Finance Committee on April 27th, 2010

[Mark Carney]

That's entirely correct. The issue that the recovery will turn on is the full response of the private sector. We've seen, as I say, quite strong housing activity, and consumption has held up. What has been lower than the general experience in recessions has been business investment.

Our forecast—and this is an important component of our forecast for several reasons—is that we see the recovery in business investment basically from now going forward, and that picks up over the forecast horizon. That's important, obviously, just as a direct contributor to growth, but it's important particularly because it goes back to your productivity point.

And we have, in terms of the supply side of the economy, the capacity of the economy, rising productivity, from very low levels, over the course of our forecast horizon through the end of 2012, which is obviously very much dependent on the scale of that business investment.

[Mike Wallace, Conservative, Burlington, ON]

Just to comment on liquidity, we heard often going into the recession that business didn't have access to capital. I think you mention here that from the world perspective, it's mixed; some places have more liquidity than others. What's the Canadian experience at this point in terms of availability of capital to the business sector?

[Mark Carney]

The availability of capital on the whole is very strong, but there is still some tightness in the availability for small and medium-sized enterprises. We've seen that. The conditions tighten more for small and medium-sized enterprises than for large enterprises. Large enterprises obviously have the benefit of access to capital markets, which are quite open at this stage.

While we've seen the end of the deterioration in the tightness of credit conditions for small and medium-sized enterprises and just the start of an improvement, there is still a way to go. But as a whole, in terms of the recovery and the recovery in business investment, I would characterize Canada as, if not the least affected, one of the countries least affected by this credit tightness that we see globally.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Carney.

I have one question that is more a personal interest of mine. On page 15, you have a chart on CPI, showing “Total CPI” versus “Core CPI”. I've probably asked you this question each time. A number of our programs, particularly for seniors, such as OAS and so on, are attached to CPI, so their increases or non-increases change based on that number.

I've advocated that maybe there should be a seniors' CPI, one that weights things differently and would deal with issues of a higher value to seniors. Driving to and from work doesn't happen that often for many seniors, so the cost of fuel, as in gasoline, shouldn't play as big a role. The core inflation, the blue line on the chart, is a lot flatter; it doesn't change nearly as much as the variances in the total CPI.

Can you explain to me briefly what the difference is between the two in terms of weighting and what plays a bigger and lesser role?

[Mark Carney]

Very briefly, the adjustment for the Canadian core and total CPI is that what is removed from total CPI are the most volatile items in that basket. But what is important here is that while there's less variation in core CPI—and core CPI is the best predictor of future CPI levels, so you see much bigger swings in total CPI—if you look over a longer period, the level of those prices as they move over time is consistent. So for core CPI in Canada--not uniquely, but it's relatively unusual--it is much more the case here that core is a good predictor of total CPI. You have higher variance; both move in tandem.

[Mike Wallace, Conservative, Burlington, ON]

I may come back to that.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Wallace.

Monsieur Mulcair, s'il vous plaît.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chairman.

Welcome, Mr. Carney. Thank you for being with us. It is always a pleasure to hear your explanations. Every time, they are really to the point. For several years now, we have had the opportunity to sit down here with you and, each time, we have appreciated the soundness of your vision of things. This is the third time — the third consecutive spring, in fact —, that we have had the pleasure of working with you in an official context. This allows us to draw links between statements made in the past and what is taking place at the present time. We see to what extent things have evolved. The liberal critic is even prepared to admit that you can be right. Things are constantly evolving.

That being said, I would like to ask you a very specific question relating to a matter of concern to us. I am talking about the internalization of the costs related to the oil sands. You and I have had the opportunity to discuss this matter in the past. I will provide you with the 30 second version.

As you are aware, we are concerned by the fact that an artificially high volume of American securities are flooding onto the Canadian market because we never applied certain basic sustainable development principles, such as the internationalization of costs or even the user-pays or the polluter-pays principles. We pass the problem on to future generations and, on top of this, it is having an effect on the loonie.

Last year, when we spoke about this, you told me that you understood, but that it was not under your jurisdiction, given that it was the choice of the government. This is how I interpreted your statements. However, very recently, I had the opportunity to see you agree with the Finance Minister of Canada when he stated that he wanted to hear no talk of what he called attacks on banks. In fact, two things are at play: what we sometimes call the Tobin tax, that is rather a tax on financial transactions, and the tax on banks. With regard to the latter, I will dare say that it is rather like a figurehead that he is brandishing. Whatever the case may be, it is indeed matter for a political debate.

I would like you to explain to me the nuance between your refusal of last year to provide an opinion on the internationalization of the environmental costs relating to the oil sands and the joy with which you supported the Minister of Finance's analysis when it suited him. For the outsider, it might have looked like a double standard. In other words, when it is to agree with the minister of Finance, you are all for it, but when it is to agree with the opposition, even when you share its view, you are hesitant. I would like you to reassure me in this regard.

[Mark Carney]

There is a difference, if one considers the responsibilities of the Bank of Canada. The main motivation of countries that are in favour of a tax on wholesale financing is financial stability.

In our view, the important issue is determining if this tax is the best way to reach our financial stability objectives. My answer is no, for several reasons. There is a difference in motivation. There are issues linked to our environment, but they do not impact upon financial stability nor on short term inflationary pressures in Canada.

[Thomas Mulcair, NDP, Outremont, QC]

My third question relates precisely to inflationary pressures, but I would first like to ask you another question. You and I have already, in the past, had the opportunity to talk about inflation. You told me about your targets. Now, you are talking to me about a tightening, most probably in order to reach your objectives in terms of inflation. We will have to discuss this further.

