Evidence of meeting #17 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was banks.
A recording is available from Parliament.
Liberal
John McCallum Liberal Markham—Unionville, ON
I had zero complaints about EDC. I was focusing entirely on BDC, so it sounds like both of you are agnostic or noncommittal on that subject.
Vice-President, Research, C.D. Howe Institute
Mr. Chairman, that would be a reasonable characterization.
There is just one point I want to add, and it's a very important point. It's that the program won't succeed if consumers and businesses don't return to the loan and lease vehicle marketplace. If they don't come back, the program won't work. This is one issue for which the government can provide a program, but it's the market that has to look after what happens next.
Conservative
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
Thank you, Mr. Chairman.
Good morning, everyone.
Mr. Drummond, your organization, the TD Bank Financial Group, was one of the few financial institutions in Canada and Quebec that did not venture heavily into asset-backed commercial paper, ABCP. It's often said that an important quality in an economist is his ability to see the future.
Could you tell us what you saw in your crystal ball before deciding not to go that route?
Senior Vice-President and Chief Economist, TD Bank Financial Group
That's a question I have a great deal of difficulty answering because it was so simple for me. At that moment in Canada, other entities were buying a lot of asset-backed commercial paper. There was a premium of approximately 17 basis points, but there was a lot of risk, some of which, I thought, was unknown. I imagined that, with a 100- or 200-basis point premium in that market, it would be possible to set aside some risk capital, but it was 17 basis points. It was entirely obvious to us. I wonder how the others came to a different conclusion.
The same was true of mortgages in the United States. We decided that high-risk mortgage loans were not a market we had any interest in getting involved in. We did not want to buy mortgages in Canada or grant any at the banks we owned in the United States. Once again, that was entirely clear in my view. We started to be concerned about that market in 2005. We noted that no deposits were being made against those mortgages and people, families, were unable to make the payments. I thought at the time that there was no value in that market and that it was a disaster. All that was very clear to us at that time, and I wonder why the others did not see the same thing. It's impossible for me to answer that, but you should put the question to the others.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
That answers my question quite well. One might wonder, since it was so clear to you, whether other interests were at stake. Of course, it's not you that I should ask that question. One may well wonder whether other interests or other reasons led the other institutions to go into that market. Among others, I'm talking about the Caisse de dépôt et placement du Québec, which bought a disproportionate number of those assets, considering the assets and size of that institution. The deputy governor of the Bank of Canada said that his organization issued a number of warnings on the subject in 2005.
Is that one of the factors that convinced you these were toxic, high-risk securities?
Senior Vice-President and Chief Economist, TD Bank Financial Group
That's a question on which I recently had the opportunity to give Alan Greenspan an interview in Toronto. The United States studied high-risk mortgage loans starting in 2000 and resumed that study in 2002. However, no regulations were implemented. When I asked why, I was told that the high-risk mortgage loan market in the United States was not in difficulty prior to 2005 and that they had decided to let the matter pass. I didn't like that answer, and I still wonder why they didn't impose any regulations when they saw that the market was in difficulty.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
In Canada, do you think one institution in particular, the Bank of Canada or an oversight organization, should have issued more warnings?
Senior Vice-President and Chief Economist, TD Bank Financial Group
The problem is that DBRS is the only agency that evaluates these products. And their rating was quite positive. In the context of my bank's activities, I never use that as an excuse. We have more people analyzing risk than DBRS and all the other corporations combined. I think the same is true for the others. In fact, the risk was unknown. In the case of non-bank asset-backed commercial paper, these were packages of car loans, mortgages and so on, but we never really knew what there was in that box. In my opinion, when you don't know the content of a box, you don't touch it.
Bloc
Senior Vice-President and Chief Economist, TD Bank Financial Group
In my view, you have the choice of not touching it or charging an extremely high premium and setting capital aside. In this case, however, the premium was near zero.
Bloc
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
Mr. Poschmann, I've learned that you submitted a document in English only, and I find it unfortunate that you didn't have it translated. We could have followed your remarks better.
You said that Canada began drawing attention to asset quality. That implies that attention was not previously being paid. Is that correct?
Vice-President, Research, C.D. Howe Institute
Perhaps. Thank you.
I have to apologize. We released our brief only yesterday, and we did not have time to translate it.
