Finance Committee on May 21st, 2020

[The Chair, Liberal, Wayne Easter]

Mr. Gully, go ahead.

[Ben Gully, Assistant Superintendent, Regulation Sector, Office of the Superintendent of Financial Institutions]

Good evening.

As the superintendent mentioned, one of OSFI's roles is to be prepared for threats to the financial system. Our guidance and expectations for financial institutions and private pension plans under our jurisdiction are aimed at supporting resilience.

OSFI's sustained efforts to review and develop guidelines have resulted in an effective supervisory and regulatory regime that protects depositors, policyholders, creditors, and private pension plan beneficiaries while allowing institutions to take reasonable risks and compete. Extraordinary times have required OSFI to ensure, more than ever, that our guidance is credible, consistent, necessary and fit for purpose in the Canadian context.

OSFI's first COVID-19-related regulatory announcement was on March 13, with the Minister of Finance and the Governor of the Bank of Canada. In that announcement, we suspended our planned policy consultations and provided some measured regulatory flexibility on capital and liquidity requirements. We have been in frequent contact with institutions and with our regulatory partners to refocus efforts on the issues at hand.

As the superintendent mentioned, we continue to work with domestic and international partners. Domestic co-operation and collaboration is important, given the independent mandates of each organization and the various measures taken by other parts of government. International co-operation benefits us, as we can learn from actions taken by our peers, share valuable lessons and make decisions that reflect the international context, with the focus on resilience of Canadian institutions. These frequent touchpoints and our ongoing supervisory work with institutions have resulted in a series of announcements and letters to the industry sectors we oversee. These have all been made available on our website. Further, we have offered technical briefings for analysts, industry and pension plan administrators to share information and provide clarity on our expectations.

From these briefings and through communication with industry, we have developed questions and answers on recent COVID-19-related regulatory measures and put them on our website. These are updated regularly as conditions change, and when OSFI takes action. This promotes a consistent understanding of OSFI's expectations across market participants and limits speculation that can occur in the absence of clear information.

While areas of uncertainty remain in how the pandemic will affect financial institutions, the Canadian economy and the daily lives of Canadians, Canadians can have confidence that OSFI is working hard to continue meeting its mandate. OSFI will continue to consider potential regulatory changes during this exceptional period and will make sure that any further adjustments are credible, consistent, necessary and fit for purpose. We will continue to publicly communicate our expectations of institutions and are happy to answer questions that you may have.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you both for your presentations.

We will start with Mr. Poilievre.

Pierre, the floor is yours.

We're only going to be able to go the two rounds, given the time. We have a pretty hard stop at 8. We'll have six minutes the first round, five minutes the second.

Mr. Poilievre is to start, followed by Mr. Fragiskatos.

Go ahead.

[Pierre Poilievre, Conservative, Carleton, ON]

Superintendent Rudin, you have lowered the domestic stability buffer by $300 billion. How much of that $300 billion have our banks used since that announcement?

[The Chair, Liberal, Wayne Easter]

Your mute is on, I believe.

[Jeremy Rudin]

Yes, I think I've solved that little problem.

Mr. Chair, just to clarify, we reduced the domestic stability buffer by 1.25 percentage points of risk-weighted assets. That creates room for Canadian banks to do as much, if not more than, $300 billion in additional lending.

[Pierre Poilievre, Conservative, Carleton, ON]

Right, that's what I was saying. How much of that have they used?

[Jeremy Rudin]

The banks will be reporting their financial results for the first quarter in a couple of weeks, and we will all see the state of their balance sheets at that point.

When we reduced the domestic stability buffer, Canadian bank capital levels were already above the required level for the buffer. We'll see whether, in the first instance, the banks have dropped into the space that has been provided, or not.

[Pierre Poilievre, Conservative, Carleton, ON]

All right. We'll look forward to those reports then.

The banks have to keep a certain amount of capital. That's a degree of liquidity that allows them to deal with shocks like the one we have before us. Are they allowed to use Canadian mortgage bonds to count as part of the buffer?

[Jeremy Rudin]

Okay, we'll want to think of capital and liquidity as being closely related, but nonetheless as being regulated differently. Capital is the loss-absorbing capacity of banks. It's not—

[Pierre Poilievre, Conservative, Carleton, ON]

Sorry, but we don't have a lot of time. Do they—

[The Chair, Liberal, Wayne Easter]

That's okay, Pierre, we'll find the time. We need thorough answers on this because it is hard to understand.

Go ahead, Mr. Rudin.

[Jeremy Rudin]

Capital isn't held in a particular form. Liquidity, which is the ability to meet cash draws as they come up, needs to be held in a particular form in what's called high-quality liquid assets. Government-guaranteed securities are considered high-quality liquid assets, and therefore the CMB would be part of that.

