Finance Committee on April 16th, 2020

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

What's the dollar value in total, then, of new currency created to date under these various programs?

[Carolyn A. Wilkins]

It would be nearly $200 billion.

[Stephen S. Poloz]

Yes, you frame the question in such a way.... The demand for currency or banknotes has not really changed significantly, and so we haven't created anything more than we normally do, but what has happened is we have created what we call “settlement balances”, which is what we call “liquidity”. It's cash that's available to the system, so in order for us to create it, we acquire the asset so our balance sheet still balances. That's all that's going on. When we acquire a Government of Canada bond, then we're crediting the system account with that much by settlement balances, so we literally call it “liquidity” because that's what it is. It's not cash in your pocket, though.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Okay. You said you believe that all of these measures that you have announced so far fall within your inflation targets and that there will be no effect on inflation by these programs. Did I understand that correctly?

[Stephen S. Poloz]

The best way to think of this as a complete scenario is to think about what would happen if we didn't do it. If we didn't do it, the system would be starved for liquidity and credit lines would be cut so those companies wouldn't have been able to draw on them. We could have seen people with maybe their credit limits reduced. In other words, there would be what we call a “credit crunch” and that would be a disinflationary effect on the economy. By creating the additional liquidity, we satisfy that need and prevent that from becoming a disinflationary problem.

I know that if we were starting with normal times and we did all these things, then you'd be thinking, well, that looks like it could be inflationary. Well, it is exactly the same operation you would do if you were trying to be inflationary, but they're doing it in order to counterbalance this disinflationary effect that would occur if we didn't do it.

Basically what Ms. Wilkins is saying is that if we are to achieve our inflation target, our first order of business is to stabilize the economy, then get it growing again so we get back to full employment, and then we're back to where we were before. Those are the steps along the way.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Over what time period do you expect to be able to return these assets you've purchased back into the market? Is this starting in a year, or will this be decades?

[Stephen S. Poloz]

As Ms. Wilkins said, the vast majority of the operations we have done so far are short-term operations and so they would just roll off the book as they matured. Whoever was borrowing then would borrow in the market because the market would be back to a normal rhythm with less tension—

[The Chair, Liberal, Wayne Easter]

Thank you.

Sorry, Stephen, go ahead.

[Stephen S. Poloz]

I'm sorry, Chair, perhaps I could just finish that sentence. Frankly, it will depend on conditions. This is a temporary disturbance, so later this year some of that unwinding will already be happening. Some of it may be longer term, but for the most part it's going to be that whenever the economy is getting back to normal then markets will be back to normal, and that's how the rollout will happen.

[The Chair, Liberal, Wayne Easter]

Okay, thank you all.

We'll turn to Mr. Fragiskatos, then go on to Mr. Cumming.

Peter.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you, Mr. Chair, and thank you to you both.

Governor, I want to ask you about the overall health of the global banking system, specifically relating to loans and debt repayment. Just a few days ago the International Monetary Fund issued the following statement:

...the resilience of banks may be tested in the face of a sharp slowdown in economic activity that may turn out to be more severe and lengthy than currently anticipated.

As firms become distressed and default rates climb higher, credit markets may come to a sudden stop, especially in risky segments like high yield, leveraged loan, and private debt markets.

In addition to the IMF, The Economist magazine has written very recently that there are deep concerns about the stability of the European banking system, particularly because of the concern around loans and debt repayment. It mentions in particular Deutsche Bank, and beyond Europe, Chinese banks.

Governor, what are your thoughts on these perspectives and the stability of the global banking system? What might that imply for Canada going forward in the months ahead?

[Stephen S. Poloz]

We've had a persistent narrative around the global financial system and the Canadian financial system that has mostly focused on our FSR, which, as you know, is once a year. Coming up in about four weeks from now, we'll be before the public with our updates on that.

In a broad sweep of your question, what we can say is that the global financial system is in far better shape and in a much more resilient place than it was at the time of the global financial crisis. There was substantial good work done through the Basel process, the Basel III reforms. The reason that took so long is that it was global and everybody had to adhere to an agreed higher standard.

The IMF itself does regular stress tests of the financial system in order to reassure us that things are working as planned. Those stress tests normally take the form of a combination of the biggest recession that the country has ever faced—we usually use the 1981-82 recession as the model—with a bigger increase in unemployment than happened then. In ours, they also used a 30% decline in house prices, just to add even more stress on the banking system. Of course, we're most familiar with our own results, but they do this for the whole community.

What we find is that the banking systems are well positioned to absorb a shock of that magnitude. That's normally something that lasts quite some time. That's a long, extended recession.

I'm not saying that that means this is a very unique situation. Of course, it's different in some ways. It's much deeper, sharper and we believe much more short-lived compared to what I've just described. I'm not going to dismiss those risks, because they are important, but I feel very confident in the resilience of the financial system as it stands today.

I think the proof is what you're seeing. You're not hearing about firms being cut off from their credit, which we heard a lot of back in 2008. For example, as we just heard this morning when we had the IMF meeting, credit is expanding in China. That's another sign that the recovery is starting to take hold there, and it's a sign that even though there are risks we can point to, their financial system is performing as normal.

I'd like to reassure you, without taking it off the table, that I agree that this is an important consideration. It's something that we study a lot, and we'll say a lot more about it in May. Four weeks from now is when that report will be ready.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you very much, Governor. I put the question to you simply because, relatively speaking, Canadian banks are quite stable but we do obviously operate in an international context.

