Finance Committee on March 12th, 2009

[The Chair, Conservative, James Rajotte]

I call the 14th meeting of the Standing Committee on Finance to order. The order today, pursuant to Standing Order 108(2), is to continue our study on measures to enhance credit availability and the stability of the Canadian financial system.

We have four organizations here with us this morning. First of all, we have the Canadian Bankers Association; second, the Financial Consumer Agency of Canada; third, the Canada Deposit Insurance Corporation; and fourth, the Canadian Vehicle Manufacturers' Association.

We'll give each organization about five minutes to make an opening statement to the committee, and then we'll proceed to questions from members. We'll go in that order.

We'll start with the Canadian Bankers Association, please.

[Nancy Hughes Anthony, President and Chief Executive Officer, Canadian Bankers Association]

Thank you very much, Mr. Chair, and good morning.

I am joined by my colleagues from the Canadian Bankers Association—Terry Campbell, Vice-President of Policy and Darren Hannah, Director, Banking Operations. We also have for you an information package on the issues that we will be discussing this morning, and which I hope has been handed out to you.

I hope you have our information package there. I won't read the opening remarks; instead, I will just briefly give the highlights of the issues we will be discussing this morning.

To begin, I would like to highlight a few statistics about the contribution of banks to the Canadian economy. In terms of employment, banks and their subsidiaries employ a quarter of a million Canadians—this is an increase of 16% over the past 10 years.

As well, most Canadians are shareholders in Canadian banks, either directly or through the Canada Pension Plan (CPP), other pension and mutual funds. Speaking of taxes, of course, banks paid close to $9 billion to governments in Canada last year.

Banks make an important contribution to the economy, and I'm sure the members around this table realize that. The real message today is that Canadians need to continue to have confidence in their banking sector.

Reflecting on the turmoil in the global financial system, we need to remember that this turmoil did not originate in Canada. Banks in Canada have largely avoided the difficulties that banks around the world are now facing, although they are not immune, and they've had no need for direct government intervention, as we have seen in so many countries around the world. Why is that? I think most observers point to four principal reasons.

First of all, we have a national system with very well-diversified banks.

Second, our banks in Canada are among the best-capitalized in the world, and they are strengthening their capital levels with new capital being raised from investors in the marketplace. Also, they are prudent and well-managed.

I think the third reason is that our regulatory system is very strong, very robust. I know that this committee has heard from the Superintendent of Financial Institutions, Ms. Dickson. We are also regulated by the Financial Consumer Agency of Canada, and you have Ms. Menke here with you today.

I think the final reason our banks are so strong in comparison to others right now is that Canada's mortgage market is very different from that of the United States. In Canada, by far the majority of mortgage loans are prime loans. We have avoided that subprime problem. Mortgage arrears remain very low in Canada. They are close to historic lows, in fact.

Clearly, each of these attributes has served us well through very difficult times. I stress, however, that a strong and stable banking system is essential to helping Canada get through these tough economic times.

I'd like to turn briefly to the issue of credit, something we're certainly hearing a lot about from members of Parliament. Let me assure you that our banks are continuing to lend to creditworthy customers. The facts prove it, and I'm sure we will speak about that matter today.

On the consumer side, Bank of Canada figures for January show that consumer credit continues to grow. It grew 14% from January to last January. In terms of business credit, bank financing of business is up almost 11%, well in excess of the growth in financing in the marketplace, which is about 4%.

It is extremely important to note that banks represent about half of the business credit marketplace and only about a quarter of the total financing marketplace. In your information kit you have a little backgrounder called “Business Credit Availability”. A pie chart on the second page shows you that banks represent about 56% of that business financing marketplace.

There has been a serious slowdown of business credit from other sources, from sources other than banks. Some of them are non-banks. Some of them may be lenders, and we have a representative here today. Some Icelandic banks, for example, as you know, have completely left the marketplace.

Banks are trying to fill the gap left by these non-bank providers, but they can't do it all, so we were pleased to see that there are some steps to address this issue in the budget, specifically by funding increases for the Business Development Bank of Canada and for Export Development Canada as well. Those complement banks, and we're working very closely with those two agencies to make sure that credit flows to creditworthy businesses.

There is a new reality in the international credit marketplace. Certain types of credit, such as commercial paper and the securitization market, are just no longer functioning properly around the world. Those that are functioning are available at relatively higher costs, so that does affect the banks' overall cost of borrowing and certainly has an impact on the consumer.