[Pierre Poilievre, Conservative, Carleton, ON]

Do you think there is a possible distortion in the system? Canada mortgage bonds are effectively mortgages that banks have lent out and that are then securitized through the government, backed up by the taxpayer. The banks then buy them back, and you put them back on their balance sheet, this time as high-quality liquid assets that now apply to their buffer.

Do you think this can create a bit of a distortion in the system when an asset that is not originally considered a high-quality liquid asset is sent off to the government, gets stamped with a guarantee, and is is sent right back and is now all of a sudden a high-quality liquid asset?

[Jeremy Rudin]

Certainly the eligibility of the Canada mortgage bond as a high-quality liquid asset makes it a more attractive thing for banks to hold. That said, if Canada mortgage bonds or other government-guaranteed securities were not considered high-quality liquid assets, banks would have to hold other types of high-quality liquid assets, which might be government debt, so it's not obvious that one is better than the other.

[Pierre Poilievre, Conservative, Carleton, ON]

All right.

I've always been concerned about the system that we have whereby banks get the profit from a mortgage and taxpayers get the risk. Once it is CMHC-insured, or securitized, then all of the risk goes to the taxpayer and all of the profit goes to the bank. I've always believed, as a supporter of the free market, that risk and reward should go together. Profit and loss should be joined, so the same person who can profit on the upside is the one who takes the hit on the downside.

Do you think our system breaks that natural relationship and gives the bank access to risk-free profit?

[Jeremy Rudin]

Mr. Chair, the mortgage insurance requirement is a long-standing feature of the Canadian system. We do require, as a matter of law, as established obviously by Parliament, that mortgages that have a down payment of 20% or less must be insured against default. That insurance can come from CMHC, a crown corporation. It can also come from private corporations.

This is a measure that does contribute to financial stability in Canada because it diversifies some of the risk away from the banking system and into the insurance system, and also, as the member pointed out, to some extent, to the government.

[The Chair, Liberal, Wayne Easter]

Go ahead, Pierre. We have time.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

I don't think you answered my question. Banks can externalize their risk by putting that risk onto the taxpayer. They get all the profit. We get all the losses. I wanted to know if that could lead to certain distortions in the marketplace and, if so, what we would do to mitigate those distortions.

[Jeremy Rudin]

One thing I would add is that some of the profit from these mortgage transactions is earned by the mortgage insurers, because a premium is paid and they have to hold capital against that. In the case of an insured mortgage, the capital is held principally not by the lender but by the insurer. These sorts of risk transfers are common in the financial system.

All I can say from my own experience is that prior to the global financial crisis, there were some concerns about this approach, which is, if not uniquely Canadian, nearly uniquely Canadian, but a lot of observers felt that it was helpful to Canada in navigating through the global financial crisis.

[The Chair, Liberal, Wayne Easter]

I had taken a little time from you, Pierre, so if you want another question, go ahead.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you so much, Chair.

My final question is this. We now know from CMHC that 12% of Canadians are deferring their mortgages. That could rise to 20% by the fall. That's an extraordinary level of delinquency. I want to know, is our financial system secure right now?

[Jeremy Rudin]

As I said in my opening remarks, Canadians can have confidence in our financial system, because despite the extraordinary circumstances, it's a very resilient system and it's very well prepared.

There is no question that the mortgage market will have some difficulties. It's too soon to say that all of these deferrals will turn into delinquencies. There are certainly people who have asked for deferrals who will be able to be current...but certainly there will be some who do not. This is why we require the mortgage insurers and the banks to have very strong capital levels, so that they are able to withstand significant losses, continue to operate normally and continue to provide financial services to Canadians.

[The Chair, Liberal, Wayne Easter]

Thanks very much to you both.

We'll go to Mr. Fragiskatos and then to Mr. Ste-Marie.

Peter.

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

Thank you, Mr. Chair.

Thank you, Mr. Rudin and Mr. Gully, for appearing today.

There's always a concern, or not even a concern, but more of an observation that our federal institutions, because of the very specific and very technical work they do, can sometimes be distant from the citizens they're ultimately working on behalf of.

Now, you've been good enough today, as representatives of OSFI, to come to present to the committee. It's a very valuable thing to have you here. On behalf of constituents—although they are probably not watching, let's be honest—I think this question has to be put: Can you tell us in layman's terms about some of the very basic things that OSFI has been working on?

For example, the domestic stability buffer has been lowered. Naturally, that's an important thing to discuss, but I can tell you that 99.9% of my constituents will have questions about what the domestic stability buffer is in the first place. Let's go back to first principles: Why is the lowering important, but to begin with, what is the domestic stability buffer?