Finance Committee on May 16th, 2012

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

I gathered that. I realize that part of the due diligence of the purchaser is to look for themselves. I was curious if there was a ministerial test at all, but that's fine. You've answered the question, and I appreciate that.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Brison.

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

Under the widely held rule, no one can take more than 10% of one of the big banks. ADIA, the Abu Dhabi Investment Authority, manages about $627 billion. CIC, China Investment Corporation, manages about $350 billion. The Japanese government pension fund I think manages $1.3 trillion or $1.4 trillion, as an example. These are big players. In Canada, the CPP Investment Board manages about $160 billion, or something like that, maybe a little less this week. These are very significant players.

Besides the ministerial discretion, if the Abu Dhabi Investment Authority wanted to take 10% of a Canadian bank, and CIC wanted 10%, and the Japanese government pension fund wanted to buy 10%, and there were a couple more of these sovereign wealth funds, is there any legislative or regulatory barrier to one of the big Canadian banks effectively having more than 50% of its shares owned by a consortium of foreign sovereign wealth funds after this change? Is there any specific regulatory barrier?

[Jane Pearse]

As I said, the minister will be able to assess using a variety of criteria in the process of looking at an approval.

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

So it's purely ministerial discretion at that point--there is not an equivalent foreign ownership limitation?

[Jane Pearse]

Well, there is a national security clause in the Bank Act. There is also the best interests of the financial system in Canada.

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

But the call would be interpreted by the minister.

[Jane Pearse]

That would be assessed by the minister as part of the approval process, yes.

There is also another technical component of the financial institution legislation that's related to associates. In the event there were a series of owners that were deemed to be associated or were acting in concert, that would be addressed through the statutes. There's the widely held rule and the other framework related to ownership, 10% of large institutions, up to 20% with approval by the minister. There's a piece that goes on the top, which allows for an interpretation of association and acting in concert.

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

We don't have in Canada the size of sovereign wealth funds that compare to some of the ones I just mentioned. We have big, successful pension funds in Canada, but this is a significant change. I'm not opining on whether it's negative or positive, but it is a very significant change.

Has there been any consideration of some additional regulatory change to address some of the concern I just expressed--the potential for a group, perhaps not even acting in concert, perhaps acting individually and effectively the control of a Canadian bank falling into the hands of foreign ownership? As I said, I'm not expressing whether that is good or bad—that's for another debate—but were there any specific prohibitions considered in terms of a regulatory change to prevent that possibility?

[Jane Pearse]

I think the other thing that's critical for this question is that these amendments address primary issuance only. These provisions allow primary issuance only. So the Canadian financial institution would have to deem that it is in their best interest to issue a series of new common shares, for example, to a new investor. In your example, you are diluting the current shareholders by issuing new shares. There would have to be a decision made by the board that it was in the best interests of the company.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Brison.

Ms. McLeod, go ahead, please.

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

Can you just make some comments regarding the restrictions on board membership?

[Annie Hardy]

Well, we said in the legislation that public pools of capital won't be able to nominate any employees or directors to the board of directors of the financial institution. The reason for this is to limit the influence the public rules of capital will have on the management of a financial institution. We want to keep them as much as possible as passive investors. We also prohibit them from having an active position on a board of directors.

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

Actually, it's unfortunate.... I was feeling that Mr. Brison had some concerns, so I was seeking some more opportunities for him to perhaps understand how the board was going to have some restrictions in terms of that influence he seemed to be expressing concerns about. So thank you for sharing that.

[The Chair, Conservative, James Rajotte]

Thank you.

I have Monsieur Caron. No? Mr. Marston....

Okay. That's it for that section then, for division 10, financial institutions. We will now move to division 11, Canada Mortgage and Housing Corporation, amendments to acts.

[Jane Pearse]

Division 11 sets out legislative amendments to strengthen oversight of the Canada Mortgage and Housing Corporation and to ensure that its commercial activities are managed in a manner that promotes the stability of the financial system. The proposed changes are part of the government's efforts to strengthen the housing finance system. The proposed legislative amendments include additional objectives for CMHC to ensure that its commercial activities promote and contribute to the stability of the system, including the housing market; legislative and regulatory authorities for the Minister of Finance in respect of CMHC's securitization programs and any new commercial programs; authorities for the Superintendent of Financial Institutions to review and monitor the safety and soundness of CMHC's commercial activities and report to the CMHC board of directors and the Ministers of Finance and Human Resources and Skills Development; and the addition of the deputy minister of the responsible department, Human Resources and Skills Development, and the Deputy and Minister of Finance to CMHC's board of directors as ex-officio members.

Division 11 also includes a legislative framework for covered bonds. Covered bonds are debt instruments that are secured by a pool of high-quality assets, such as residential mortgages. Until now, Canadian banks have issued about $60 billion in covered bonds under contractual, non-legislative framework. The legislative framework was announced in budget 2010 in order that covered bonds could better support financial stability by making the market for those bonds more robust and helping lenders access new sources of funding.

The framework will be administered by CMHC and will be open to federal and provincially regulated mortgage lenders. The key elements of the legislative framework include allowing covered bonds to be registered by CMHC; providing investors in these registered covered bonds greater certainty about their claim on the covered bond collateral; prohibiting the use of government-backed insured mortgages from being part of the covered bond collateral pool; and requiring that federal financial institutions only issue covered bonds under this legislative framework.

Since the budget announcement of this framework, stakeholders both in Canada and internationally have been supportive of the announcement.

[The Chair, Conservative, James Rajotte]

Thank you very much for that overview.

We'll begin with Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

I think we would all agree that promoting stability in the financial system is important, and certainly in the housing market, where there is, of course, concern about a bubble in the real estate sector, given what we've seen in the U.S. and the U.K. and other parts of the world.

How would the proposed responsibilities through CMHC help provide greater stability and perhaps address reducing the risk of a housing bubble?

[Jane Pearse]

The amendments in the bill are intended to strengthen the oversight of CMHC so that there would be better knowledge within the government of the risk profile of CMHC—the types of activities it's engaged in, its activities to mitigate any of those risks, and the capacity of management and the board to respond to risks within the products covered in its commercial programs.

So it provides the ability for the government to establish the terms and conditions of the securitization program and provides for OSFI to be more engaged in the supervision of that entity, as it is currently engaged in the supervision of the private sector entities that provide mortgage insurance in Canada.

It enhances the CMHC board of directors by adding two deputy ministers—one from the responsible department, Human Resources and Skills Development, and the Deputy Minister of Finance—as ex-officio members to the board.

The intent is to have a more cohesive system of oversight on the CMHC.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Can you describe the difference in risk factor between CMHC-insured mortgages and private-insured mortgages?

[Jane Pearse]

Risk factors in terms of...?

[Peggy Nash, NDP, Parkdale—High Park, ON]

In terms of default, in terms of instability....

[Ling Wang, Chief, Financial Institutions Division, Housing Finance Review, Financial Sector Policy Branch, Department of Finance]

We don't have the specific data, but both CMHC and private mortgage insurers are subject to government-backed insured mortgages. The government has made several changes to the rules over the last several years. These rules apply to both CMHC and private mortgage insurance companies.

[Peggy Nash, NDP, Parkdale—High Park, ON]

If I recall, I think for the private-backed insurance companies, their mortgages are backed by up to $300 billion. Is that your understanding?

[Ling Wang]

It's $250 billion currently.