Finance Committee on April 23rd, 2013

[Mark Carney]

It's an important question. Let me begin by stating the obvious, but it's important to state the obvious. Financial institutions in Canada that are covered by deposit insurance—CDIC deposit insurance—are numerous, and that deposit insurance has the full faith and credit of the Canadian government. If anyone has any concerns about whether their institution is covered, www.CDIC.ca or www.SADC.ca is the way to check your institution. It's covered to $100,000 by account and institution. There are several categories of accounts—individual, joint, TFSA, and RRSP are separate accounts, and trust accounts as well. There are quite comprehensive and considerable insured deposits in Canada. And for the vast majority of Canadians, they are covered by CDIC insurance, so this issue instantly goes away there.

On the second point, the situation in Cyprus, what happened there was that only the banks themselves were funded by deposits. That's number one. Number two, the Government of Cyprus did not have the resources and the backing of their deposit insurance scheme that the Canadian government, a triple-A government, does have. The uninsured deposits in Cyprus were ultimately “bailed in”, so uninsured depositors in Cyprus were taking losses. The Government of Canada, through the Minister of Finance's spokesperson, has said that all consumer deposits will not be subject to a bail-in regime. I will leave it to the government to come back with more details on the regime in due course. They signalled their intent to go in this direction; they can provide more details.

I'll make a general comment, from a global perspective, if I may, about the work that Mr. Macklem and I do through the FSB. In general, in advanced economies, banks are funded by insured deposits that are rock solid, as I just described. Then there are some uninsured deposits, and different countries can make different decisions about whether there is “deposit or preference” for those. To make it simple, they have unsecured debt, and then they have equity. The equity, if a bank gets in trouble, is obviously the first call. In a number of jurisdictions, that unsecured debt would be bailed in if a bank were really in trouble. It would become an equity holder; it would take losses. Different jurisdictions will do things differently. What's absolutely essential is that there is clarity, in advance, about the creditor hierarchy and what order different classes of funders of banks are bailed in.

It's also helpful to go back to the purpose behind all of this, and it's two-fold. First, it's to reduce systemic risk in the system. It ensures that there's clarity, as I say, and that there are adequate resources. If a bank makes mistakes, has big losses, gets itself into trouble, the private shareholders and the private creditors—the debt holders, not the depositors—bear the brunt of those losses, and obviously the management as well.

The second thing is that, in doing that, it brings discipline into the system. It brings capitalism to the heart of capitalism, if you will, in the banking system. It doesn't rely on the taxpayer to support the institution, as we have seen time and time again in the wake of the financial crisis.

[The Chair, Conservative, James Rajotte]

You have about 30 seconds, Mr. Brison.

[Scott Brison, Liberal, Kings—Hants, NS]

You've referred to, and spoken of, the less than robust level of business investment in Canada. Given the strong relationship between investment and productivity, is there a risk to long-term productivity in Canada? Secondly, what are some public policy measures for us to consider to address this?

[Mark Carney]

I'll only answer the first part; we can come back to the second part.

We review and update our view of productivity in Canada every October with the October report. There will be an update. The absence of strong investment does raise risk in terms of the rate of productivity growth, and that ultimately has implications for the conduct of monetary policy in the short term.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Brison.

Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

Welcome, Mr. Carney and Mr. Macklem.

You made a comment about shock from abroad and how it can impact the housing market. I wonder if you could elaborate on that and give Canadians an example of how shock from abroad can impact the housing market and how the impact on the housing market can also affect their household debt and their debt levels. I wonder if you could elaborate on that and tell us what this could mean to the individual Canadian.

[Mark Carney]

In effect, from a contextual perspective, Canadian debt to income is at an all-time high. Certain cohorts of Canadians are more vulnerable within those aggregate figures. By this I mean they have debt obligations that are above 40% of their post-tax income. That historically has been a level where you see step change in terms of their ability to service debts because of shocks. I'll try to avoid causing a shock, so I won't speculate on what exactly a shock could be, but it's something that materially lowers global economic growth. This could be events in emerging markets or events in one of the major economies. Materially lowered global economic growth has a flow-through impact on Canadian exports and has a knock-on impact on Canadian investment and hiring because businesses are uncertain. They also see less prospect for profit, so it has a knock-on effect that hits Canadian jobs.

