Finance Committee on March 12th, 2009

[The Chair, Conservative, James Rajotte]

You have 10 seconds if you want it.

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

I'm finished. I'll pass my 10 seconds to my Bloc colleague.

[Some hon. members]

Oh, oh!

[The Chair, Conservative, James Rajotte]

Mr. Laforest, you have seven minutes and 10 seconds.

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

I greatly appreciate your generosity. Thank you.

Thank you, Mr. Chair. Greetings to all of you.

I have a question for Ms. Menke. You said that your agency plays an education role for consumers with regard, obviously, to financial products and services that they can purchase. Last spring, the Finance Committee heard from numerous witnesses, not groups, but citizens who came to speak about their dismay because they had bought a great deal of commercial paper. Several of them had invested, I would say, almost all of their savings in that vehicle. They had suffered enormous losses and had depleted their retirement funds.

Does your agency conduct analyses of the precarity or the volatility of these papers? Did you issue warnings to consumers concerning the enormous risk they were taking by investing therein?

[Ursula Menke]

Thank you for your question.

Allow me to respond in two specific ways. We do indeed have an education role to play, and we generally play this role in a way... I wouldn't say that we give specific advice. We try to make consumers understand how the financial system works in general, how financial transactions work, more or less, and we tell them to consider the advantages and disadvantages of financial products and services.

It's a somewhat general role. Since I took on this position, I have never sent a warning about any kind of product in particular. In any case, this type of product is not a banking product for which I have a specific mandate, but our education role is not necessarily limited to that. We do not limit ourselves to so-called banking products, when it comes to our education role.

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

But doesn't that concern you just the same? If you have an education role to play and people don't understand the system... We often hear that these are very complex products.

[Ursula Menke]

Yes. I can't speak about disclosure rules because these are not rules that we are responsible for. So, in general, in this type of case, what we do is try to encourage consumers to be very careful with the contracts they negotiate and to ensure they clearly understand all the aspects of these contracts. Personally, I'm not in a position to give this advice, and I don't have the means to do so. Frankly, it is not our role to say whether a product is good or bad. We simply try to tell people to be careful and to read their documents closely. On the other hand—

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

Since my time is limited, I'm going to ask other questions. Thank you very much.

Even with the additional time we've been granted, we don't have very much.

My question goes both to Mr. Davies and Ms. Hughes Anthony. Last week, we heard from the Senior Deputy Governor of the Bank of Canada, who told us that as concerns commercial paper, the bank had issued warnings in a financial magazine.

It may be the case, Mr. Davies and Ms. Hughes Anthony, that it is not your role, but did your organizations assess the risk linked to the purchase of commercial paper? Did you discuss it, did you write anything about this subject?

Ms. Hughes Anthony.

[Nancy Hughes Anthony]

I can answer briefly. Of course this was a market situation that concerned the banks in a certain sense, but the products on the market were non-banking products. Obviously, some banks were involved, and I think the good news is that everything turned out fine in the end. We learned lessons that led us to change our procedures.

The Canadian securities administrators have proposed the elimination of certain kinds of status or asset-backed commercial papers. That increases more disclosure and prevents the sale of ABCP to retail investors. That is a proposal that is out for consultation.

Also, we have seen that the Office of the Superintendent of Financial Institutions did issue an advisory on securitization in October 2008. I gather the general gist of it is enhancing the regulatory requirements for securitization facilities such as ABCP.

I'm just pointing that out to say that I have the impression, as Ms. Menke said, that this is more closely related to Ms. Dickson's purview, and also that of the provincial agencies.

[The Chair, Conservative, James Rajotte]

You have 30 seconds left.

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

Mr. Davies, could you tell me whether the pension funds are members of the Canada Deposit Insurance Corporation, please?

[Bryan Davies]

Certainly. The answer is no, they're not members. I will let Michèle elaborate on that.

[The Chair, Conservative, James Rajotte]

You may elaborate very briefly.

[Michèle Bourque, Executive Vice-President, Insurance and Risk Assessment, Canada Deposit Insurance Corporation]

The pension funds are not members of the Canada Deposit Insurance Corporation. Banks and trust and loan companies are members.

As concerns your other question, regarding ABCP, they are not deposits, so in our case, any statements would have sought to encourage Canadians to contact us to confirm what it was they owned and whether it was eligible for deposit insurance. But ABCP is not a deposit product insured by the CIDC.

