Okay, let me—
Evidence of meeting #53 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.
A recording is available from Parliament.
Evidence of meeting #53 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.
A recording is available from Parliament.
4:45 p.m.
Conservative
4:45 p.m.
Governor of the Bank of Canada
Yes, a few small items. I'll do two and three and then pass to Mr. Macklem for the first one, although we may need to come back.
Just as it is for governments in Europe, the United States government, and the Canadian federal government, it's important that all our provinces are on sustainable fiscal paths. We note the efforts of our two largest provinces to accomplish that. The lesson we've all learned over the years has been that it's important to have a path, it's important to have a plan, it's important to over-perform relative to that plan over time, and credibility is built with performance, as opposed to announcements.
There have been tough decisions that have been taken in those jurisdictions, and it's not really appropriate, obviously, for us to comment in detail, aside from the overall. It is important for the continued health of the Canadian economy that these provinces continue to make progress consistent with the fiscal paths they have outlined over the course of the last several years, and we welcome the progress they have made.
With respect to number three, on financial reforms, let me break it into three parts. First, we entirely disagree with the comments of the president of the Canadian Bankers Association. I gave an answer to this shortly after it came out. It was a good thing we didn't press pause when the financial crisis was on, didn't press pause in providing liquidity to the Canadian banks. It's a good thing the government didn't press pause when they were providing extraordinary liquidity, when we were engineering a restructuring of the non-bank asset-backed commercial paper that ended up preserving tens of billions of dollars of value for individuals, for our major pension funds, for governments across this country.
The crisis revealed deep deficiencies in the structure of the global financial system. Some of those deficiencies were shared here in Canada, fewer here than elsewhere. But we're resolute and I think the government is resolute and the Superintendent of Financial Institutions is resolute as well to ensure that we methodically and quickly address those.
4:50 p.m.
Governor of the Bank of Canada
Now to Volcker and shadow banking.
On Volcker, we have made our concerns known to the Secretary of the Treasury and the chairman of the Federal Reserve. Obviously we respect absolutely the sovereign right of the United States or any country to regulate their financial affairs within their country, but it's the extraterritorial impact of Volcker that concerns us. That happens from time to time. Our basic concern is the structure of the rule—and I won't go into detail—and the distinction between market-making and proprietary trading, which we don't see as a workable definition.
I'd note in passing that there were 17,000 comments on this rule, and that it recently was announced, last week in fact, that implementation would be delayed by two years as they work through these comments. And we do have faith in the U.S. system to address any deficiencies that are found there.
On shadow banking.... Are you out of time?
4:50 p.m.
Conservative
The Chair Conservative James Rajotte
I am out of time, so maybe we'll return to that at a later date.
4:50 p.m.
Governor of the Bank of Canada
We can come back to it, because there are five main thrusts of what we're doing on shadow banking.
4:50 p.m.
Conservative
The Chair Conservative James Rajotte
Maybe Mr. Brison will ask the same question I had. Thank you.
We'll go to Mr. Brison now, please.
4:50 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
Given that you asked two questions I intended to ask, I would be delighted for the governor to continue on that. I have another question further on the Volcker rule, but I would actually ask the governor to continuing in answering the question on shadow banking.
4:50 p.m.
Governor of the Bank of Canada
Okay. Well, first, for some quick context, most of the focus of regulatory reform has been on the regulated banking sector. The other half, though, of the financial system is the so-called shadow banking system. Our objective here is to turn that from something that exists in the shadows to something that has full daylight, from a pejorative term—shadow banking—to something that has a more neutral term: market-based finance. The way to do that is to address five aspects. Let me unify and comment on them.
What matters for financial system stability, for what happens outside the regulated sector, is the provision of credit where there are maturity transformations. You borrow short and lend long. It's that combination of maturity transformation and credit intermediation where you create risk that could potentially impact the whole system. With regard to the non-bank ABCP in Canada, people borrowed short, they lent long, and that's fundamentally what created the risk.
The first of the five areas we're focused on at the Financial Stability Board is the links to the regulated sector, the links to the banks, whether through back-up liquidity lines or other arrangements.
Second is how money market funds are structured, particularly in the United States. More broadly it's this structure where you have a guaranteed net asset value in a money market fund. It looks like a bank. You put your money in the fund and you have what's perceived as a guaranteed net asset value. It's upon the realization that the guarantee has no safety net, no capital underneath it, that you get a run on the money funds, which is what we saw in the U.S. There will be a report and recommendations coming out on that very shortly.