Certainly the bank is not distant. It has taken an active role, arguably the most active role it has seen for itself in Canadian history. However, for many Canadians, federal institutions can seem distant. Do you have a message for everyday Canadians about the approach the bank is taking and how the bank's actions are having an impact on their lives? What is the focus in terms of making sure that people's lives are stable and secure? How does the central bank go forward with that in mind?

[Stephen S. Poloz]

I know that the programs we described can sound exotic and arcane, and so on. It's easier to think of it more like plumbing. When it's working fine, it doesn't really attract your attention, but when it doesn't, we have the problems.

We're really playing a complementary role. The star in this is the fiscal approach to buffering the shock for people. For us, it's making sure that we're using all our tools to ensure that those things can get to ordinary people so they can renew their mortgages, so they can buy a house when the recovery is under way, and so on. That's what we're aiming our efforts at. Therefore, if they don't really see us, it's probably a good thing.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Stephen, that was a great description.

I'll turn to Mr. Cumming, and then go to Sean Fraser.

Mr. Cumming.

[James Cumming, Conservative, Edmonton Centre, AB]

Thank you, Chair.

Thank you for appearing today. I want to touch on a couple of things.

First, your earlier comments talked about, even prior to COVID, there being strains in the economy with the commodity prices, specifically in the resource sector. As you see it, how important is that sector to the recovery of the economy?

[Stephen S. Poloz]

I see it as very important. As I said in my introductory remarks, whenever there is a global shock such as this, we of course feel the shock just like everybody else does. However, since we're a major commodity exporter, we feel a second shock because the prices go down too, and that's like an income cut for the entire economy.

One of the things I try to make clear is that, just on the basis of the drop in commodity prices alone, we would have cut interest rates by at least 100 basis points, such as what we did in 2015, because it's not unlike what we saw in late 2014 and early 2015. Possibly we would have ended up doing all 150 basis points, if that were the only shock we were facing. That is a very real shock to the economy, and it will work through in its usual way. Of course, it has regional implications. It's not all spread across the entire economy.

The secondary effects of it are.... Alberta and Saskatchewan have experienced the effects of lower oil prices. When everybody who's affected spends less money, that lower spending affects the rest of the entire economy. We've seen that over and over. This is one of the things that sets Canada apart from, say, the United States. They don't see it nearly to the same extent as we do.

It's crucial, so we do think the oil sector could recover a bit more slowly because of the buildup of inventories. That means prices have fallen and they might take longer to get back up to a more reasonable level, but it's a very hard forecast to make at this stage. There's a lot going on in that market. I would just like to see how it turns out for now.

[James Cumming, Conservative, Edmonton Centre, AB]

I want to talk a bit about this corporate bond buy: the $10 billion in corporate bonds so far, and there could be more. There's a risk that you might overpay for those assets and the bondholders will profit from that acquisition.

Would you welcome the Auditor General to audit to ensure that you didn't overpay for those assets?

[Stephen S. Poloz]

Carolyn, would you like to take that question?

[Carolyn A. Wilkins]

First, on the program itself, we intend to have a very well-respected and experienced set of people doing those purchases, with the operational capacity and the robustness of experience to do that. In my mind, that's the very first line of defence, along with our other risk mitigations there.

Under our act, we have a provision for the Governor in Council to appoint two firms of accountants to audit the affairs of the bank. That's stated in our act. The auditor's report is put in our annual report and it's submitted to the Minister of Finance as well.

For 2019, as a point of reference, our auditors were PricewaterhouseCoopers and KPMG.

[James Cumming, Conservative, Edmonton Centre, AB]

Thank you.

I want to go back to a comment made earlier about the extension of credit and companies building up their operating lines just after the crisis and about the term “park the money”. What evidence would there be.... To me “park the money” means it's money available, but that may not necessarily be the case. If they fully extended their lines, they may be tapped on their lines.

Where does the comment “park the money” come from? That would indicate that they have set aside money for liquidity, and I'm concerned that this may not necessarily be the case.

[Stephen S. Poloz]

I used the expression because the evidence we had, which is anecdotal obviously, was that companies were drawing their lines to their maximum even though they didn't need to for their cash needs at the time. This was probably just because they remembered that back in 2008, when we actually had a credit crunch, some of those lines were cut back before they were able to tap them completely.

What I understand from our discussions over the past few days is that this activity has calmed down, that the line draws have slowed right down. In fact, some companies have begun to pay back some of their lines. This is just another sign that our policies have had the desired effect of restoring liquid conditions in the market and making people feel more confident that if they need to, let's say, issue a corporate commercial paper sometime next week, it will succeed. They don't need their credit lines to be full with cash on hand if they know they can do their regular commercial paper issuance, whereas if the commercial paper market were frozen up, they would need to draw on their lines to satisfy their basic cash needs.

It's no more complicated than that, really. Parking it means you're keeping it in your chequing account so that you can use it for your day-to-day needs, but if you have extra that you don't need, you're going to put it back into the system and not pay interest on it.

[The Chair, Liberal, Wayne Easter]

Thank you both very much.

We'll turn now to Mr. Fraser and then go on to Mr. Ste-Marie.

Sean.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you, Mr. Chair, and thank you, Governor Poloz, for joining us and for your service over the past number of years, and particularly the past number of weeks.

Mr. Chair, please cut me off with a minute or two to go. I'm going to yield a bit of my time to our colleague from Saanich—Gulf Islands, if possible.

[The Chair, Liberal, Wayne Easter]

Sean, I don't want to interrupt you. We have lots of time. Take your full time and I'll put Elizabeth on at the end.