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.
10:05 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you, Mr. Chair. Thank you to the witnesses for appearing.
I kind of feel bad for Mr. Phillips and Mr. Russell.
10:05 a.m.
A voice
No one feels bad for those guys.
10:10 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
The witness of the day is definitely Mr. Bethlenfalvy, so I guess I'm going to continue with that. I have a whole bunch of questions based on the same subject matter. I'm trying to get clarity. I understand you want to protect your corporation. But if you don't survive, somebody else will take over what you're doing today, so the idea—and I think Mr. Wallace just alluded to it, and I think everybody else around the table—is to protect the future and how we correct.
I've been hearing what you're saying. You're talking about complexity. I don't believe that. I don't believe that things have gotten too complex. For me, if I have $50 I want to put in a bank, I want a return on it. Either it's a GIC or it's dividends in an asset growth company. The reason it's gotten complex is that there have been people who have gotten greedy out there. I expect people to protect me, whether it be a securities regulator, a rating agency, my bank, or my credit union. It doesn't matter who. However, the feeling out there is that's not what is happening.
I think Mr. Mulcair asked you about assets versus non-assets. I'm still no further ahead. You're saying that some instruments are no longer being rated by your agency. What is the difference? What's stopped? Now you're saying there are instruments that are market disruptions. What is that? You're being regulated, but who's regulating you? Who's verifying that? You're assuming that the regulator is regulating you, and the regulator is assuming you're verifying what you're rating. But you're saying, no, we never rated what was being put together because that's not our job.
I still don't understand who your customers are. Are they third parties? Is your customer just a person who's issuing the issuing item or instrument? If you're not rating that instrument, could a third party actually hire you and ask you to evaluate or put a rating on that security?
I guess I'm going full circle. The idea is this. How do we prevent this from happening again? It will happen again where 1% is not good enough for a GIC and then 3% is not good enough. Eventually these instruments will get complex again.
My question is this. How do we avoid this? What happened in the past? Let's just look at the last 12 months. How can we avoid it happening in the future? What is your part in preventing this from repeating itself?
10:10 a.m.
Co-President, DBRS
Those are all very good questions. I think the number one thing I keep coming back to is putting our opinions into the market. Again, if I may quote from the G-20—
10:10 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
No, really, I don't want you to quote from anyone. I want you to tell me, so that this doesn't happen again. The G-20—I'll be able to read all the quotes in the paper tomorrow. I don't have a problem with that.
10:10 a.m.
Co-President, DBRS
Well, we do take note of what governments are saying and what they want us to do.
10:10 a.m.
Liberal
10:10 a.m.
Co-President, DBRS
They say that rating agencies have an important role in providing unbiased information and assessment to markets. That, we do believe, is a fundamental role, that more opinions with more information—and that's what it is. I would never counsel anyone to just use a rating to come to a decision. But I would also say that having a rating opinion and having public access to it, which is our issuer-pay model, allows us to make these methodologies and the ratings public for free. We changed the model and had someone else pay to get around conflicts of interest.
10:10 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
So you're asked to rate something, an instrument, let's say a basket. Do you actually go in there and review the contracts? You don't, correct?
10:10 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
You have a basket of asset-backed commercial paper, assets--call them what you like--and you've been asked by bank A to rate these instruments. What is your role there? Do you say, okay, fine, send all the contracts over and we'll rate them, or do you say, well, I'll input them in my computer model and then send you a bill and you tell me what you want?
10:10 a.m.
Co-President, DBRS
No, you take the portfolio data that you have. If there are 10,000 pieces in, you don't go and meet every customer, but you look at the statistics, the payment history, the loan to value--
10:10 a.m.
Liberal
10:10 a.m.
Co-President, DBRS
The bank or the sponsor of the program--some of the banks that have been mentioned around the table.
10:10 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Okay, so now let's say a bank asks you to quote--
10:10 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Let's say TD does not ask you for a rating, but CIBC wants to buy some of that TD paper. Will CIBC be a client or a customer? Will CIBC say, can you rate the TD paper?
10:10 a.m.
Co-President, DBRS
From time to time we have customers who do that and who say, give us a third-party independent assessment of this portfolio, and that does occur.