[The Chair, Conservative, James Rajotte]

Thank you.

I'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

I'm going to go fairly quickly, because it's a very interesting panel and I only have seven minutes.

We are in a dilemma, as I think my colleague across the way said. Here we have the IMF report this week saying good things about the Canadian banking system. We've had a number of reports about Canadian banking, how solid it is, and that's why we're in better shape than many other countries around the world. We've had quarterly profits announced by your organization, the banking organization, with all making money. Many pension plans, including, I believe, the CPP, have a lot of money invested in banks. So you're making money. A company in this marketplace making money is not a bad thing, in my view.

But we have also reduced the bank rate to near zero. In the same week, I'm hearing...and it happened to me. My bank raised my personal line of credit by 2%. Somebody needs to explain to me, so I can explain to my people, how can the bank rate go down, things be in such good shape for the banks, and I still get a 2% increase?

[Nancy Hughes Anthony]

I'll take a good stab at this, Mr. Chair.

There is a very common misunderstanding about what the Bank of Canada rate is. The Bank of Canada rate is really a short-term overnight rate that affects maybe 1% of the borrowing of Canada's banks. So for the rest of their funding, as we previously mentioned, they have to go to other markets and make sure they have matched their funds. And those funds, as we appreciate, are very expensive. So two factors are at work right now with the Canadian banks. One is the expensive cost of funding outside of the Bank of Canada, and the second is the risk profile.

It's my job to make sure that everybody is extremely confident in Canada's banks, and obviously they are. But you may have noticed in the last first quarter results we had from major banks that there were increases in writeoffs and losses and there were more provisions being taken by banks--going into this recessionary climate--for credit losses. I suspect we're going to see that continue.

With respect to the kinds of products.... Mr. Wallace, you'd probably be very happy if you had a variable mortgage, because you'd be getting a letter stating that the variable mortgage was going down. As you know, the mortgage rates are going down--

[Mike Wallace, Conservative, Burlington, ON]

[Inaudible--Editor]...thank you very much.

[Nancy Hughes Anthony]

I know. Exactly.

Do you have a further comment on that, Terry?

[Terry Campbell]

It's exactly as Nancy said. We're in an environment here where you have, right across the board, increased risk. And you have to price risk accordingly. If you didn't price risk accordingly, there'd be less credit available. Re-pricing means you can actually continue to lend.

Now, mortgage rates are going down.

In terms of lines of credit, where you see it based off the bank's prime rate, even with these risk-based adjustments in pricing, the actual cost is down in many cases. You are seeing things coming down. If you go back as recently as, let's say, August of 2007, the prime rate was 6.25%. Now the prime rate for the banks is 2.5%.

[Mike Wallace, Conservative, Burlington, ON]

I'm going to come back to you.

Ms. Menke, I have the CRA come out to my riding every year to give a seminar on taxes, basically. Service Canada also shows up. Does your organization provide such a service to MPs, such that if I had a town hall, would you be able to have staff come and do a review of the financial system in this country and of the tools that are available?

[Ursula Menke]

I'd be thrilled to do that. We do send out a householder periodically to MPs to give them some basic information about what we do. The reality is that we are a very small organization and therefore limited in the actual amount of time we can do. We are about 45 people.

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

I've been on the auto sub-caucus, so I've seen lots of folks from the auto business lately, and I appreciate your coming. Last night there was Mr. DesRosiers, who's an expert in the field. There was a question about why the banks are making so much money from auto loans. The pushback from him was that the financial arms of the automotive manufacturers are providing products that a bank might not necessarily be able to, like 0%. I am looking at a car at 0.9%. Can you comment on that? Is it an accurate statement that the financial arms of the manufacturers are in the business of moving product off the lots?

[Peter Andrews, Regional Director, Consumer Lending, General Motors Acceptance Corporation of Canada, Canadian Vehicle Manufacturers' Association]

I think the prime motivation for any captive finance company is to aid the manufacturer in delivering its product. So all the programs we deliver for the manufacturer are around that. It really goes right to the reason for the CSCF that was introduced in the budget.

It's a liquidity issue, and our funding has dried up completely across the markets. So the auto market captives need $40 billion a year to deliver their product for their manufacturers. Today we're probably down 98% on what we can deliver in capital to that market.