Finance Committee on March 26th, 2009

[Martha Hall Findlay, Liberal, Willowdale, ON]

That will be for the first quarter.

[Glen Hodgson]

Yes, that is for the first quarter, even though, again, we're getting a little bit of good news as we go along.

You simply look at all the other factors. The thing that troubles us the most right now is the contraction we're seeing in investment, whether it's through polling or whether it's through the kind of information Ted has. Actually, looking at investment intentions or at the numbers we're seeing as we get the data down, there are very sharp contractions in manufacturing in southern Ontario and Quebec, and particularly in the oil sands. In Alberta right now there's a real recoiling of investment intentions related to oil sands expansion--for the upgraders, for example. People are simply cancelling things. It is probably based on the belief that oil is going to go to $35 a barrel and stay there.

[Martha Hall Findlay, Liberal, Willowdale, ON]

So overall, what do you think those contractions...?

[Glen Hodgson]

I think there's actually been a step up on a global basis in oil prices, and we're going to see oil back at maybe $60 a barrel.

[Martha Hall Findlay, Liberal, Willowdale, ON]

But generally over the next two, three, or four quarters, do you see contractions?

[Glen Hodgson]

Yes, certainly in the first two quarters of this year. There will be a sharp contraction in Q1 and certainly a contraction again, but not quite as sharp, in Q2. Then we get into an area of debate about whether there's going to be enough fiscal stimulus, because infrastructure spending will start in earnest in Q3, which is summer and into the early fall. We certainly expect that the economy will be growing again by Q4. At that point, we're sort of half back towards a more normal state. That will take most of 2010. Our 2010 forecast will probably be in the mid-2% range--so growth of about 2.5% in 2010--and the economy will not really be getting back to potential and beyond, as it normally does, until 2011.

[Martha Hall Findlay, Liberal, Willowdale, ON]

I think from what you said, you see Q2 and Q3 as contracting still.

[Glen Hodgson]

Q2 is certainly within the forecast. Q3 is an area of debate inside the shop right now, looking at a whole variety of what people would see as extraneous factors, such as inventories. Are they going to go up or down? And how quickly will people start responding to the investment recoil and start building investment plans out again?

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you.

I have a question for Mr. Mallett. In figure 7 on your chart, which is the interest rate you're paying on the largest loan currently outstanding, clearly the line at the bottom, the prime plus 6% or greater, leaps off the page. Historically, how does that relate to what we've seen in the past? On a one-look basis, that jumps off the page. Is that significantly different, however, from what we've seen in the past?

[Ted Mallett]

We've never asked this question in this particular way. We've known that an awful lot of our members use high-interest-rate kinds of instruments. Many small businesses use credit cards to finance their businesses, and of course that number would be off the page, over there on Glen's side.

We do look at who's offering these types of loans and who's demanding them, and it's typically, again, BDC kinds of loans. Credit unions are more likely to be in that category, as well as the specialty asset companies. It's not typical of the domestic banking industry. There are a few people who say that there are domestic bank customers paying those kinds of rates.

What we're noticing, though, is that this time around there's a lot more flexibility in where the interest rates are. There seems to be more pricing for risk in the market now, whereas in 1990 generally the notion was that if you didn't qualify for a prime-plus-2% mortgage or loan or line of credit, you weren't allowed to get any financing. This time around, there's some discussion that someone is moving to prime-plus-3% or prime-plus-4% but is at least still getting a loan. Our members were complaining 20 years ago that, boy, they would have loved to have the chance to pay prime-plus-3% for a loan, but their bank wouldn't let them do that. They were saying that they wouldn't lend them any more.

We haven't seen that to date, and really our role is to measure.... I mean, we're not in the forecasting business. We've often thought that maybe we should be, but forecasting the future with imperfect current information isn't great. So what we try to do is provide current information to help Glen and Don and others do their jobs better. What we're noticing is a bit more reliance on price for risk in the financing area and less concern that financial institutions are cutting off loans to people just because they're in a certain sector. We've noticed a couple of comments from members along those lines, and we're going to be monitoring that over the next couple of months to see if it gets worse. We'll certainly let any policy-makers know about what kinds of changes and adjustments we see.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you both.

And thank you again, colleagues.

[The Chair, Conservative, James Rajotte]

Thank you.

Monsieur Laforest, s'il vous plaît.

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

Thank you, Mr. Chairman.

