Finance Committee on Oct. 30th, 2012

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chairman.

Governor, it's good to see you here again.

Certain observers have said that the Canadian job market has not actually been that strong in recent years. They have, for instance, implied that we have not recovered all the jobs we've lost since the recession, or have said that the quality of these jobs has been low.

I wonder if you could comment specifically on whether we have recovered the jobs we lost in the recession, and if so, what the quality of those jobs has been. Have they been full-time or part-time, public sector or private sector? Finally, how do we compare with our G-7 counterparts?

[Mark Carney]

It's an important question. The short answer is yes, for well over a year, in fact almost two, Canada's been in a position where we've fully recovered the 400,000-odd jobs lost in the recession, and then we have added jobs. Obviously, the number added moves around with each employment report. I'll look to Tiff. If memory serves me, it's about 380,000 net jobs. That's our final answer. I need to phone a friend on this one.

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

We lost 430,000. We got those back, and we've added about another 380,000.

[Mark Carney]

Thank you. We've added another 380,000.

Your question about quality is an important one. About three-quarters—77% to be exact—of those jobs are in industries where the wage is above the average wage paid, so those are in higher quality industries as measured by wage. The vast majority of jobs—I think almost 85% on the most recent read—are private sector jobs. Most of them are, obviously, full-time as opposed to part-time. The quality of job creation has been high.

We're obviously still, though, in a position—I think all members would agree—where there are more Canadians who want to work than are working. We can see that in a variety of measures. The unemployment rate is at 7.3% to 7.4%. The employment-to-population ratio is still a couple of percentage points lower than it was before the recession. The level of involuntary part-time workers, people working part-time who want to work full-time, is still elevated relative to what it was prior to the recession. All those factors are important from a monetary policy perspective. They're obviously important from a personal perspective, but from a monetary policy perspective they're important because they illustrate a degree of slack that still exists in the labour market measured across the country as a whole, which is one of the reasons that a monetary policy can be and continues to be and should continue to be very accommodating.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

How do we compare to our G-7 counterparts?

[Mark Carney]

Certainly relative to the United States, there's no comparison. The United States has not recovered all the jobs lost. They're still millions of jobs down. The drop in the proportion of Americans working relative to the population is much more marked and severe than it is in Canada—it's another couple of percentage points on that employment-to-population ratio—and the involuntary part-time is much higher.

Obviously, within continental Europe, the G-7 countries, and unfortunately in the U.K. as well, the pace of job creation from recession troughs has been quite slow, and the quality has been beneath that found in Canada.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Speaking of the United States, we certainly don't want to see the same problems they've had in the housing market. I know this is something you've been very concerned about as well.

As a government, we've moved the period of amortization to 25 years. We've also taken some steps with CMHC and the new supervision of the Office of the Superintendent of Financial Institutions. How do you feel these two things have changed the situation? Are we stronger? Are we in a better position to not run into the same problems they've run into in the United States with the housing market?

[Mark Carney]

We have welcomed the moves the government has taken on reducing amortization, increasing down payments, effectively raising the credit scores, reducing and effectively eliminating the ability to access mortgage insurance for refinancing and for investment properties. These measures as a whole are contributing to a more sustainable development of the housing market here in Canada, and we welcome them. We also welcome the measures that OSFI has taken to improve the mortgage underwriting standards of financial institutions.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

Monsieur Mai, s'il vous plaît, pour cinq minutes.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you, Mr. Chair.

Good afternoon, gentlemen.

Mr. Carney, you said last summer that Canadian companies are not doing enough to stimulate economic growth and create jobs.

According to Statistics Canada, those companies had a reserve of $526 billion at the end of the first quarter of 2012, an increase of 43% since the end of the 2009 recession. You called that reserve dead money.

Could you explain what the impact of this is, since the money is not being reinvested in the economy, or in productivity, where Canada is having trouble? What could be done to improve this situation? I know the Minister of Finance agreed with you that this was dead money.

[Mark Carney]

Thank you. That is an important question.

Yes, the cash to book ratio has reached a record level. It is not just the amount that is important; it is also the ratio.

What can be done? We can use monetary policy. This is one of the reasons why that policy is so accommodating at present. The overnight rate is 1% and return on Government of Canada bonds is a little under 2%. Obviously, that money is not earning a company's capital costs. So after a certain time, they feel the need to invest.

What more can be done? The incentives for companies to invest can be changed, with measures like the accelerated depreciation deduction that the government put in place in the last budget. That is one approach.

What is essential is to offer certainty as soon as possible. There has to be certainty in the conduct of monetary policy, in budget policy, and in the regulations. As well, if it could be done, we would like to offer certainty globally, in Europe and elsewhere, but that is impossible.

[Voices]

Oh, oh!

[Mark Carney]

Even the Bank of Canada can't do that.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

I think that is beyond your capacity.

You met with us last year and you raised the issue of household debt. The reason the economy has grown is household consumption. There has been talk of record debt levels. According to Statistics Canada, the debt level has reached 163.4%.

What should be done about this? I think this is a concrete issue. Last year, you said it would continue to rise. What can be done?

[Mark Carney]

First, the rate of growth in household debt has declined. That is a confirmed fact.