10:10 a.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Thank you, Mr. Chair.
Mr. Bethlenfalvy, I'm going to ask you a different question. I know that the DBRS is also involved in rating financial institutions, and I know you have a background in the banking industry as well, with TD. Recently the economics editor of the British Broadcasting Corporation published an article on the BBC website that said a number of things about the Canadian banking system. I'd like to share those with you.
She was very critical of the British banks and the performance of the British government and she said:
Nowhere is immune, but by most key measures, the Canadians are coming out of this crisis in a league of their own.
Take the banking system. Canada's banks have not just had fewer bailouts than other countries. Ghey've had none. Zero. Not a dime.
She said:
As the FT pointed out today, of the seven institutions in the world that still retain a triple-A Moody's credit rating, two are Canadian banks. And as their competitors have tumbled, so they have ascended the global rankings: all five Canadian banks now rank in the world top 50.
She further said:
Of course, Canada has been hit by this crisis--about a third of its GDP is taken up with exports to the US. ... But it looks set to have the shallowest recession of all the G7 economies, with the smallest decline in activity in 2009 and fastest growth in 2010.
Its sober management of the public finances has even left it room for a decent-sized stimulus package for this year and next. Net debt last year was an irritating 22% of GDP.
I wonder if you could comment on the comparisons between the Canadian banks and the banks in Europe and the United States.
10:15 a.m.
Co-President, DBRS
That's a great question.
First of all, I would say at the outset, I know Canadians don't like to boast. I wouldn't boast too much about our Canadian banks, because who has a crystal ball better than mine? Who knows what's around the corner? One thing about banks: no risk, no bank. Banks take risks, including Canadian banks.
Number two, the Canadian banks had less leverage. As I mentioned before, partly due to regulatory involvement and I think because of our conservative risk culture, the banks had less leverage. The U.S. has a system of massive leverage. The financial institutions are levered one times to their GDP, over $14 trillion. The U.K. banks, in particular...their banking system has 450% of GDP. Iceland has nine times; Ireland, six times. The problem is going to be massive in western Europe, for a number of reasons, partly because of the leverage.
So on a relative basis, I think less leverage and more prudent risk management, going back to credit principles and not getting involved in a lot of toxic assets, helped the Canadian banking system. But I'd be careful to boast too much, because we still are in unchartered waters.
10:15 a.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Well, she did go on to say, “Canadians are so sensible they even have the sense not to brag, in case things turn out badly for them after all.” She was being cautious in that regard, but I think it's insightful to know what other people are saying about the comparisons between Canada and other places in the world.
I have a question for Mr. Russell.
Mr. Russell, your members represent and advise consumer investors across Canada. Perhaps you could tell us about your views on a national securities regulator and how you think that having a national securities regulator in Canada would better protect the customers of your members.
April 2nd, 2009 / 10:15 a.m.
President and Chief Executive Officer, Investment Industry Association of Canada
Yes, I'd be pleased to answer that question.
I'll start by saying that regulatory regimes around the world are in the process of reform. We've talked a bit about that, and you're exploring that in the context of ratings.
It's my view that for us to embark on vigorous comprehensive reforms of our capital markets—and I think we need to do that—moving toward a single regulator would certainly facilitate that. I'll give you two examples.
The first one is that it's very clear in these reform discussions that there has been a lack of effective coordination among the regulators themselves, both domestically and internationally, largely because there's this interrelationship or symbiotic relationship between banking and the capital markets. And it's important that one hand knows what the other hand is doing.
It was alluded to in this discussion that in Canada, while we do have a Financial Stability Forum, I believe it's called, which is a round table bringing the regulators together, the one seat that's missing at the table is probably one of the most important, a national regulator who represents the regulation of the capital markets.
We can talk a lot about greed—and I agree that greed was pretty rampant—but the fact is that greed is historic. What we have here is the failure of regulation, not so much in Canada but very much so in the U.S.
So I think that, first of all, the case for a national regulator can be more effectively made, again, in the context of facilitating greater coordination and greater consultation among banking regulators, insurance regulators—the Bank of Canada plays a very key role as lender of last resort—and the securities regulator.
The other point I want to make—