Risk is also another factor affecting the rate of interest on loans. Unfortunately, we are in a recession, which does have an impact on both retail and business customers. As prudent lenders, banks need to adjust their pricing to reflect this new risk reality, but I stress that it is really important to remember that banks are open for business and that credit does remain available for creditworthy customers.

To conclude, Mr. Chair, Canada's banks are strong. Canadians remain confident in their banking system. This is an advantage for Canada that other countries do not have, and certainly keeping that advantage will be crucial to the recovery of Canada's economy.

Thank you very much. We'll be pleased to answer your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Hughes Anthony.

We'll go now to Ms. Menke, for your opening presentation.

[Ursula Menke, Commissioner, Financial Consumer Agency of Canada]

Good day, Mr. Chair.

Thank you for having invited the Financial Consumer Agency of Canada to appear before the Finance Committee today.

I am accompanied by my colleague Lucie M. Tedesco.

While the role of my agency is limited with respect to the specific nature of the present study, it's my belief that the overall effect of our work produces very real and widespread benefits for individuals and the Canadian financial sector in general.

The agency has two principal roles. First, we promote and ensure compliance by federally regulated financial institutions with the consumer provisions in their legislation.

The agency is also charged with a consumer education role. Through its consumer education mandate, FCAC provides objective and timely information to help Canadians understand and shop around for day-to-day financial products and services.

It is worth nothing that the compliance and consumer education roles of FCAC's mandate are inextricably linked. They support and complement each other. In essence, the consumer provisions provide consumers with detailed disclosure about the product or service they wish to procure. Our education role is aimed at ensuring that they have the knowledge and confidence to make informed use of that disclosure.

We do not, however, have a role to play in the setting of interest rates or service fees, so we try to help consumers by providing them with objective financial information and education. Financial products such as credit cards and bank accounts are an indispensable part of everyday life.

From our surveys we have learned that many Canadians are not using their financial products to their best advantage. To take the example of credit cards, many consumers are not using them as a method of payment as they should be used, but instead are relying on them to borrow money. That is an extremely costly way of borrowing. Through our consumer education publications we inform consumers about the advantages and disadvantages of different financial products and services, explain the costs and other features, and provide them with alternatives to consider.

Through our website, we offer interactive tools that allow consumers to quickly and easily compare the different options available to them for credit cards, banking packages, savings accounts and mortgages. We regularly update these tools to ensure that consumers have access to accurate and timely information. Our credit card selector tool, for instance, allows users to compare more than 200 credit cards to find the best product for their needs.

But beyond information on financial products and services, we promote broader financial education. We have directed our initial efforts at young Canadians. We believe that early exposure to financial skills will serve people well throughout their lives. With the British Columbia Securities Commission we launched a new course last fall called “The City: A Financial Life Skills Resource”, aimed specifically at the learning needs of 15- to 18-year-olds. We're excited about the program because it is designed to give all young Canadians a solid foundation of basic financial acumen. There are no shortcuts or magic solutions to elevating money smarts. It is a long road, but I believe we can make headway through initiatives such as “The City”.

All interested parties and governments at various levels, working together with private and voluntary sectors will achieve the greatest impact and make a lasting, meaningful improvement in financial knowledge and the financial future of the greatest number of Canadians.

I would like to speak to an important compliance initiative that we have undertaken recently to benefit consumers. Over the past year, we have initiated a process to review and modernize our Compliance Framework, which sets the guiding principles for our supervisory work. We intend to implement a compliance approach that builds upon and broadens our current complaints-focused compliance framework, which has been in place since 2002. Our modernized framework will seek to actively promote compliance in the marketplace through a risk-based oversight approach. This approach will permit us to better identify compliance risk areas in the marketplace and address potential market conduct compliance issues more effectively and in a more timely manner. While such an approach to compliance will be new for FCAC, similar approaches have been implemented effectively by other regulators in Canada and abroad. Our discussions with these regulators have highlighted the benefits of such an approach which we believe will lead to a more responsive framework to the benefit of all stakeholders.

I would like to thank you for the opportunity to appear before the committee. I look forward to answering any questions you may have.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Menke.

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

[Bryan Davies, Chair of the Board, Canada Deposit Insurance Corporation]

Thank you, Mr. Chairman.

As chair of the board of CDIC I appreciate this opportunity to meet with you and members of the committee to discuss the role our crown corporation plays in enhancing credit availability and the stability of the Canadian financial system.

With me is Michèle Bourque, executive vice-president, insurance and risk assessment. Unfortunately, Guy Saint-Pierre, our president and CEO, is ill today, but I can assure you that Michèle is a very able substitute for him.

