Finance Committee on May 10th, 2016

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I think it needs to be put into context that while there haven't been failures in the past in the credit union movement, there had been significant provincial backstopping, costing significant numbers of dollars.

[Glenn Campbell]

Provincial credit unions are largely managed through their deposit insurance arm and in some cases, there are two entities. And where they may have been cost-borne, it could have been in their deposit insurance fund. I'm not aware of statistics that attribute back to what the fiscal cost may have been. Clearly costs are often borne when institutions are consolidating. But you'd have to call provincial experts to the table to answer that question.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Aboultaif.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

The proposal or the change that those two items that provide protection through loan guarantees and so on, who is the government trying to protect and why now? Is this something we anticipate that we're going to go through down the road? Are there some policies that might be affecting bank institutions or credit unions?

[Glenn Campbell]

The development of the federal credit union framework has taken almost a decade to put in place, given the demands of the sector wanting a federal option to be able to grow regionally or nationally. The government and Parliament have responded over the years of developing this framework. Throughout that process, many credit unions have indicated there is uncertainty in moving provincially to federally, and given the uncertainty, that could include impacts on their ability to fund themselves under certain scenarios. The loan guarantee is mainly to deal with transitional risks, moving from the provincial system to the federal system. There are some differences in various provinces, and obviously the criteria is the members of that institution have to agree to move federally. The province has to agree for that institution to move federally, and federal supervisors and the minister have to agree to receive them.

Throughout that process, a member could choose to leave that credit union and potentially remove their deposits or no longer be affiliated. There are scenarios, transitional risks that this is trying to mitigate, and it has been raised by the credit union sector for a long period, that for them to make this decision, having some provision to promote financial stability through that initial period would be helpful.

To answer your question, this is really about financial stability for the institution and for the system.

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

Thank you.

[François-Philippe Champagne, Liberal, Saint-Maurice—Champlain, QC]

[Technical difficulty—Editor] rational, but you did it.

[The Chair, Liberal, Wayne Easter]

Thank you.

Turning to division 5, bank recapitalization regime, bail-in, we would call Dan Robinson and Alexandra Dostal to the table.

Ms. Dostal is senior chief, framework policy, financial institutions division and Mr. Robinson is senior project leader.

Are there any questions on division 5?

Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I have a clarification question for anyone out there. Any event, or a need for bank capitalization, would not impact depositors. Is that correct?

[Glenn Campbell]

It's correct.

Mr. Chair, I had a statement, if you wanted me to read it, at the—

[The Chair, Liberal, Wayne Easter]

I'm sorry.

Glenn, go ahead.

[Glenn Campbell]

It does, in fact, answer the question. I will start with that by saying yes, all deposits are out of the bail-in regime, and they're not contemplated here in any way. I'm happy to answer questions in that regard.

As a quick summary, the proposed amendments in part 4, division 5, provide a legislative framework for a bank re-capitalization, or bail-in regime for short. Bail-in is the power to convert certain debt of a failing bank into common shares to absorb losses, re-capitalize the bank, and allow it to keep operating.

Clauses 126 to 168 amend the Canada Deposit Insurance Corporation Act and the Bank Act to implement the bail-in regime, with consequential amendments to the Financial Administration Act, the Payment Clearing and Settlement Act, and the Winding-up and Restructuring Act .

These amendments build on the existing provisions in the CDIC Act that relate to managing the unlikely and remote scenario of a bank failure.

Amendments to the CDIC Act would provide CDIC with the power to undertake a bail-in conversion. Specifically, the corporation would be able to convert some of the failing systemically important bank's long-term debt into common shares. This would only apply to certain long-term debt securities prescribed in regulations. Deposits would be excluded.

The proposed amendments include updates and enhancements to existing provisions of the CDIC Act in order to ensure they function effectively with the bail-in power. These include: one, CDIC's power to take temporary ownership or control of a bank; two, provisions setting out how bank creditors and investors can seek redress or compensation from CDIC following a resolution process of a bank, in short, if they were bailed-in; and three, provisions aimed at preventing the termination of a bank's contract in the context of a resolution process, again, to keep it operating to protect customers.

