Evidence of meeting #13 for Finance in the 40th Parliament, 3rd 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
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
But is the philosophy still to recover past losses or is it to go forward?
Governor, Bank of Canada
The most ambitious variant of that tax is to build up a fund to anticipate future losses, which in our view is unacceptable, because the point is that the losses stay in the sector; the sector recapitalizes itself. And you create tremendous moral hazard by setting up this pot. Finally, that pot probably isn't going to be there in a pinch.
Conservative
Robert Carrier Bloc Alfred-Pellan, QC
Thank you.
Welcome, Mr. Carney. It is a pleasure to have you with us again.
My first question relates to the issue of a bank transaction tax. I am aware that you share the view of the Finance Minister, in other words that you are not in favour of such a measure. The chief executive officer of the International Monetary Fund has recommended to the G20 countries that they apply such a measure. However, it must also be said that it could be advantageous to combine it with stricter regulation of the finance sector.
I would like to know the reasons why you are opposed to this tax. Do you consider that the regulatory system that applies here is already sufficiently strict and that this regulation should be reserved to those countries wishing to improve the situation?
Governor, Bank of Canada
Thank you, Mr. Carrier.
I would simply like to clarify one thing. Are you talking about the same thing as Mr. Pacetti and Mr. Mulcair, or are you talking about the Tobin tax? You are rather talking about a Tobin tax?
Governor, Bank of Canada
Unfortunately, the document that we received from the International Monetary Fund, the IMF, was provided in English only. It is their fault and not that of the Bank of Canada.
With regard to the Tobin tax, I must say that the IMF advises that it not be adopted.
I have just a quick quote, which says that the financial transaction tax, and that's a Tobin tax, is not the best instrument for these purposes. It is “not the best way to finance a resolution mechanism”. It “is not focused on the core sources of financial instability”, and its “real burden” will “fall largely on final consumers rather than...earnings of the financial sector”.
The advice that we received very clearly from the fund with respect to a financial transaction tax, a Tobin tax, was, “Don't do it”. There was no serious discussion of implementing that.
As you are more certainly aware, a Tobin tax could be put in place without the agreement of all of the major countries.
Bloc
Robert Carrier Bloc Alfred-Pellan, QC
Very well. I will move on to another matter.
In your presentation, when you talked about the progression of the GDP, I noted that it was falling back. You are predicting a progression of 3.7% in 2010, 3.1% in 2011 and 1.9% in 2012. I would like us to compare our economy to that of the other countries. Is it similar to other economies? Is this progression, that seems to be slowing down, specific to Canada, or is it generalized?
Governor, Bank of Canada
Thank you for your question. This is an important point.
First of all, with regard to the growth rate in Canada, the numbers of the Bank of Canada and those of the IMF are somewhat different. However, the interpretation of the numbers is the same.
This year, we are predicting that Canada will have the highest growth rate of all of the G7 countries. However, afterwards, as you mentioned, the growth rate for Canada will begin to slowly fall back. Thus, according to the Bank of Canada, our growth rate in 2012 will be the same as our potential growth rate. That is one answer to your question.
For comparison purposes, the potential growth rate of the Canadian economy will, for example, in our view, be of 1.9%, compared with a potential growth rate of approximately 2.4 or 2.5% in the United States, still according to us. Two types of factors are at play. There are demographic factors and there are productivity factors.
Conservative
Bloc
Robert Carrier Bloc Alfred-Pellan, QC
Yes.
To finish up with regard to this matter, is this linked to the growth rate in the United States, upon which we are greatly dependent? Is a slowdown there automatically going to bring about a slowdown here as well?
Governor, Bank of Canada
Very quickly, there are two factors. The slowing in the United States is a factor, but it's also that we reach our rate of potential growth, so the economy is equilibrated. If we want to grow faster.... It's unlikely we will improve our demographic profile, so it's a question of productivity.
Our judgment is that productivity growth, given where investment has been, would be about 1.4% per annum by 2012. So that is the key regulator on the rate of growth in this economy.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
Thank you, Mr. Carney, for being here with us.