The other question I wanted to ask you is purely technical in nature. It relates to market regulation structures. During a symposium held in London at the end of November, and which was attended by the critic for the Liberal party, I was much surprised by what one of the participants had to say. She was an American, who plays an important regulatory role in England. What she said was surprising. It had to come from someone from the financial milieu and who works for the State. In her opinion, the rating of securities and bonds on the market, as it is done by the Dominion Bond Rating Service and others, should be a function of State regulation.

During a conference I participated in as a speaker, in Paris, in the month of January, I was surprised to hear Joseph Stiglitz state, during a discussion, that he shared this viewpoint. There are aspects of what we have experienced over the last two years that are directly linked to the defects of this rating system. If you, as a former Goldman Sachs man, are here today smiling and chuckling with elected members of the House of Commons rather than being subjected to the throes of a full-fledged inquisition before the American Senate, it is because you made a good career choice. What I most want to know is if you agree that this way of rating securities on the market might eventually fall to a regulatory role of the State.

[The Chair, Conservative, James Rajotte]

You have about one minute, Mr. Carney.

[Mark Carney]

In my opinion, this would not be a good idea. It was a mistake to grant this mandate to a rating agency. Several official mandates have been given to rating agencies.

To be quick, in a variety of regulations, including capital regulations, there's an ability to use ratings, which effectively reinforce the franchise of these agencies, and so there is a desire, and also in investment regulations and other things from the officials' side.... So it would be an advantage to remove, to the maximum extent possible, these mandates that reference ratings--

[An hon. member]

[Inaudible--Editor]

[Mark Carney]

Yes, in order to.... But the mandated use of ratings, in order to have...if it's going to be private, it should be truly private and survive not by fiat from the public sector, but because of the effectiveness of their opinions, which reinforce the original business model of these entities.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go now to Mr. Pacetti.

You have a five-minute round.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

Thank you, Mr. Carney, for appearing.

I want to stick a little bit around that realm and the fact that the economy seems to be doing well globally. We're talking about a global recession recovery.

The last time you were here, we talked a little bit about some of the actions and some of things we can do to reform the financial system. I think you were quoted in certain areas as saying that you want to see better collaboration, with OSFI perhaps taking over some of the responsibilities.

The only thing I've been reading about is this bank tax. That's sort of being put off now. What is happening on the global end in terms of reform? Is it now going to just go by the wayside or has there been improvement? When I talk about bank tax, isn't there some type of bank tax in Canada--if you want, you can call it insurance--the banks have to pay, whether it be to OSFI or CDIC?

Why is there so much pressure for our banks to pay into a global fund? Can you explain that to me?

[Mark Carney]

Thank you for the question.

Very quickly, we collaborate very closely with OSFI, the federal Department of Finance, CDIC, and other federal agencies. There is no desire to change any of those relationships. I'll just assure the committee that we do work effectively together and, I think, to good end.

In terms of your last question, yes, banks do pay a deposit insurance premium that is collected by CDIC and invested. That protects retail depositors; there are more details, but it's basically up to $100,000 per account.

On the issue around the bank tax, if I can explain the motivation--and this goes back to the previous question--there are two justifications for it.

On the first, I will quote the other side, if you will, on this argument. It is to make up for the losses that the state in various countries, for example, the U.S., had for recapitalizing their banks--the direct losses. So they make those up over time. Obviously that isn't an issue for Canada, as has been pointed out.

The second one, though, is to--quote--“internalize the externality” that comes from wholesale borrowing--so not retail deposits, but wholesale borrowing. By setting a tax on that, you would reduce the amount of that, and then you'd set up a fund and that would be there--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So it would be a global CDIC.

[Mark Carney]

Exactly--well, this is in the most extreme versions. Now, the issues we have with that are multiple.

First off, let's just all stop and think about the prospect of having such a fund and it actually being there when it was needed, global or domestic. That's the first point.

Secondly, what would that do to the behaviour of the individual institutions and other market participants, knowing that the state was behind these institutions through a fund?

Thirdly, there are better ways to get this externality. We agree that there's an issue with the size of balance sheets. How do you get at it?

You get at it by having a simple leverage test that just restricts the overall size of balance sheets, which we have in Canada. We need one globally. It's one of our top priorities. You get at it by increasing the amount of capital within a business. You get at it by having differential charges for certain types of activities. Notably, if you want to trade derivatives in the dark, that's fine, but it's going to cost you a lot more from a capital perspective than it does if you do it on a central clearinghouse exchange.

Then, the last aspect is that, again, instead of having a fund globally or domestically over there that probably wouldn't be there when you need it—and I don't want to insult members of the finance committee, but sometimes taxes aren't always ring-fenced for their uses—you have the fund embedded in the actual institution through contingent capital. That is an example, to go back to the first point on OSFI and collaboration, where we are working in extremely close collaboration with OSFI in developing a concrete proposal, which has some support internationally, but there are a lot of details to be worked out still.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

That would be my question, I guess. Just to go back in reverse, if the bank tax is not acceptable, why not sell our advantages, the institutions that the previous Liberal government put into place? Why not sell that internationally?

[Mark Carney]

Yes. I--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

What is the failure there? I don't think there would be the reform--

[Mark Carney]

Yes. I'm conscious of your time.

And that is the strategy, first and foremost. The core of this is that we need more and better capital. We need leverage ratios on an international scale, as we have in Canada. We also need to make some other measures, and we can talk about them if the committee is interested, but I would say--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

What's holding it up?

[Mark Carney]

We are making progress on this. It's going to be very intensive between now and the November summit in Korea, which is the target for having this package together.

We're available any time to go into detail on these issues if the committee is interested, but I would say that the success of this past weekend was to put the distraction of the bank tax off to the side and re-establish the focus on exactly what you're talking about.