Finance Committee on June 6th, 2013

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

You have answered it in part.

We are actually talking about the impact of the financial crisis on the banking system. I believe that everyone recognizes that Canada's banking system was more solidly based than a lot of others, and for a number of reasons. But Canada's financial system was affected by things whose dangers were unknown. Things like asset-backed commercial paper and subprimes, for example. Those things came into play and triggered the crisis.

So there is an issue in terms of complex financial tools, which is what the Financial Stability Board is looking into. It wants to see if the system actually is out of control because the tools are so complicated. In that sense, what course will the Bank of Canada set in the Financial Stability Board?

Then, if you have any time left, what advice could you offer, to the Minister of Finance, for example, so that he could play a proactive role in terms of the causes of the crisis?

[The Chair, Conservative, James Rajotte]

Mr. Poloz, you have a minute left.

[Stephen S. Poloz]

The crisis certainly affected our banking system profoundly. The system is quite complex and it is actually getting more complex by the day.

We need a collaborative system where the rules are almost voluntary, given that everyone wants the system to be more robust. That is everyone's goal, including the banks. So we need more extensive discussions of a collaborative nature between the banks and the people here in Ottawa. The Bank of Canada has a contribution to make and has to be part of those discussions. Specifically, it can make a significant contribution in research.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Poloz.

In the final round, Ms. McLeod, please, with your questions.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you.

Again, I'm really pleased that we've covered a lot of different subjects.

We touched briefly on household debt and how much of a concern that was. I also notice that TransUnion's market trends looked at the latest results and that there was a pretty large reduction, so it's certainly heading in the right direction.

Also of interest to me personally was my meeting this week with the Financial Consumer Agency of Canada, which has actually done some micro-level analysis in the riding that I represent, in terms of a much higher use of lines of credit versus other areas. They were saying that the debt was looking very different and that was very much a regional issue at times.

Could you talk a little bit more of the trend and perhaps on that regional sort of analysis of household debt and its potential impacts?

[Stephen S. Poloz]

Yes, thank you.

I should start off by reminding everyone that the world has changed quite a lot in the last 20 or 30 years. Household debt today is probably not easily compared to it 20 years ago simply because the financial system has become so much more flexible—almost self-serve in nature. You have the ability to control your own level of borrowing much more easily than you could in an earlier generation.

That has improved what I call the “efficiency” of the financial system. It means that households may have more debt on their balance sheet, but they may also have more assets, so they've somehow managed that in much the way we think of a firm managing it. So I don't want to distract our conversation from that, but I just want to remind everybody that we shouldn't look at something that's a certain percentage now and a percentage from 20 years ago and say, “Oh, that can't be right”, because we don't have quite that kind of assurance.

The trends that we're observing, though, are very constructive, as you mentioned. Indebtedness has at least stopped rising relative to income, which is the minimum that we would like to see. As I mentioned before, provided that the rest of our story unfolds as I described earlier, what we'll see is a period where consumers strengthen their balance sheets because they won't be leading the economic growth charge.

The adjustments we've made in the insurance space are obviously contributing to that shift in behaviour, and we wanted to make sure that there weren't any speculative elements emerging in the housing sector, in particular.

The analyses that FCAC have done on a micro level sound great. I know those folks and I'd like to see some of that, but I haven't seen it as yet.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Yes, it was interesting because housing costs in our community are certainly less than in a community like Vancouver, so you wonder if people just absorb that level of fluidity and if they're not paying as much on housing if they tend to enjoy other opportunities. So I think looking at the micro level is going to be an interesting opportunity, at least for different members of Parliament.

We've talked about the U.S. and Europe and you touched briefly on where they are in terms of their situations and where you see their future, but if you want to expand a little bit on that, please do.

[Stephen S. Poloz]

Thank you.

Let me begin with the U.S., which is largely a good-news story. Certainly in the U.S. we saw very rapid efforts to liquefy the financial system, a very fast response by policy-makers, which meant that unlike in other countries, all the damage was done at the beginning and then the healing process began very rapidly.

Of course, we had a tremendous fallout in the U.S. housing sector. That was the biggest element that was hit hard. We're seeing very positive signs that it is going back to a more normal course. This is very important to Canada since we export materials that often go into that equation.

Importantly, the U.S. economy, fundamentally, is stronger than it appears as a headline, because we have a significant fiscal adjustment layered on top. The part of the U.S. economy that we export to is more the private part than the government part. That's one of the reasons why EDC's export forecast for the U.S. is stronger than you might have guessed, given how much growth we expect to see in the U.S.

In Europe there is a different story, obviously. It remains in a very difficult situation. We have there, if you like, institutional gaps that have made it difficult for them to do the same things that the rest of us tend to take for granted in policy action.

I would say that those institutional gaps persist, but I am encouraged that though they persist in practice, the intellectual leap has been made. The bridges have been built. People understand what is needed. So I have to believe that being constructive about what's going on in Europe is the right thing. We think it will gradually improve, but it will be a very prolonged story.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. McLeod.

Governor, on behalf of all the committee members, I want to thank you so much for being with us here today and for your dialogue with us

As we did with Governor Carney, we would like to host you twice a year, once in the spring and once in the fall. We certainly look forward to continuing the dialogue with you at the committee. We appreciate your time here.

Colleagues, I will suspend for one minute and then we have some brief committee business to do.

Thank you.

[Proceedings continue in camera]