Not surprisingly, one of the key indicators of heightened delinquencies on mortgages is employment. If you get a shock to unemployment, because we're an open economy and because of a reduction in global demand, you would have that knock-on impact. The challenge is if the impact is big enough, you can get a feedback to the housing market as well. More properties are on the market, fewer people are buying the properties. That hits the prices, that hits confidence on the margin, and there's less spending. These are recession-type dynamics, which are caused by a hypothetical larger shock. This is not our expectation in any respect, but we have to be conscious. All the parties involved, all the federal agencies involved, including the bank, have been quite conscious of this potential vulnerability over the course of the last few years, which is why we individually and collectively have taken steps to help manage the situation.

[Randy Hoback, Conservative, Prince Albert, SK]

You also made a comment about the fact that two-thirds of floating rate mortgages are now converted to 10%. Does that offset that risk?

[Mark Carney]

It lowers the risk, without question.

Just so members are clear, that's a flow calculation. A year ago, two-thirds of people who went for mortgages went for floating rate mortgages. Now it's only 10%. Over the course of the last year, every month around 10% or 12% of mortgage applications have been fixed rate. Obviously there are advantages. If there were a shock that caused interest rates to go up, people with floating rate mortgages would be more exposed. Having mortgages fixed for five years reduces the vulnerability. On the margin it's a sensible thing for people to do if they have any concerns in that regard.

[Randy Hoback, Conservative, Prince Albert, SK]

When you talk about debt-to-income ratios in this environment, what should a family look at? Would the Bank of Canada say it's a healthy debt-to-income ratio versus an unhealthy debt-to-income ratio?

[Mark Carney]

It's slightly a product of where they are in their life cycle.

As we all know, we all started out at one point, and you had to stretch a bit to take on a mortgage. It depends on whether both partners are working, or expect to work, and the security around those jobs. I hesitate a bit to be too prescriptive, to say there's a magic figure. Certainly once debt service starts to get up north of 40% of income, the weight of evidence is that delinquencies tend to go up.

We can provide some background to the committee, if it's of interest, and we've done some sensitivity analysis around this. You don't have much margin for error if your shifts get cut back or you have a child and you're out of the workforce for a bit—these types of things. When life intervenes, there's less of a margin for error, and individuals have to make judgments around that.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you.

I'll stop there, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hoback.

We will now turn to Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I would like to welcome Mr. Carney and Mr. Macklem.

I would like to go back to comments that you made last week regarding the possibility that the Bank of Canada may use interest rates to deal with household debt, and mortgage debt in particular. You commented on this possibility, but the next day, or shortly thereafter, you backtracked. I would like you to clarify the Bank of Canada's position on what action it may or may not take with respect to household debt.

I have a second question on the same topic. If taxes are the most effective tool that the Canadian government has to deal with household debt, particularly mortgage debt, should the government and the Minister of Finance be more aggressive and make it more difficult to be eligible for a mortgage, should you feel that this issue is still troubling or worrisome?

[Mark Carney]

I would like to answer your first question. I will turn the floor over to Mr. Macklem to answer the second one.

I feel that I was saying exactly the same thing. There are many factors that influence the Bank of Canada's monetary policy trend. If I had to choose three factors, I would say that, first of all, there is the pool of unused capacity, namely the surplus supply in Canada which remains at high levels right now. Secondly, there is the inflationary trend here in Canada. Thirdly, there is the evolution of household debt and the situation that exists in Canada in the mortgage and housing sectors.

Right now, we have a significant surplus of supply. Inflationary pressure is not significant. In addition, there has been constructive evolution in the household sector. As a result, it is clear that the considerable monetary easing that we see now in Canada will no doubt remain for a certain period of time. However, at one point, at a time that has not been identified by the Bank of Canada, it is likely that there will be a modest increase in the key policy rate.

As to your second question, I will let Mr. Macklem answer.

[Tiff Macklem, Senior Deputy Governor, Bank of Canada]

Thank you, yes. That is a good question.

Up until now, the steps taken by the government, OSFI and by us, through our upward bias with respect to our interest rates, have, all together, succeeded in reducing the activity rate in the household sector and the credit growth rate. I can give you a few significant figures.

For instance, last year we had approximately 225,000 housing starts; now, this figure has dropped to 185,000, according to our demographic demand estimate. These numbers have therefore fallen off slightly, after having been clearly high for some time. As for the resale sector, last year there were 480,000 units sold, and now the figure is 430,000, slightly below the average for the past 10 years. The growth rate of household credit is now approximately 4%. Last year, it was 6%, and before that, it was 10%. This rate has therefore dropped significantly.

As the Governor stated, this entire evolution is positive. It is not occurring too quickly, we do not see an acceleration. However, it is important to note that, in our opinion, even though the household debt-to-income ratio is about to stabilize, it is still relatively high. The same thing applies to the price of houses. So there are still some vulnerabilities. This gradual evolution must continue.