Thank you. Mr. Menzies would no doubt have liked to have a different answer, but you answered that a single securities commission wouldn't be entirely effective, with regard, among other things, to the purchase of commercial paper in Quebec. From what I understand, you came out in favour of a single securities commission, but for other reasons. You no doubt know as well that there is virtual unanimity on this issue in Quebec. For reasons of constitutional jurisdiction, among other things, the Government of Quebec is opposed to the idea. Whatever the case may be, that didn't prevent the massive purchase of commercial paper, particularly by the Caisse de dépôt et placement. Based on Mr. Drummond's remarks, one might well believe that that was more the result of a lack of clear-sightedness, prudence, on the part of officials and investors. It is also possible that other interests were at stake. We don't yet know the reason, but we hope to discover it.

Mr. Drummond, you said earlier that, at that point, it was entirely clear in your mind that buying asset-backed commercial paper was really too risky and that you naturally avoided, as it were, venturing into that. However, did you share your view of the situation, which you found obvious? When the attraction to commercial paper appeared, did TD Bank warn its clients, generally speaking? Did it explain to them why it was not touching those products?

[Don Drummond]

We wrote a lot about the situation regarding mortgage loans in the United States, but we wrote nothing about the situation involving commercial paper in Canada. After all, we compete with the other institutions. We didn't give them our information. I can tell you, however, that not only did our bank not buy commercial paper, it also did not include any in its mutual funds. At least we shared the benefits of having avoided that market with our customers—but not necessarily with those of other banks, as I mentioned.

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

You say in your document that “TD Economics provides analysis of economic performance and the implications for investors.” Since that was a highly fashionable product, you no doubt said or wrote something on the subject.

[Don Drummond]

No, and as I've already said, I don't think it's the responsibility of a private bank to provide that kind of service. If we want to establish a system of governance, I think that responsibility should be assigned to a rating agency or an organization responsible for regulating securities, but not to a bank.

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

Mr. Poschmann?

[Finn Poschmann]

Oui. Merci.

Very quickly—

[The Chair, Conservative, James Rajotte]

We're going to have to check how long the bells will ring. It's an unscheduled vote, just to let the witnesses and the members know. We're going to check about the length of the bells.

I'm sorry, Monsieur Laforest.

[Finn Poschmann]

Thank you.

In 2002, DBRS, the bond rating service, published a positive assessment of non-bank-backed ABCP in the Canadian market. At the same time, Standard & Poor's, another rating agency, refused to rate them. They issued a document that explained exactly what their concerns were with the quality of the product. It was for exactly those reasons the product eventually failed.

So there was competing information available in the marketplace. It was not acted on, for an interesting set of reasons involving incentives on the part of buyers, distributors, and rating agencies as well.

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

Thank you very much.

[The Chair, Conservative, James Rajotte]

Merci.

The bells are ringing for 29 minutes, I'm told.

As the chair, I'm going to take the next Conservative spot and I want to ask about a couple of issues.

First, Mr. Drummond, you raised the shadow banking sector in your response to another colleague's question. On Tuesday we had a witness before the committee who said that one of the issues was the fact that this sector is not regulated enough in Canada. He certainly said it's a bigger problem in other countries like the United States, but in Canada we ought to look at greater regulation of things like hedge funds, derivatives, and asset-backed commercial paper was an example of that.

Mr. Drummond, perhaps you want to start, and if anyone else wants to comment, they may. Does that sector need to be better regulated in Canada?

[Don Drummond]

Absolutely, but Canada can't do it alone. It has to be done in an international context. I think that's an inevitable result of the discussions that are going to be held on April 2 by the G20, and held within each country. The regulation in the United States is so fragmented relative to what we have, but there's a whole host of it. In fact, probably almost half of the credit that was provided in the United States in 2007 was being provided by non-regulated entities. That proportion wouldn't be nearly that high in Canada. But absolutely the spectrum of coverage of the regulators has to be expanded.

[The Chair, Conservative, James Rajotte]

Mr. Hodgson, do you want to comment?

[Glen Hodgson]

We just published a paper done by two outside authors, an academic and a former banker, looking at global financial regulation. The premise is, as I'm seeing now in the media, that we have to think about the global requirements but really act on a local basis. I'll give you one of the ideas in the paper.

In future securitization, for example, as you bundle things together and sell them into the market, we would propose that the originator be required to hold a portion of that for their own book. That will change the behaviour fundamentally. If you have to hold the risk to term yourself, you're going to take a lot more responsibility for what you're underwriting and for doing ongoing risk evaluation and keeping in touch with what the risk is.

That's on our website, and I will certainly commit it to the committee.