Second, as we were discussing with Mr. Van Kesteren, on four occasions, the government has implemented significant measures to tighten CMHC's mortgage insurance rules.

That said, we have to continue to be vigilant. A number of regulatory options are available. The recent changes have just been put in place and we are starting to feel and see the effects. All in all, we think now is when we will observe the impact of the measures.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Mai.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Chair, and welcome to Mr. Carney and Mr. Macklem.

As you know, the financial system as such makes an important contribution to the welfare of all Canadians, giving the ability to firms and individuals to hold and transfer assets. With the recent global downturn over the last number of years, Canadian banks have certainly weathered it well, being well capitalized.

With the G-20 financial sector reforms that were proposed and then Canada going even further by introducing legislative amendments to support a central clearing house standard for over-the-counter derivative transactions, could you comment on how this technical change is important in maintaining Canada's global market economic stability?

[Mark Carney]

There is a series of reforms that are, as you say, technical and relate really to the plumbing of derivatives markets. I think we do well to remember that these are $300 trillion-plus markets in notional size. These are immense markets globally. They bring real, true systemic risk to global financial institutions and back into institutions in Canada. The so-called infrastructure of these derivatives markets was found wanting in the crisis and needs to be fixed.

I'll briefly walk through some of the key elements.

First, we actually want to know what's going on in these markets. In other words, we want to make sure that every trade in every derivatives contract is actually reported to what's called the trade depository, so that regulators and authorities can see the actual level of activity, spot trends, see emerging vulnerabilities, and address them as necessary. That's the first thing. Unlike the equity market, one does not have a central repository of the trades that actually happen in derivatives, and it's not acceptable. It's being fixed. It's the first element. Canada is moving forward on that.

The second thing is that the actual mechanisms of so-called settlement in these markets used to be done effectively on a bilateral basis between you and me. I'm going to pick on you, Mr. Adler. If you were going bankrupt, the concern of all other members of the committee would be who else is exposed to you. Then we would think maybe we should cut off the Chair, for example, with all due respect, or maybe that wasn't the best choice; maybe we should cut off Mr. Brison. If the consequence of that was to freeze the system, if there's a central counterparty in the middle so all our trades are through a central pool and all our collateral is held there, if you have the misfortune to fail, then the rest of us can continue to function because we know the collateral is safe and the system continues.

That is fundamental to ending too big to fail, which is a shared objective certainly of members of this committee and of the G-20. Also, it's fundamental to actually make the system more efficient because by pooling the collateral, there can both be more of it available in the event that you fail to the system as a whole but less of it required as a whole because it is in fact pooled.

What Canada has done—and maybe I'll say, as FSB chair, all G-20 countries have just done—is to decide the direction in which they're going to proceed with central clearing. Those legislative amendments were important for the ability of Canada to make those decisions.

[Mark Adler, Conservative, York Centre, ON]

Could you comment on how you use monetary policy to calm the growth of household debt?

[Mark Carney]

As you are aware, the important aspect here is that the first responsibility of monetary policy is the achievement of the inflation target, it's inflation.

With respect to issues around household debt, there are several lines of defence. They start with the individual and the institutions lending to those individuals. They then extend to so-called micro-prudential regulations, which are a type of regulation that OSFI would put in place. The amount of capital a bank has to hold against a given loan, OSFI has actually been raising those amounts, so that has helped.

Related to that, the second line of defence is supervision and underwriting standards. OSFI has been tightening those underwriting standards, so that has helped.

The third line of defence is macro-prudential regulations, the types of measures raised by Mr. Van Kesteren on CMHC and mortgage insurance. They have been tightened four times. That has helped.

The last line of defence is monetary policy. One doesn't want to lean with monetary policy, but one doesn't want monetary policy working at cross-purposes, easing when everything else is tightening, for example, when there is economy-wide vulnerability. Monetary policy can play a complementary role. It's the last line of defence. That's why we work closely with other authorities to ensure that all potential mechanisms and tools can be used to the greatest effect.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Adler.

Mr. Marston, please.

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

Thank you, Mr. Chair, and welcome, gentlemen.

Governor, I'm going to take advantage of the fact that we've got your expertise here to go a little off track from where we've been.

This committee has been tasked with hearing testimony on a private member's bill that requires the publishing of financial information from a number of organizations, which raises some very serious concerns, not only from the witnesses but from some members from all parties.

Could you speak to how the market would be impacted if the details of all financial transactions had to be publicly disclosed? Suppose that this only applied to a single group. What impact would that have on their operations?

[Mark Carney]

I'm not sure I have quite enough information to answer that question at this stage. If we drop it down another level....

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

I thought we might be at that point. It's regarding unions and other associated organizations, labour trusts, and places like that. For example, if that information were published, employer groups would know the assets of the union, would know what they could apply for bargaining and a variety of investments they have in the building trades where they have contracts with specific municipalities or whomever. Their competition would know that.

Would that affect the outcome of the collective bargaining if the finances of that union were made evident?

[The Chair, Conservative, James Rajotte]

Mr. Marston, I'm going to interject. We invited the governor and senior deputy governor to talk about the monetary policy report. I think we're really stretching relevance; even your generous chair may think this is not relevant.

I don't know if it's fair to ask Governor Carney something that we haven't....

Governor, you are welcome to comment generally about it or we can certainly follow up later.