Going back to your question, I would say that it is too soon to drop our guard. If ever we see an acceleration, we will have to look at the measures that could be taken.

[The Chair, Conservative, James Rajotte]

All right, thank you.

Thank you, Mr. Caron.

Mr. Jean, please. It's your round.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

Thank you, both of you. I've enjoyed your testimony and the opportunity to listen to your questions over the past few years. I have found it very professional and educational, so thank you.

I want to talk about two particular issues that interest me. Of course, being from Fort McMurray, I'm interested in workers and the ability to keep the Canadian economy as strong as we possibly can. I am interested in the temporary foreign worker program as well as mobility.

I'll start with the mobility issue, because of course Canada does have a workforce that is very mobile, but we also have one of the highest air travel costs of many of the OECD countries. I'm interested in opportunities that present themselves for increasing the ability of Canadians to be mobile in a marketplace that allows for flexibility.

I travel to Fort McMurray pretty much every weekend. There are two direct flights from St. John's that I can catch a ride on in Toronto. It's amazing how many people I meet there who tell me that they can work in Fort McMurray for three or four months and make enough money such that they don't have to work the rest of the year at home; in fact, they say that amount of money is what they make at home.

The mobility issue is very, very important. Do you have any ideas on how we could increase mobility of Canadians for jobs?

[Tiff Macklem]

I'll make a couple of points. First of all, it's worth underlining that the mobility of Canadian workers has improved quite markedly over the last decade. We have some research done at the Bank of Canada that shows this, and we can share it with the committee. This has noticeably improved the efficiency of our labour markets. While there are still issues of matching workers with jobs and of skill gaps, the efficiency of the labour market is better than it was.

In other words, for every level there's a locus between unemployment and vacancies, and that is shifting to the origin, so that there are fewer unmatched jobs. A big part of this is due to improved mobility.

There are other elements to that matching. We've already talked about skills. That is an important element: making sure that the workers have the skills the employers need.

In terms of further improving mobility, there has been some progress, and there is room for more progress around accreditation. It's a case of having a labour market across Canada, in which particular workers in trades can move seamlessly across provincial boundaries—

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Is that the Red Seal program in particular?

[Tiff Macklem]

The Red Seal program is a good example.

So that is one area I would highlight.

You mentioned the temporary foreign worker program. The government is reviewing it. It is designed to deal with temporary skill gaps, and the intention is to bring workers in to fill those gaps on a temporary basis. It's important that it be used appropriately, and the government is reviewing that.

As a country, though, what we need to do wherever there are sustained skill gaps is invest in the country to generate those skills here in Canada, so that we have our own home-grown labour force.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Would it be fair to say this especially of the high-end jobs—the highly skilled, highly trained, high-return-on-investment jobs?

[Mark Carney]

Yes, that's absolutely right. There can be short-term, and you're familiar with it.... Mr. Macklem was just in Fort McMurray, and I'm from the area as well, so we're familiar with the kinds of gaps you get there. One doesn't want an over-reliance, certainly, on temporary foreign workers for lower-skilled jobs, which prevent the wage adjustment mechanism from making sure that Canadians are paid higher wages, but also so that firms improve their productivity as necessary. We don't want to mask it, and the intent of the government's review is to ensure that this is used for transition, for those higher-skilled gaps that exist and can hold our economy back.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

If that is the case, and if the program is working, let's say hypothetically, the way you describe it, how important is the temporary foreign worker program to keeping the economy rolling?

In Fort McMurray, for instance, I've never seen anyone earning more than $20 or $25 an hour who is a temporary foreign worker; such a case just doesn't exist. The average income there is $185,000 per household—it's the highest in the country—and there is a huge service sector that is servicing the people working in the oil sands. Those people are not going to work for $20 or $25 an hour. So how important is it that we have a properly managed temporary foreign worker program, but also that we have one that works as you describe?

[Mark Carney]

I think the spirit of the program and the spirit of the government's review is to ensure that this program is concentrated on higher skills, number one, to fill gaps, and to recognize that those are temporary gaps, so that we are ensuring that Canadian businesses are providing Canadian solutions—the training—and that we're working together to ensure that Canadians can meet those gaps.

For the lower-wage jobs, it is important over a reasonable time period to ensure that the market adjusts and that those market wages adjust; then there will be productivity and other adjustments that ensure that Canadians are paid more, but also that we're a more productive economy as a whole. Getting that balance right is what is necessary.