Finance Committee on May 9th, 2017

[The Chair, Liberal, Wayne Easter]

The committee will come to order.

Pursuant to Standing Order 108(2), the committee is studying the subject matter of Bill C-44, an act to implement certain provisions of the budget tabled in Parliament on March 22, 2017, and other measures.

Yesterday we heard from representatives of Finance Canada. This afternoon we'll start on part 4, division 3, entitled “Financial Sector Stability”, and hear from Lisa Pezzack, director, financial systems division, financial sector policy branch; Liane Orsi, senior adviser, financial institutions division, financial sector policy branch; and Justin Brown, chief, financial systems division, financial sector policy branch.

Welcome. After your opening statement, we'll go to questions.

The floor is yours.

[Lisa Pezzack, Director, Financial Systems Division, Financial Sector Policy Branch, Department of Finance]

Thank you, Mr. Chair.

This proposal seeks to strengthen Canada's bank resolution regime by formally designating the Canada Deposit Insurance Corporation as the resolution authority for its members and by requiring Canada's biggest banks to develop and submit resolution plans. The proposal would also clarify that the Superintendent of Financial Institutions may set criteria for how domestic systemically important banks must meet the requirement to maintain a minimum capacity to absorb losses.

The Canada Deposit Insurance Corporation has been responsible for providing deposit insurance for Canadian banks since it was established by the Canada Deposit Insurance Corporation Act in 1967. Following the financial crisis, and in line with the development of international standards, CDIC's powers and tools have been expanded to facilitate the orderly resolution of its member institutions in the event of a failure. The proposed changes would formally designate CDIC as the resolution authority for its member institutions.

In this capacity, CDIC has undertaken a number of initiatives to ensure its readiness to deal with any banking failures. One of them pertains to the development of resolution plans, which describe how a systemically important bank could be resolved in an orderly manner while ensuring the continuity of critical financial services and protecting financial stability.

In 2015 Canada's systemically important banks were asked to work with CDIC to prepare plans demonstrating how they could be resolved in a manner that ensures financial stability in the unlikely event of their failure. The proposed changes would put the requirement for Canada's largest banks to develop resolution plans in legislation and provide CDIC with the authority to set out the framework for these plans in a bylaw. Together, the proposed changes would provide additional transparency regarding CDIC's activities as the resolution authority for its members, which should facilitate CDIC's role in supporting the stability of the financial system.

This proposal would also clarify that the Superintendent of Financial Institutions may set criteria for how domestic systemically important banks must meet the requirement to maintain a minimum capacity to absorb losses. The requirement for systemically important banks to maintain a minimum capital to absorb losses is set by the superintendent and met through additional regulatory capital and debt, subject to conversion into common shares in a failure through the exercise of CDIC's bail-in power.

Thank you, Mr. Chairman.

[The Chair, Liberal, Wayne Easter]

Thank you, Ms. Pezzack.

Do we have any questions?

Go ahead, Mr. Sorbara, and then Mr. Ouellette.

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

Thank you, Mr. Chair.

Good afternoon, everyone. Welcome to the committee today.

It's nice to see you, Liane. We interacted before, in a prior career.

First, on the change in role with regard to CDIC, can you guys comment in terms of how this fits in with the changes that have occurred over the last several years and since the financial crisis?

My second question is with regard to bail-in. I left a financial institution about two years ago now. We were having initial discussions and going along the way in terms of having bail-in securities put in place by the bank so that in the event there were some disruption to the financial sector they could be converted and bondholders would share some of the risk. Can we get an update on that?

Thank you.

[Lisa Pezzack]

In answer to the first question, over the past several years since the financial crisis, CDIC has been given a variety of tools and powers, but it's never been formally designated as a resolution authority. But many of the powers and tools they have would allow them to resolve a bank in the case of a failure. In that sense this is mostly a formality to say they have this power and that they can require banks to provide the resolution plans.

As you know, in budget 2016 we implemented the process for bail-in. It's a relatively new process internationally in which you issue debt and securities that would then be converted into common shares in the case of the failure of a domestic systemically important bank, and that process has been under way. This is a clarification of the roles and powers of the superintendent within that process. The legislation is in place, and we'll be working toward putting regulations in place.