I appreciate that you have other witnesses today with whom you wish to have a dialogue, so I will keep my remarks brief.

As the members of the committee will know, in framing CDIC's statute, Parliament specifically mandated the corporation “to promote and otherwise contribute to the stability of the financial system in Canada”. I would suggest through another one of our objects, namely to provide insurance against the loss of part or all of deposits, we also contribute to enhancing credit availability.

As of April 30, 2008, we insured some $512 billion in deposits in 80 member institutions. Canadians are comforted by the existence of the insurance provided. Deposit insurance supports their willingness to place deposits with the banks, trust companies, and other entities comprising our membership. Those organizations in turn can mobilize the deposits entrusted to them to make credit available to a broad range of borrowers.

For Canadians to have the type of confidence that an effective deposit insurance scheme provides, they must first be aware of its existence. To help increase that level of awareness we have been pursuing a series of public information campaigns over recent years. Our strategy for this year includes a six-week national advertising campaign, delivered in concert with our partners at the AMF in Quebec, which is just now drawing to a close. I hope some of you have seen the television and print advertisements that form part of that campaign.

We have pursued similar campaigns during the RRSP season in prior years, which is a period when the general population tends to have a higher interest in such matters. But this year we plan to resume our publicity program again in the fall.

Judging by the extent of inquiries we have been receiving at our call centre and via our website, we know that Canadians have a heightened desire to know what is covered by deposit insurance and how it works. Although no CDIC member has failed in over 13 years, Canadians have observed media coverage of failures in other jurisdictions, including some where the existing deposit insurance schemes did not offer the type of comfort that we believe our approach here in Canada provides. This definitely raised anxieties in some, and it is an important part of our mandate to put to rest those types of unwarranted concerns.

Another way we contribute to the stability of the financial system is by being ready to act should the need arise. We have dealt with 43 failures since our creation in 1967. In the process we've protected $26 billion in deposits held by over two million Canadians. Throughout this, not one person lost one penny of insured deposits.

As an organization we focus on readiness. In cooperation with our federal partners--the Office of the Superintendent of Financial Institutions, the Bank of Canada, the Department of Finance, and the Financial Consumer Agency of Canada--we monitor the health of our member institutions so we can be ready to take actions to intervene if we ever need to. I can state that the level of inter-agency coordination and information sharing in Canada is the envy of many other jurisdictions throughout the world.

Another aspect of readiness is ensuring that appropriate tools are available to CDIC to enable it to act effectively and efficiently should the need arise. In that regard Bill C-10, now before the Senate, contains several key measures related to CDIC's powers. These measures provide CDIC with greater flexibility and reflect best international practices, in keeping with Canada's commitment to the G-7 plan of action to stabilize financial markets and restore the flow of credit.

Mr. Chairman, and members of the committee, Michèle and I would be pleased to answer any questions you might have.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Davies.

We'll go to Mr. Nantais, please.

[Mark Nantais, President, Canadian Vehicle Manufacturers' Association]

Thank you very much, Mr. Chairman.

Good morning, ladies and gentlemen.

The CVMA is very pleased to be here to discuss the current state of the auto sector in Canada and the importance of credit to the operation of our industry. With me today is Mr. Peter Andrew, who is the regional director of consumer lending with the General Motors Acceptance Corporation.

The CVMA, for more than 80 years, has represented Canada's leading manufacturers and sellers of light and heavy-duty vehicles, namely Chrysler, Ford, General Motors, and Navistar. By way of background, it is important to note that our member companies touch virtually every province and every territory and every major community. Through their 45 Canadian facilities, our members directly employ about 35,000 Canadians and support roughly 50,000 Canadian retirees.

They have over 1,750 dealers in their networks and literally thousands of suppliers and business partners across the country in a wide variety of industries, including rubber manufacturing in Nova Scotia through to aluminum in Quebec and B.C. and petrochemicals in Alberta.

Their vehicle assembly and parts manufacturing operations are the backbone of their operations in Canada as well as the pivotal link to the broad direct and indirect supplier network across the country. Chrysler, Ford, and General Motors continue to produce 70% of all cars and trucks in this country and to purchase over 80% of all Canadian-produced parts and components.

