Finance Committee on March 24th, 2009

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

Thank you, Mr. Chair.

Professor Lee, in the business papers there has been a bit of a food fight going on between the Bank of Canada and OSFI about regulatory supervision of financial institutions. You're sort of staying on the sidelines watching this.

On the one hand, we seem to have a fairly well-regulated institutional structure, where everybody seems to be at the table. On the other hand, the Bank of Canada seems to want to step in and take supervisory jurisdiction. It appears that the bank may have committed us in international circles to go in that direction.

What are the pros and cons here? What is the net gain or benefit for Canada if in fact we go in that direction?

[Prof. Ian Lee]

That's an excellent question. It's been debated, of course, in the States as part of their examination of reregulation. Currently the U.S. is the only system where the central bank regulates the banks--inspects, audits, regulates the banks. The other major countries in the world do not. They've divorced it from the central banking system.

There are arguments for and against. The argument is that the central bank has a deeper understanding of the macroeconomy and monetary policy and monetary conditions than anybody else. The counter-argument is that they are in a conflict of interest in terms of their mission, somewhat similar to CMHC; they have a conflict between their commitment to social housing, which is very legitimate, and their commitment to being a mortgage insurance company.

The central bank, if it becomes the regulator of banks, is in a conflict because its primary job is to ensure stability of the financial system, integrity of the currency, and moderate price inflation. And yet, if they're responsible for banks and they have to bail out a bank from time to time, they want to do things on the monetary policy side to help that particular bank.

So I'm also sitting on the fence, because I've seen very good arguments on both sides. But the preponderance of the evidence is that in the G-7, only one country at the moment has given the regulatory authority over banks to the central bank, and that's the United States.

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

It didn't seem to work for them, did it?

[Prof. Ian Lee]

And it didn't seem to work for them.

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

The other area that you talked about in previous testimony had to do with the non-banking sector, which is 50% of the market. When you're talking about the non-banking sector, are you including in there provincially regulated institutions? Are you including pension plans, things of that nature? They're huge players in the marketplace, and yet it seems that most of our difficulties in this country come from that sector.

[Prof. Ian Lee]

I was hoping, actually, that I wasn't going to be asked that question.

[Voices]

Oh, oh!

[Prof. Ian Lee]

I didn't want people from different provinces to be shooting at me.

We've learned in the last five, six, seven years--Volcker has said this, David Dodge has said this, others have said this--that all financial markets are interconnected. They are deeply interconnected because of the nature of financial markets. They are fungible. They are virtual. They are not physical. Money is mobile, instantly mobile.

For that reason, I think the distinctions between federal and provincial in terms of financial markets are completely artificial. When I was in the bank, we dealt with credit unions all the time, and yet they were under a completely different regulatory regime.

Take pension funds; I'm at Carleton University, and our pension fund is regulated by the Province of Ontario. I'm in Ottawa, where many of the other pension funds are regulated federally. Yet they're in the same markets. They're investing in the same package of securities. They're on the same TSX.

I think it's inevitable that we'll have to confront the day when all financial organizations come under a single regulator. This includes credit unions and pension funds. I do understand, though, that it would be very unpopular.

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

Yes. We have political sensitivities around here that make absolutely no sense at times. But that's another issue.

[Voices]

Oh, oh!

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

Greater scrutiny of CMHC is in the risk profile. In another life, I used to be a mortgage lawyer--doing mortgage remedy work, which made me very popular. What I don't quite understand in CMHC is that initially they insured the package of loans. Now they are in effect borrowing money from the government to buy the loans that they've already insured, effectively shifting the risk to the taxpayer.

Is that where we're at?

[Prof. Ian Lee]

No, I would respectfully disagree with you. The Government of Canada had already taken on the risk the moment they insured the mortgage. All they've done is taken over the physical title to the mortgage, if you will. The bank has conveyed the mortgage. It is as if I sell my car to you. You pay me cash, I give you my car; you get the car, I get the cash. That is what the government has done with the chartered banks.

That money, whatever it is, the $75 billion or $125 billion, has gone into the banks so they can reinvest, re-lend in the mortgage markets and in the credit markets.

[The Chair, Conservative, James Rajotte]

Mr. Serré, do you have anything to add to that? Okay.

Mr. Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chair.

I wish to remind my colleague Mr. McKay that the sensitivities he was referring to earlier are also called areas of jurisdiction. In our country, there are federal and provincial areas of jurisdiction. It is important to be reminded of this if we want to avoid continuous problems involving the interpretation of areas of jurisdiction.

I have a question for Mr. Rabbior, who represents the Canadian Foundation for Economic Education. You have graciously provided us with very interesting documents. Who funds your organization? Perhaps you already mentioned this, but I did not hear the answer.

[Gary Rabbior]

We don't get any sustaining funds at all. We're actually project funded. It makes us be what we teach, and that is entrepreneurial. We have to identify needs, we have to come up with ideas, and we have to find people who are willing to fund them. So we get funding from the federal government, provincial governments, the corporations, foundations, and some industry association partners.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you.

You have a great document that is targeted to newcomers, and this document is partly funded by the Department of Citizenship and Immigration. Is the document distributed by the identified partners to all new immigrants who arrive in Canada?

[Gary Rabbior]

It is funded by HRSDC. We distribute it through over 600 immigrant-serving agencies across Canada. We provide it free to them, they order it, and they put it into the hands of newcomers.

Both HRSDC and CIC help us with connecting with newcomers, but primarily the distribution and connection that we have is through the 600 immigrant-serving agencies that work directly with them.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

That's fine.

The document concerning young people and money is very interesting. I noted that there is very little involvement of Quebec representatives. It is surely because of the issue of sensitivities, as referred to earlier, and the fact that education falls within provincial jurisdiction. Is this the case? Is this document distributed in Quebec schools, since it does target young people?

[Gary Rabbior]

I don't think much has been mentioned of any particular province. So it hasn't been provincialized in that degree. It is distributed through the schools and also to individuals who want to use it with their children or grandchildren.

Jean Lapierre mentioned this book on the air about five years ago. We had 60,000 phone calls in two and a half weeks. That comes back to my point that there is a hunger and a demand for this kind of information. What happened there is that someone who was a trusted source said this book isn't trying to sell you anything, it's something you should get for your kids, and the doors opened.

I think what it is, is we need to have more trusted sources that Canadians can go to knowing they're not being sold a product. This is one effort on our part to try to provide that, particularly to young people.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Did you say that the document is distributed in Quebec schools?

[Gary Rabbior]

Any teacher can order a class set for free.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Is there already an agreement?

[Gary Rabbior]

I could provide you with a list of schools that order it. It is not distributed generally. It is only on request, when a teacher wants it. Our cost of the resource is a one-page evaluation. The teacher has to tell us what they think of it and how they're going to use it, and in return for that they get free copies for their students.

[The Chair, Conservative, James Rajotte]

Okay. In a minute.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I have another question for the representative from Option consommateurs. You did not submit any written document. Is there one?