Third is issues around securitization markets.
Fourth is other shadow banking entities, which can include hedge funds, as an example. There are a variety of measures there.
Finally, and very importantly, there is the structure of what's called the repo market, the repurchase market, which is one of the core funding markets for institutions. Basically, it's asset-based short-term lending. The fact is, the way those markets operated was exposed during the crisis. Bear Stearns and Lehman showed you can have huge impacts across the system.
I would note that in Canada we've made tremendous progress in the launch of a central counter-party for repo, which is going to take out a lot of those risks.
4:55 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
There have been concerns raised recently on regulation LIBOR, interbank interest rates. What are the concerns here in Canada, or should we be concerned, and is there a need to evaluate this more thoroughly?
4:55 p.m.
Governor of the Bank of Canada
Oh, LIBOR. Yes. We're not privy to any particular information, but as you're aware, the performance of LIBOR is a key reference rate. During the course of the crisis it did not move as much as underlying tensions in the market would have suggested it could have moved.
4:55 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
Do you think the concerns that have been raised could be applicable here in Canada?
4:55 p.m.
Governor of the Bank of Canada
The Competition Commissioner from the Competition Bureau of Canada is engaged in the investigation. As I said, we're not privy to any information, but it's certainly being handled in the right hands.
4:55 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
Do you think the U.S. administration has been receptive to your concerns raised on the Volcker rule? We're coming up on...what is it, 2014 when it is due to be implemented?
4:55 p.m.
Governor of the Bank of Canada
Yes. The way U.S. officials have to behave, and do behave, is that when they put out a rule they are entirely in receipt mode in terms of comments. Their job is to understand the comments and then decide whether they have merit and make adjustments accordingly. That's their legislative responsibility.
We're in a process where they are entirely neutral, if you will. As I said, they're in receipt mode; they're neutral.
That said, I would observe that quite a range of participants, both in the official sector and the private sector, from across a range of geographies, have pointed out some very common deficiencies in the rule as it was structured, and some major international spillovers. These are quite serious comments.
The Minister of Finance also has written to his counterpart, and so has the Superintendent of Financial Institutions. We would expect that they would take it seriously.
4:55 p.m.
Liberal
Scott Brison Liberal Kings—Hants, NS
Finally, with your concerns on the CBA president's statements, do you fear that if we push the pause button there would be a risk of what you call backsliding?
4:55 p.m.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Mr. Brison.
We'll go to Mr. Adler, please.
4:55 p.m.
Conservative
Mark Adler Conservative York Centre, ON
Thank you, Mr. Chair.
I want to turn to another topic. I recently read a rather interesting book by Jim Clifton, the chair of Gallup. He wrote a book called The Coming Jobs War. His thesis is that the next major battle is going to be over jobs, and those countries that can create the jobs of the future and attract those workers are going to be the powerhouses of the future; it's not necessarily military power that is going to dictate what countries are going to be economically powerful. I was wondering if you could comment on that.
Also, when I go through my riding, where we have a lot of private small and medium-sized businesses, I always receive a lot of accolades that we've lowered the corporate tax rate—because we all know corporations don't pay taxes—and that we seem to be hitting all the right buttons to create jobs. I was wondering, as a supplementary question, what you're hearing in your circles, among your colleagues in other countries, about how Canada is performing and what they're asking you.
4:55 p.m.
Governor of the Bank of Canada
I'll look for this book with interest. I think one of the things to recognize, whether you term it a jobs war or the changing nature of work, is that because of trade and technology, a variety of tasks are being transformed and elements of them are becoming tradeable, if you will.
Highly sophisticated skills—don't worry, I won't use finance as an example, because some would be tempted to.... With diagnostic skills, for example, you can break apart the basis of diagnostics and outsource elements of the testing and analysis. We all know that you can outsource large amounts of programming and other elements on IT to other countries and form teams among people who have never met and are never physically in the same place.
The consequence of that is that there is more that's tradeable and that the bit that remains in Canada is the truly high-value-added component, which is good news. That leads to a higher return to that individual. It also puts a premium on our developing those skills, recognizing that there are elements of the other skills that could be outsourced over time because of the development of trade. That is something the appropriate people need to be alive to in the development of training, both retraining and university-level education.
In terms of what we hear from colleagues, I'm not sure that we get a general message. People are very focused. There's a little bit of jealousy, I guess.