[The Chair, Liberal, Wayne Easter]

Mr. Ouellette, you're next.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you very much.

I would like to know how the superintendent of financial institutions will be able to establish the exact amount. What criteria are needed for the bank's minimum capacity to mitigate losses?

[Liane Orsi, Senior Advisor, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance]

Thank you very much for your question.

The purpose of this amendment is not to determine how the amount is calibrated but more how it's satisfied, the criteria for what instruments may be eligible. However, I'm happy to respond to both.

On the question of how it would be calibrated, we would be looking at what losses a domestic systemically important bank could plausibly experience, based on historical experience and stress testing, and also what level of capital is necessary to restore the bank to adequate levels of capitalization, with a buffer beyond that to establish confidence in the bank. This is a bank that has failed, so the intent is to recapitalize it such that it can continue to remain operating.

In addition to the calibration of the amount, this amendment that we are seeking views on will allow us to establish criteria as to what instruments, regulatory capital, or long-term debt are available to meet this requirement. We are seeking flexibility here not only in calibrating the amount but also in how to satisfy this amount, given that this is a new standard and market practices are evolving as well as international standards.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I was also wondering who constitutes the committee.

Who will be on the committee referred to in subsection 18(1) of the Office of the Superintendent of Financial Institutions Act?

[Lisa Pezzack]

It's the financial sector regulatory community, so it's the Office of the Superintendent of Financial Institutions, the Department of Finance, the Bank of Canada, the Financial Consumer Agency of Canada, and the Canada Deposit Insurance Corporation.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

I would like to ask one last question.

Do all businesses and banks have to maintain a resolution plan or a draft plan at all times? Is it done at the last minute?

[Lisa Pezzack]

It applies only to Canada's six major banks.

These six have been designated as systemically important financial institutions, and they're in the process of developing these plans now. It's a bit of an iterative process. You try it once, you see if you think that's good enough, and you go through the process. They're working with—

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

They don't have a plan on file, and then if something does occur they can....

[Lisa Pezzack]

Supervision is ongoing, and if something comes up that they think would warrant a change in the plan, the plan would be updated.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

Mr. Deltell, you're next.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you, Mr. Chair.

Ladies and gentlemen, welcome to your House of Commons.

In a way, you are the guardians of the economic stability of Canadian banks, which of course requires adjustment based on the new reality.

The bill covers the whole work. Are the proposed changes an updating function, or will they lead to more profound changes in the management of the security of the Canadian banking system?

[Lisa Pezzack]

I would say that, rather, they are an updating function because they really reflect the decisions already made for the Canada Deposit Insurance Corporation, or CDIC. In the case of amendments to make to the powers of the Office of the Superintendent of Financial Institutions, I would say that this is instead a clarification of its powers.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

I don't want to go into too much detail, but we know that there was a jolt in the mortgage lending world a few days ago or about two weeks ago, when a mortgage lender saw its shares melt like snow in the sun. Is it your responsibility to protect the banking system or the loan system, or does the real estate sector come under another register?

[Lisa Pezzack]

The supervision of that particular institution falls in the purview of the Superintendent of Financial Institutions as well, and the superintendent also has powers in relation to setting expectations for how mortgages are written, for example, underwriting standards, and those sorts of things. To the extent that a company is involved in mortgage underwriting, they're subject to supervision by the Superintendent of Financial Institutions at the federal level if it's a federally regulated institution. The provinces of course do their own thing.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

So it belongs in your hands? Does that responsibility belong to you?

[Lisa Pezzack]

No, the Superintendent of Financial Institutions.

[The Chair, Liberal, Wayne Easter]

Just on that point, the mortgage company—I can't think of the name—that is affected at the moment, has come out—

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

Home Capital Group.

[The Chair, Liberal, Wayne Easter]

Yes, Home. They've come out with a plan.

Did they have to run that plan by the Superintendent of Financial Institutions before they come out with, or is that...?