Recently there has been much attention in the media and in public and political discussions to considering what is the best public policy direction to go in to support Canada's auto industry. This is not a binary question that can be reduced to an either/or response. Let me be absolutely clear. We require a comprehensive support package, which must be implemented immediately, to help stabilize the vehicle manufacturing base and retail network in Canada: first, repayable bridge loans for those manufacturers who require it; second, credit facilities for finance companies and suppliers—we must free up credit market access in a manner that is affordable to those in our industry needing it, and ultimately the consumer; and third, a direct but very simple consumer stimulus in the form of a vehicle scrappage program to help kickstart new vehicle sales and help instill consumer confidence in the market.

If we lose our focus, specifically on the first and second points, Canada risks losing critical elements of its auto manufacturing footprint, which includes the substantial, highly interdependent supply chain that Chrysler, Ford, and General Motors, as well as Toyota and Honda, depend upon. As an export-driven economy, Canada cannot afford to risk losing an industry that exports 85% of its output to the United States.

A consumer stimulus in Canada, however, by and of itself, will not be enough to support this industry. As such, the first priority for government must be to continue to offer short-term bridge loan financing to manufacturers proportional to that being made available in the United States. This financing is essential to stabilize Canada's automotive manufacturing base. Without this support, manufacturing operations, including the supply chain, will without a doubt quickly migrate to other jurisdictions that are fully supporting their manufacturers. This would have substantial negative economic ripple effects across the entire economy, which according to some studies would mean hundreds of thousands of job losses, along with the loss of tens of billions of dollars in tax revenues at all levels of government—not to mention the huge additional burden on municipal, provincial, and federal social assistance programs, a reality that every taxpayer should be concerned about.

The second priority must be the support for automotive finance companies through the creation and implementation of the much-welcomed Canadian secured credit facility, as announced in the budget, as well as the extension of credit to auto parts suppliers through the BDC and EDC.

Auto finance companies are a critical arm in the auto value chain, in that they provide financing loans and leases to consumers to purchase vehicles as well as the majority of wholesale floor plan credit for dealers' vehicle inventories. In essence, they help manufacturers move vehicles from factories to consumers.

Normally, auto finance companies raise the necessary capital in traditional markets. Unfortunately, despite a long and successful history in auto finance, the markets for all asset-backed securities, including automotive, dried up in mid-2007. This drying up of financing markets has as a result led directly to lower consumer sales, lower dealer purchases, and a very stark decline in vehicle leasing as a lower-cost option for consumers, and in the end has significantly reduced auto production.

Given their positive history, investment-grade ABF securities offer Canadian taxpayers a high-quality and low-risk investment that will provide returns on investment, and as such they are an excellent investment for the government.

To be fully effective, however, the facility must be expanded beyond the original amount, given that auto financing and leasing assets in themselves are worth roughly $55 billion, representing virtually half of the asset-backed financing of the vehicle and equipment leasing industry.

While the announced $12 billion facility is an excellent start, it will need to be expanded to meet the goals established by the government itself to get credit flowing to Main Street, given the size of auto financing in Canada. The facility must be set up to provide the flexibility needed to raise necessary funds in the constantly changing credit markets. The facility must improve access to dealer inventory financing; this will allow dealers to order more vehicles from the factory and provide consumers with greater choice in vehicle selection. Finally, it must be established as quickly as possible to fulfill its goal of economic stimulus, as it will help find a bottom in the Canadian sales market by providing more credit for consumers to get back into the vehicle market and will provide the capital needed to support the small and medium-sized business represented by our dealer networks.

In light of this, the government's goal of stimulating the economy can be best accomplished quickly by providing those companies, whose expertise is in providing credit through ABF backed by vehicle loans and leases, with access to sufficient amounts of the CSCF to kickstart the sale or lease of vehicles. These companies can quickly generate the volume of business needed to get credit flowing again on Main Street Canada. Federally regulated institutions must be prepared to support and promote the term ABS, which represents a good low-risk business for them to pass through to the CSCF.

While the facility is most critical for immediate implementation, the industry has also suggested that the government should introduce direct consumer stimulus for auto purchases to strengthen the Canadian auto market, possibly including tax holidays and fleet renewal or scrappage programs. In Germany, for example, a vehicle scrappage program is being credited with increasing sales by 21% in February compared with year-earlier levels. This is compared to a 27% decline in February sales in Canada.

Mr. Chairman, I'll stop there. I would be pleased to answer any questions you may have.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Nantais.

We'll start with John McKay. You have seven minutes.

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

Thank you, Chair.

I want to start with Ms. Nancy Hughes Anthony.

We have a huge irony here. There isn't an MP at this table who doesn't believe that credit is more difficult to obtain, and yet your stats show that you're up in every category. I think the reason you may be up in every category is that a lot of non-bank actors have effectively exited the field. Because they've exited the field, the government has felt it necessary to push the risk down onto BDC, EDC, and entities of that nature.

