Evidence of meeting #19 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was securities.
A recording is available from Parliament.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
Who pays the flat fee? That is what I am trying to understand. When someone buys a security, does part of the cost go to DBRS? Who pays you, the issuers or the buyers?
Bloc
Co-President, DBRS
It depends. For a number of structures, you just pay a flat fee regardless of how much you issue.
Co-President, DBRS
A flat fee. Rating agencies, in relative terms to underwriters, with all respect to underwriters, get paid a lot less. You don't see any Porsches in the driveways of rating agency people.
The issuers do pay, that is correct. In some cases, if the issue size is increased, they get paid more. In some cases, it's just a flat fee and you can issue. The Government of Canada pays us a flat fee. The provinces or various—
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
I understand, but since there were so many, several issuers issued a large number of them. When you granted a triple A rating, did you confirm whether the other rating agencies had given any ratings?
Basically, given that you were the only ones in Canada to rate those securities, you were also the only ones to make any money from all those transactions.
Co-President, DBRS
Never.
We never check with other rating agencies. We don't know what they're going to rate. I'll give you an example. We were just asked to rate the Canada Pension Plan's creditworthiness. We had no idea if they had approached other rating agencies. We used our methodologies to come up with a final rating. We published that last week for the Canada Pension Plan. And S and P provided a rating. We have no say in whether they get multiple ratings.
We have to stick with our standards, our methodologies, which are all public, on our website, and come up with a final rating independent of the fee. Our analysts don't even know if we get paid.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
You said you have accepted your responsibility, but you can also say that you made a healthy profit from ABCP.
Co-President, DBRS
We did get paid for rating. For any security, we often do get paid. Sometimes we provide ratings without fees.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
At the end of your presentation, you talked about the framework of a single securities regulator, saying that it would provide a more consistent, effective and efficient means of regulating agencies, and that it would help coordinate international communication.
Those are wonderful words, but do you have specific examples to illustrate how the current system has been inconsistent, ineffective or inefficient? As we know, the OECD has said that Canada has an excellent securities system and that it has been improved by the passport system.
Were there times when communication was really bad between the 13 existing regulatory agencies?
Co-President, DBRS
Those comments relate more to the fact that capital markets are global and they're interconnected, versus interconnected even within Canada. Our real point there is that harmonization amongst the G-20 countries is critical, otherwise capital will flow be arbitraged in weak regulatory regimes.
It's not specifically that anything is broken in Canada. It speaks more to the fact that whether we like it or not, we're in an interconnected capital market, and to have weak regulatory jurisdictions elsewhere is not beneficial to rating agencies or participants in the capital markets.
Conservative
Daryl Kramp Conservative Prince Edward—Hastings, ON
Welcome to our guests.
My first question is either to Mr. Bethlenfalvy or Mr. Russell. I want to talk, just for a second, about mark-to-market accounting, whereby the accounting standards and the assets and liabilities are assigned a value based on their market prices.
I have a statement here about how a number of financial statements had to write down the value of their financial assets, which many people say exacerbated the financial turbulence, and yet some commentators—we've had the C.D. Howe Institute here—suggest that the financial institutions should be allowed to use alternative accounting methods, either model based or historic cost valuations, when liquidity constrains the markets.
If we have a single accounting mechanism, should we maintain the consistency that we have or should we, potentially, in your opinion, be looking at other options for evaluation?
President and Chief Executive Officer, Investment Industry Association of Canada
I'll take a run at the question.
I think the debate over mark-to-market is one dealing with the pro-cyclicality of mark-to-market, which is the point you made. In up markets, you're marking up the assets, so you're encouraging a lot more activity in the financial sector and there's the potential of bubbles. The counterpart to that is the transparency argument, which is the argument that accountants use, which is that whatever a value is, it should be disclosed.
I think the issue gets much more complex than that, and I think that's the reason--you cited the C.D. Howe Institute--to provide recommendations that give a little more flexibility in terms of some discretion in marking to market. One of the reasons for this is that it's very difficult to in fact mark to market securities that are not actively traded in the marketplace.
Part of the problem we've encountered in our markets is it's these more esoteric securities that we've had trouble valuing. The risk in a mark-to-market scenario, without some kind of discretion involved, is mismarking the assets.