Is the implication of government measures to improve the quality of assets on the balance sheets of financial institutions necessarily that those financial institutions did not do a good job of assessing the risks underlying those assets on their balance sheet? It's a good question. It's one that we don't actually have to try to answer. We can observe the risk spreads on interbank lending among financial institutions. These had soared to very high levels, first in mid-summer 2007 and then again in September and October 2008. We suspect the reason for that was lack of trust among the institutions about the quality of those assets.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
When you say that Canada began to pay attention to asset quality, who are you talking about? Who was not previously paying attention?
Vice-President, Research, C.D. Howe Institute
The insured mortgage purchase program is intended to lift mortgages from financial institutions' balance sheets. That's run by Canada's treasury. What we're doing is substituting Government of Canada securities on the banks' books for mortgage-backed securities, which were already insured by the Government of Canada on those books. The risks implicit in these were fairly well understood. The reason for doing this, however, was to create improvements on the margin of the amount of certainty that other institutions, both in Canada and abroad, feel about the quality of the balance sheets of Canadian institutions.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
So that means that they are in fact doing something now that they previously did poorly.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Thank you, gentlemen, for your presentations this morning.
There's an event happening in Ontario today that we haven't talked about. I think we all know the Ontario budget is due to be released later today, and there's been a lot of speculation in the media about possible harmonization of the provincial sales tax with the GST. I was wondering if some of you might comment on that.
I note that in my city of Mississauga, the president and CEO of the Mississauga Board of Trade said in a recent press release, “Harmonization of the Ontario sales tax with the GST will lead to a stronger economy with higher real wages, a higher standard of living, higher productivity, lower business costs, and increased investment”.
I also know that a number of members on this panel have extensively studied the issue, including Mr. Poschmann, who I believe released a report just last week. Mr. Poschmann, you advocated harmonization and noted that “Ontario workers, employers, and consumers, not to mention the rest of Canada, would benefit from an Ontario government decision to implement sales tax reform and to do so without hesitation. The province sorely needs near-term and long-term boosts to its growth and investment outlook, which sales tax reform, with appropriate policy fine-tuning, can deliver.” You went on to say that “putting an end to Ontario's archaic retail sales tax and adopting a value-added tax like the GST would sharply lower the effective tax rate on new business investment and offer the province a much-needed economic boost”.
I wonder if you could give us a short summary of your views on harmonization and also compare it with the past experiences of other provinces that in the 1990s harmonized their provincial sales taxes with GST.
Vice-President, Research, C.D. Howe Institute
Thank you, Mr. Chairman, for that question.
It's an intriguing measure to contemplate in the current circumstances, because when we look at financial market turmoil and economic turmoil, tax reform, especially sales tax reform, isn't obviously the first thing a lot of us would reach for. However, we're presented with a fascinating opportunity for change in Ontario. The Ontario government to this point, I think it would be fair to say, has not been roundly applauded for its economic management. Seizing the moment for change in Ontario would be a terrific thing. Here's why: retail sales taxes are dumb taxes because they stack up costs of business, they raise cost to consumers, they raise the cost of new business investment in plant equipment and processes and that slows down investment, slows down wage growth, and boosts the cost of our exports. So it harms our competitiveness in international markets.
The opportunity for reform, in particular value-added tax reform, the cost that businesses are forced to build into their price of products, is simply stripped out by way of the credit invoice system. That means there's a sharp reduction in the effective tax rate on your business investment, and that tends to drive growth in investment and then wages and productivity.
What happened in 1997 when the eastern provinces harmonized at a slightly lower rate than they were taxing before is just a terrific example. The prices of some things that hadn't been taxed before under the provincial tax went up. Other things stayed the same and some other prices went down. Overall the broad price level in the eastern provinces dropped by roughly the amount of the decline in the net tax rate. So the competitive markets delivered a very quick pass-through of the lower tax on consumer prices.
Even better was the boost to investment. You have to do some fancy footwork to strip out the economic growth that was already happening in the eastern economies. Oil and gas were taking off in the mid- to late 1990s. When you adjust for all that, you still find there is a pop in investment per capita of better than 10% post-reform. That's a huge shock. It's a long-lasting positive shock and it's been a tremendous boost to the provincial economies. It lowers costs for businesses because they only have one set of sales taxes to comply with. It lowers costs for governments too. So there are wins on all sides--wins for consumers, wins for business, wins for federal and provincial governments, and that's why we encourage reform. That's why I'm delighted and hopeful that Ontario's budget today will put forward a sales tax reform program.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
It sounds as if this could be a much-needed shot in the arm for the Ontario economy and the Canadian economy. Thank you for your comments.
Do any of the other gentlemen wish to comment? Mr. Mallett.