Effectively what has happened is that the bank has increased its overall share, and your stats go up, but there's not more credit actually out in the system. In fact, consumers and business people are having, certainly at the lower end of the creditworthiness spectrum, more difficulty gaining credit, the irony being that this is probably not at all stimulative to the economy.

I'd be interested in whether that analysis squares the circle as to the contradiction between what we as MPs are hearing and what you as a representative of the bank industry are saying.

[Nancy Hughes Anthony]

You obviously have put your finger on the key issue. Let me go back to the credit market and what is going on in it. As I said, I tend to think of it as a pie, like the little pie chart we have on our backgrounder. There is absolutely no doubt that there are certain types of credit, such as securitization and commercial paper, that are just gone.

There are also certain types of institutions that are gone, and they may have withdrawn either temporarily or permanently from the marketplaces. There are some foreign banks, and different types of lenders—you've just heard Mr. Nantais talk about difficulties in the car financing business, for example. There's a big gap.

I firmly believe there is more credit flowing out of banks, and I've given you the statistics—they're in our backgrounder here—and we stand by those statistics.

The question is whether they are filling the gap, and I think the answer is no, they are not completely filling the gap. I think the initiative to increase and mobilize the interaction between financial institutions—of all kinds, by the way, credit unions and everybody else—and BDC and EDC is a good thing. I think extending EDC's mandate into certain domestic areas, as proposed in the budget bill, is a good thing right now. I also think that the leasing program, which Mr. Nantais referred to as yet to get off the ground, is going to plug a particular kind of gap.

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

The irony of the whole thing is that you have less competition, and because you have less competition you're able to pick up a whole subset of customers who are quite creditworthy, and that works rather well for the banking industry.

[Nancy Hughes Anthony]

Mr. McKay, I think there is a lot of competition, so I would disagree with you on that particular point. The point is, banks have to stick by their customers in a time like this and we all have to get through this difficult period together, however long that's going to be, because banks are only going to be as good as their customers. The fact remains, though, that when it comes to issues like the cost of credit in the marketplace, as I pointed out in my opening remarks, there are two factors at play. One is a shortage of certain kinds of funding mechanisms on the world stage, so banks do have a higher cost of credit, and secondly, the risk factors are definitely going up.

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

Canadian banks, in particular, have much less cost of credit than their international competitors, in part because you're such solid banks. Is that not fair to say?

[Nancy Hughes Anthony]

I'm afraid I don't understand that. They have a lower cost of credit. Is that what you're saying?

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

Aren't you a more creditworthy recipient of credit than say Citibank or some of the other banks that are in difficulty?

[Nancy Hughes Anthony]

Thank heavens for that.

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

Yes, I agree.

[Nancy Hughes Anthony]

But, no, I would disagree. When it comes to actually going on to international markets and matching, which is what banks have to do, they have three-year funds they need to match. They have three-year funds, they have five-year funds, they have ten-year funds they need to match. The cost has definitely gone up, and there is a competition for that kind of credit.

Fortunately, Canadian banks have been able to actually go to the marketplace and issue offerings that the Canadian marketplace has received, and I think foreign investors as well. It's received very well, so they do have the advantage of having a--

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

So the cost has gone up less quickly for Canadian banks than it has for others. Is that fair?

[Nancy Hughes Anthony]

I don't know if I actually have that number to say that our costs have gone up less.

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

Intuitively, that would make sense. The cost of money to a solid financial institution would be less than the cost of money to a less solid financial institution.

[Nancy Hughes Anthony]

I'm not sure I have the statistics to prove that.

Mr. Campbell, do you have anything on that?

[Terry Campbell, Vice-President, Policy, Canadian Bankers Association]

What I'd say there, Mr. McKay, is that I think Canadian banks are very well viewed around the world, and we're seeing all sorts of increasingly good commentary about our system here. The challenge, though, is that the marketplace simply isn't functioning as well as it should. We saw that, particularly starting in October, and it's settled down a bit, but it still is not what you would call back to that “normal” state.

For instance, Nancy was talking about the need to match funds. Five-year subordinated debt is a standard funding mechanism. The usual run rate before the crisis was about a spread of 35 bases points. The spread is now up over 500 bases points, and that's the money that you can get and that has to be taken into account. So yes, we're seen as very creditworthy, but in the context of generally disrupted international markets, everything is out of whack, so our costs are higher.

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

Thank you. That's very helpful.