invest abroad, is it possible that the company may end up putting a complete stop to its operations in Canada and that everything it used to produce here may be manufactured elsewhere from now on? Are you mindful of this possibility?

[Eric Siegel]

Companies will and must seek out the most competitive way to organize their production to be successful in the international market. In globalization it has meant that companies have had to look at how they globalize their production at the same time as globalizing their sales. There are many examples of companies that don't manufacture in Canada but make very important contributions.

In Quebec, Ericsson, which is a foreign telecom company, maintains almost 2,000 research and development jobs in Canada that we benefit from, but it does not manufacture its product in Canada. In fact, it manufactures its product in places like China, India, and elsewhere. Bombardier maintains its overall administrative head office and principal R and D capabilities in Canada, but maintains manufacturing facilities throughout the world.

We are looking to maximize the benefit Canada derives where we can, but those jobs may take different forms than just manufacturing.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

That answers my question well enough, thank you.

[The Chair, Conservative, James Rajotte]

Mr. Laforest, you still have one minute.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Mr. Gauthier, you ,mentioned an aid program worth $12 billion. Maybe it was Mr. Hatch who talked about it; I don't remember now.

You said you didn't know how this program would be implemented. You made various suggestions, such as a program to buy old cars. Is this aid program enough? Would you have had any specific recommendations to make on how it should be run? We fully understand that the problem of access to credit is affecting a lot of businesses throughout the country.

[Richard Gauthier]

Thank you, Mr. Laforest. That is a very good question.

The primary objective of the Canadian Secured Credit Facility of $12 billion is to make more cash available to the financial companies dealing daily with automobile dealers in Canada. At present, these companies cannot access the financial market. They aren't able to sell their commercial paper, which normally would be purchased by insurance and pension-fund companies, etc. This market has completely dried up on account of the world credit crisis we're now going through.

By means of the Canadian Secured Credit Facility, the Government of Canada is going to take the place of these investors temporarily and purchase their commercial paper. This way, the financial companies that could normally acquire cash on the open market to finance dealers' operations will now have access to the cash required to continue to enable dealers to build an inventory and offer attractive incentives to consumers.

The $12 billion will be used solely for this purpose. This program has no other raison d'être. We're encouraged by the fact that the government has seen the possibility of becoming temporarily involved in this program. I say "temporarily" because, as soon as the economy recovers, the investment market will no doubt return and the government will have a natural out. We don't expect that this program will have to last for more than two or three years.