Proposed amendments to the Bank Act would first enshrine in legislation the ability of the superintendent of financial institutions to designate banks as systemically important, thereby making them subject to the bail-in regime. The amendments would allow the superintendent of OSFI to set a requirement for the banks to maintain sufficient loss-absorbing capacity on an ongoing basis. This requirement will be met through an additional capital or debt subject to the bail-in power.

The proposed bail-in regime has been the subject of extensive stakeholder consultation, including with banks, credit rating agencies, investors, and creditors. Before coming into force, the regime will follow completion of regulations, which will allow for additional consultations on the technical elements allowing a smooth transition for stakeholders.

The proposed reforms in a division are in line with international best practices and standards endorsed by the G20 following the financial crisis.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Campbell.

Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Campbell.

This piece obviously came out from the OSFI consultation paper, which was released, I think, about two years ago, and was asking for feedback.

We already know that we have what's called an NVCC sub-debt and NVCC preferred shares in the market that are trading. The last aspect is to put in place what we call here “long-term debt”, which would be the senior component. We have the senior debts trading, and the existing senior debts are grandfathered, from my understanding, from the OSFI consultation paper.

Is there any sort of timeline that we have in terms of getting the last piece out, the third and last pillar, in terms of the NVCC's senior long-term debt in place in the market?

[Glenn Campbell]

Let me clarify for the record that it's the Department of Finance, the Minister of Finance, consultation paper on bail-in, although we work very collaboratively with all agencies going back internationally. It is quite correct that there are already existing instruments that are convertible, such as the NVCC instruments that you had mentioned.

In terms of additional NVCC, Alex, do you want to answer?

[Alexandra Dostal, Senior Chief Framework Policy, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance]

Just to clarify, the non-viability contingent capital requirement exists, and it's administered by the Office of the Superintendent of Financial Institutions.

As you correctly point out, what we're proposing to do here, through the legislation, is to have eligible senior debt be available for bail-in.

Before the regime would be able to come into force, the legislation would first need to pass. Subsequent to that, there are a number of regulations clarifying particular components of the regime that would have to be put in place. Before those regulations could be passed, they would be pre-published, and there would be a consultation period before that. So it is still a number of months even after the legislation would pass until the regime would be in force.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you. It's good to see progress on this front.

[The Chair, Liberal, Wayne Easter]

Mr. Caron.

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

I have a few questions but first, since we don't have much time, I would like to briefly discuss the motion that Mr. Dusseault moved at our last meeting regarding the Canada Revenue Agency. I don't think it poses a problem. It reads:

That the committee compel the Canada Revenue Agency to provide all written correspondence, including but not limited to letters and emails, between the Canada Revenue Agency and the KPMG s.r.l. accounting firm, issued between January 1, 1999, and May 5, 2016, regarding the Isle of Man tax plan and any matters related to that plan, and that the documents be provided to the committee no later than Wednesday, May 18, 2016.

The government party proposed two amendments. The first involved changing the word “compel” to “request”, knowing that the agency is entirely open and willing to provide this information. We don't see any problem with that. The second amendment was to add information that is not subject to section 241. That isn't a problem, either.

If we can include these two amendments, and if they satisfy all members of the committee, we could vote on this immediately and continue to ask the witnesses questions.

[The Chair, Liberal, Wayne Easter]

I'll read the motion as proposed and amended, Guy, if I could.

It says: “That the committee request the Canada Revenue Agency to provide all written correspondence—including, but not limited to letters and emails, between the Canada Revenue Agency and the KPMG...accounting firm, issued between January 1st 1999 and May 5th 2016, regarding the Isle of Man tax plan and any matters related to that plan, that is not subject to section 241 of the Income Tax Act, and that the documents be provided to the committee at the earliest possible date.”

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

It was not mentioned. We still wanted to have May 18 as the date. It was in the original motion.

[The Chair, Liberal, Wayne Easter]

Did you want May 18 in there? Is there agreement on that?

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

I think it would be important to have at least documentation before the minister comes.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

It will be at the earliest possible date.