Finance Committee on May 21st, 2020

[Jeremy Rudin]

We'll see what my colleague might wish to add to this answer, but my own view is, as long as is necessary. The increase in the covered bond limit has been very helpful in improving the liquidity of banks.

An earlier questioner was talking about the use of government guarantees in order to create mortgage-backed securities that can be used for liquidity. One of the features of the Canadian covered bond system is that the covered bond collateral has to be uninsured, so this is all a private risk. Nonetheless, it's been an efficient way to help increase the ability of banks to borrow against some of their assets, which has been necessary, particularly in the early weeks of the crisis, and may yet come back. We're certainly prepared to leave it in without setting a deadline at this point.

I don't know whether Mr. Gully wants to add something.

[Ben Gully]

There's nothing further to add from me. Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Mr. Cooper.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you very much for that.

I want to talk a little more broadly about some of the risks that face the banking sector.

We saw, for example, that Fitch had dropped its outlook on the Canadian banking sector from stable to negative. We know that some of the significant risks, including ones you've identified today, include household debt. We heard just on Tuesday from the president of CMHC, and in his testimony he indicated that household debt to GDP could reach as high as 200%, if not higher.

In broad terms, could you just speak to that issue from the standpoint of asset risk to Canadian banks?

[Jeremy Rudin]

From the asset side, the principal risk faced by banks is on the credit side. This can incorporate mortgages that don't stay current, credit cards that don't stay current, commercial loans. All of these areas are going to be affected by the very sharp economic downturn we are currently experiencing.

From our perspective, as the questioner mentioned, we have been concerned for some time about elevated levels of indebtedness both at the household and corporate level. We don't pretend to have anticipated the pandemic, but we're always planning for a severe and prolonged recession. We want to make sure the individual institutions and the system as a whole are able to navigate through that. The principal, but by no means only, method that we use to do this is by making sure that capital levels, so the loss-absorbing capacity in institutions, are at quite a high level, which allows them to confidently navigate through a severe and prolonged recession.

We need to be prepared to see bank results we haven't seen for some time because we've gone through a very long, benign credit period, one of the longest and most benign periods of credit performance in Canadian history. We at OSFI, and in the financial sector, have not taken that for granted and have not assumed it will continue. We have prepared for the eventuality that it would not.

[The Chair, Liberal, Wayne Easter]

We will have to end it there.

We have Mr. McLeod for four minutes.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair.

Thank you to the presenters from OSFI. It was very interesting and very educational. We seem to have such good witnesses at our committee. We had a presentation from the PBO the other day and it really helped us to understand the fiscal situation in Canada.

As your organization has the sole oversight on banks, and now that we're in these unprecedented times, I want to ask about what indicators you are watching for when it comes to the economy. If the conditions continue to deteriorate, if the banks start to report losses, what will your organization do, and how should we react to that?

[Jeremy Rudin]

We watch a variety of economic indicators, not so much so that we'll understand the present, but so that we can understand what might happen in the future. What we're looking for in the future is not for our own purposes to predict what's likely to happen, but to figure out what could happen, and to make sure that we, and the banking system and the insurance companies, are prepared for that.

The key indicators that will affect credit performance will certainly be unemployment and overall income. From a commercial point of view, we've already seen quite a disparate impact on different types of businesses. We'll be watching that very closely, and then mapping it back into the particular risk exposures of the financial institutions.

As I said, from a capital point of view, capital is loss-absorbing capacity. We've gone through a long period when it's been rare to see banks or insurance companies have a negative quarter. If we see it, I understand that it will be unfamiliar and alarming perhaps for some people. I'm not saying we will see it, but certainly a severe and prolonged recession can bring that about, at least for some institutions. What's important to understand is that we have ensured that the financial system has a great deal of loss-absorbing capacity so that it is able to navigate through periods of losses, continue to provide financial services to Canadians and command the confidence of the public.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you very much.

[The Chair, Liberal, Wayne Easter]

We are a little over time. I apologize for that.

Mr. Rudin and Mr. Gully, on behalf of the committee I want to sincerely thank you for your presentation, but perhaps even more so, to thank both of you and your team for the work you do to ensure that our financial institutions are secure in this country. That's important to people out there on my street in Hunter River and it's important to the people in downtown Toronto. You have an extremely responsible position and we thank you for the work that you do.

Thank you for appearing before the committee today.

For committee members, I'll just outline the panels we will have next week. We will need lists of witnesses from all parties, preferably at midnight tonight, but we'll go to 10 o'clock tomorrow morning. Maybe the clerk could put out an email on this as well.

Could members give that some thought and get your proposed witness lists in to the clerk as soon as possible so he and his staff can do the work of trying to call those witnesses and get them in place?

On Tuesday, May 26, the first panel is on public transportation; and the second panel is on self-sufficiency and the supply chain. On Thursday, the first panel is on oil and gas; and the second panel will b e the bi-weekly report of the Minister of Finance and officials from Finance and other departments.

David, can you put out an email just following the meeting, as well, so people have the topics that we agreed to at the steering committee meeting last week?

I see Peter on there and I know Pierre is listening. If we can arrange it, we should probably try to have a steering committee meeting on Monday.

With that, again, thank you to our witnesses and thank you to all the members. We had a lot of information this afternoon, so I thank everyone for their endurance as well.

Also, thank you to the interpreters and staff.

The meeting is adjourned.