As I was reviewing your most recent report, I noticed on page 17, in table 2, the change that has occurred between the Bank of Canada's overnight rate and the prime rate. It's been some time since the historical gap between the two was 1.75%.
I think we can all appreciate...Canadians can mostly appreciate, for those who have variable rates, the increase that occurred, that was experienced back in December of 2008, from 1.75% to 2%. I'd be interested in knowing your perspective on the implications of this change in this historical gap. What was the basis was for the change? I can speculate on it.
My real question has to do with whether or not there should be action taken to encourage financial institutions to return to that 1.75% gap and what implications that would have for Canadians.
Governor, Bank of Canada
Thanks for the question.
I would say first off that in terms of the implications for Canadians and for monetary policy, we take this into account; we take the spread between our rates and the rates that Canadians are paying, whether it's on prime borrowings or on mortgage rates--not just what's posted, which is what is reported, but what they're actually paying.
If you look at the chart--as you have--you'll see, for example, that on variable rate mortgages, actual variable rate mortgage payments continue to come down. The discounts to posted five-year mortgages and the discounts to posted prime re-emerged over that time, so the effective rates that Canadians have been paying have come down over that period of time.
This is not for all Canadians. The likelihood of somebody writing a letter to you or to me—and I get plenty of these letters—is partially a product of whether they're in that camp.
Your question is, what do we do about it? We take it into account. We care about what rate Canadians are actually getting and what that means for economic activity and, ultimately, inflation.
I'll leave it at that and let you follow up.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
Wasn't the basis for the change the worldwide economic recession that was experienced back in 2008-09? Since that has resolved itself somewhat, would it not be reasonable for Canadians to expect the historical gap to return?
Conservative
Governor, Bank of Canada
--if I may. One is the funding costs of banks and the increase of the spread. Ultimately, it's a product of the recession, but where bank funding costs and bank spreads went in shorter term markets....
I'm going to get technical, but it is the finance committee. If you look at, for example, the spread between the CDOR and the OIS rates--so where the market expects our interest rate to be and where banks are borrowing in the interbank market--those have not returned to historic norms. The stability has returned to that market, which is welcome, and that means that on a level basis there's less need for liquidity, but they haven't returned to historic norms.
Ultimately, these are markets, and one has to be quite careful about dictating market prices, I would suggest. From our perspective, the market price that we set is the overnight cost of money, and we take into account where markets are going from there in determining where that level should be.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
Changing the subject just a little bit, in your remarks, in the summary of your report, and in the report itself, you make this statement: “On the downside, the combination of the persistent strength of the Canadian dollar and Canada’s poor relative productivity performance...”. When you refer to our “poor relative productivity”, who are you comparing us to?
Governor, Bank of Canada
Well, it's a pretty long list, actually, unfortunately. I would draw your attention to chart 19 on page 21. In that chart, the relevant line is unit labour costs in Canada and the United States. “Unit labour costs, Canada (in US$)” is the green line going up, and the blue line is “Unit labour costs, United States (in US$)”. You see the gap that opens up.
That is a product of the exchange rate, partially, but it is also the product of the fact that unit labour costs in the United States have been falling. They've been falling because productivity growth has been so high relative to wage growth. They've continued to rise in Canada despite large increases in spare capacity, and that's a product of flat to negative productivity in Canada.
So I'm afraid that vis-à-vis our largest trading partner the story is not good, and there is a longer list, not quite as impressive relative to Canada, of those that have performed on productivity.
Conservative
Liberal
John McCallum Liberal Markham—Unionville, ON
Thank you.
I certainly agree with what I think you said: that a bank tax that created a fund for future financial crises would constitute moral hazard, and that funds built up within banks, based on their own capital, are better. I think that's what you said.
But I have a question about “too big to fail”. I read in the latest Economist magazine where they were claiming that one justification for a bank tax was that the big banks get a lower interest rate because they are perceived to be too big to fail, and that this could justify a tax. I guess partly I'd like to ask you if you agree with that point of view.
But more importantly, The Economist went on to say that a better solution is to do something about the too-big-to-fail challenge; I know that is a challenge and I know people are working on that. So my question to you is, do you think there is some sort of resolution in sight and that means can be found so that large institutions may no longer be seen as too big to fail?