I would agree with the recommendation of the C.D. Howe Institute that says we have to look at this more carefully, and we probably have to treat the accounting of financial institutions a little bit differently than maybe we have in the past because it has exacerbated some of the problems we're facing.
Co-President, DBRS
If I could just say one quick thing on that, one of the things that we really have to watch for.... We're very supportive of mark-to-market accounting, but again, we have to have harmonized standards, because FASB is taking a certain approach and the International Accounting Standards Board may be taking a different approach.
Harmonization--I keep using that word--is critical. Otherwise, it really is difficult when we rate banks in Canada, in the United States, in Europe to have apples to apples. We'll support whatever the standard is. We think a good, clean communicated standard is what's required.
Conservative
Daryl Kramp Conservative Prince Edward—Hastings, ON
Then obviously it's certainly preferable to have a base common denominator we can use that's comparable.
Co-President, DBRS
A good corollary would be the Basel II for capital, and every jurisdiction has to have the base minimum. You can have higher standards, and OSFI has often said we want higher standards in Canada. It's part of the reason why we have less leverage in our Canadian banks.
Conservative
Daryl Kramp Conservative Prince Edward—Hastings, ON
Thank you.
Mr. Phillips and Mr. Luimes, in your opening statement you basically gave us the comparison of your market authorizations for the small businesses, SMEs, in the various regions, and it was 18% overall. Yet in two of the provinces, P.E.I. and Manitoba, it's 50%, in Saskatchewan it's 62%, etc. Reading into that, in Ontario and Quebec obviously you don't have as much of a penetration. Would that be a fair assessment, then?
President and Chief Executive Officer, Credit Union Central of Canada
I always hesitate to use national market share figures because for a system that's as regionally based as us, that can sometimes not give the right impression. That's why I wanted to point out that this penetration is actually quite large in some parts of the country. Ontario is an area where our presence would be less so, but I think we're very accurate.
I'd actually like to draw Mr. Luimes into the discussion here because he is a CEO of a credit union in Ontario and can give you a bit of a perspective.
Ralph Luimes Chief Executive Officer, HALD-NOR Credit Union, Credit Union Central of Canada
Thank you, honourable members, for providing an opportunity to share with you and respond to your questions.
I'd like to just expand on David's comments with respect to the Canadian business owner strategy. It is a two-pronged program. There's an internal component, which is our emphasis right now, and a potential external for future consideration.
The internal is readiness for market, trying to ensure that all the credit unions.... We have about 300 of the 440 or so credit unions engaged in the CBOS program right now, and our emphasis is very much on trying to improve the readiness, build what they currently have, and take it to another level. That includes probably our most significant piece, which is our training program, or HR development program, in which we have over 200 employees already enrolled just in the last two months.
Conservative
Daryl Kramp Conservative Prince Edward—Hastings, ON
It's almost a fact, even admitted by the major banks, that SME lending in rural areas is slim to non-existent, and yet your penetration into those areas obviously is at least still serving part of that market. Would that be a fair assessment?
Chief Executive Officer, HALD-NOR Credit Union, Credit Union Central of Canada
Very much. The small business area and small town rural Canada, shall we say, is the heart of our operations.
Conservative
Daryl Kramp Conservative Prince Edward—Hastings, ON
Thank you.
Mr. Bethlenfalvy, you made a statement that I would like you to elaborate more on so I have a better understanding. You said funding is necessary, but not necessarily funding. Can you give me more of a swing of where you were going with that?
Co-President, DBRS
Sure, I'd be happy to.
No one expected what happened in September with Lehman Brothers and the corollary on the global capital markets. A number of the programs weren't in place either in the U.S. or Canada to help liquidity, to bridge through a tough time. I look at the insured mortgage plan that provides the Canadian banks with liquidity as a vehicle that helped. The Canadian lending assistance facility, which Parliament has passed through the budget, has not been used, but it is there if necessary. No one can predict what next week is going to bring and whether our banks will need various vehicles to get them through a short period of time if a crisis in confidence happens in the capital markets.
My point is very much to have these programs in place and if necessary they're there to be used. They may not be used. There was a problem for Canada because our banks were better. We didn't need these programs, and the international market started to say there was something wrong with the Canadian banks because the governments weren't supporting them. That's no further from the truth, but wise to put these in place to let the global community know, which often doesn't take much time to understand.
