Finance Committee on May 21st, 2020

[Jeremy Rudin]

Mr. Chairman, just to reiterate briefly, we're paying close attention to all the support being provided directly or indirectly. It's very important to us as a prudential regulator. That said, I didn't bring a figure with me for the total amount, and I can certainly undertake to provide one.

[The Chair, Liberal, Wayne Easter]

If you could provide that to the clerk, we'll send it out.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you so much.

On March 13 OSFI indicated that the banks should not use the measures that were being taken around the domestic stability buffer to increase distributions to shareholders or employees, or to undertake share buybacks. I notice today you mentioned in your statement that OSFI instructed banks not to undertake dividend increases and share buybacks. Of course, in other countries we've got the European Banking Authority, the Prudential Regulation Authority, the Mexican financial regulators. They all have absolutely made strict requirements that if you're getting public support, you can't do any of these things.

I'm interested both in the shift that appears to leave aside the issue of executive bonuses. Given the number of banks, including the CEO for TD Bank who said it doesn't change anything in their dividend policy, what are the consequences if banks deliberately say they're not going to co-operate, they're going to increase their dividends, provide executive bonuses and do share buybacks?

[Jeremy Rudin]

As the questioner mentioned, when we reduced the domestic stability buffer, we instructed all the financial institutions that we supervise—banks and insurers—to not increase their dividends; to cease share buybacks, including share buybacks that we had previously approved; and to not increase compensation levels. I have to say that I would expect full compliance on this; I have no doubts in this matter.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

No, my question is this: If they do not follow, what are the consequences?

[Jeremy Rudin]

Well, Mr. Chair....

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Are there consequences?

[Jeremy Rudin]

There would certainly be consequences.

I think that we have a variety of tools at our disposal. We would want to understand why we had non-compliance, and we would want to tailor the tool for the particular circumstance of the institution.

That said, we keep very close tabs on all the institutions that we supervise, and we have no indication that there will be non-compliance.

[The Chair, Liberal, Wayne Easter]

Ask your last question, Peter.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Obviously, seniors, small businesses...they're all struggling. The banking sector has been imposing fees and penalties around mortgage deferrals. They haven't lowered their credit cards or lines of credit to zero. Some credit unions have, but not the banking sector.

You're monitoring these banks. We're going to be hearing profits for the first quarter in just a few days' time. Are you concerned about windfall profits?

I'll cite, from back in 2009, of course, when the banks received support in the order of $114 billion and announced $27 billion in profits. The public appetite will not be positive if banks are announcing windfall profits over the next few days despite all of these public measures to boost the banking sector.

Are you tracking and do you have some sense of what the profit margins will be when they are announced in the next few days?

[Jeremy Rudin]

Well, Mr. Chair, as I said, banks will be starting to report their results. Everybody will be able to see their levels of profitability. There are some enterprises that are profitable in the current situation, and others are not. I think that can be an important social issue. It is perhaps an important policy issue. It's not, however, an issue that Parliament has ascribed to OSFI. Parliament has given it a mandate to protect the interests of depositors and policyholders by making sure that the banks and insurers are in safe and sound financial condition.

[The Chair, Liberal, Wayne Easter]

Thank you.

We'll go to Ms. Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you, Mr. Rudin and Mr. Gully, for being here today. Thank you for your presentation, and thank you for your extraordinary service to our nation. We're very grateful.

I have two questions, and then I would like to give the rest of my time to Ms. Koutrakis.

You mentioned, Mr. Rudin, that we are in touch quite a bit with similar international bodies. How do we line up versus other countries in terms of our resiliency?

[Jeremy Rudin]

Well, Mr. Chair, the best answer to that question will be shown in the future as we see how we navigate through this circumstance.

Mr. Gully is a member of the Basel Committee on Banking Supervision, so I'll ask him to comment. However, at a high level, I would say that Canada has a reputation around the world for strong and rigorous regulation and supervision of financial institutions from the prudential point of view, and that we have one of the most demanding capital and liquidity regimes in the world.

[The Chair, Liberal, Wayne Easter]

Mr. Gully.

[Ben Gully]

I'll just build on that. We are subject to international peer reviews that examine the standards that we apply to the institutions. We continue to get “compliant” ratings out of that process. We're also subject to reviews from the International Monetary Fund that review in more detail the practices that we apply, not just regulations but also supervisory practices. They continue to give us good ratings.

The levels that we've applied to capital and liquidity, and risk management standards more broadly, have certainly served us well to date. We continue to benchmark ourselves well relative to those international peer groups.

[The Chair, Liberal, Wayne Easter]

Thank you.

Ms. Dzerowicz, be quick.

[Julie Dzerowicz, Liberal, Davenport, ON]

This is my last question. We lowered the domestic stability buffer by 1.25%. What would be the triggers that you'd be looking for that would make you look at reducing that further?

[Jeremy Rudin]

Mr. Chair, as Mr. Gully mentioned, we wanted to make a significant decrease in order to respond to the severe and extraordinary circumstances we're in, and to create appreciable space for banks to access the capital loss-absorbing capacity they had built up in good times and might need in these circumstances. I think a great deal will depend on the depth and duration of our economic difficulties, and also how this is reflected in the results of banks.

As we mentioned, there's a great deal of support being provided by the government directly to support people's incomes, to fully or partially guarantee loans to businesses. All of that will reduce the need to use the buffer. However, if that recession is deep enough and goes on long enough, it's possible—it's by no means certain—that banks will move into the buffer space. We would consider that a normal and prudent thing for banks to do in a severe recession: to use their capital to support the economy to absorb losses. If they move well into the space that has been occupied, we'll have to consider whether we should create more space.

[The Chair, Liberal, Wayne Easter]

Ms. Koutrakis, you have time for one question off Julie's round.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you very much, Mr. Chair, and thank you, Julie.

I will turn to pension plans, as I think benefit pension plans are critically important for the well-being and security of retirees and are good for society as a whole. People need to have financial stability in their lives, especially when they are retired and older.

Could you please update us on the state of the DB plans in this current period? Have you analyzed the short- and medium-term impact of COVID on DB plans, given the very low interest rates inflating liabilities and much lower equity values depressing assets?

[Jeremy Rudin]

Thank you, Mr. Chair.

You praised our use of teamwork, and I'm about to show that again.

One thing I would mention to the committee, so they understand OSFI's jurisdiction, is that we regulate all the banks in the country, most of the insurers, but we are by no means the largest regulator of pension plans. We have 1,200 of them, but those are the ones that fall in the federal jurisdiction. The majority of both members and dollars in pension plans are in provincial jurisdiction.

That said, we're happy to talk about what we've been doing, and Mr. Gully will take the baton at this point.

[Ben Gully]

Mr. Chair, based on our examination and review, the private pension plans and defined benefit pension plans under our jurisdiction have performed well relative to the recent conditions. Solvency rates clearly have come under pressure, but there is nothing unexpected in that regard.

Our supervisory work remains focused on examining the sensitivity of the solvency positions to different scenarios, possibly including interest rates, and asset values more broadly. That work continues, and again, it is used to inform a broader assessment and a potential set of actions as we look into the future. Our focus very much remains on protecting the rights and interests of pension plan beneficiaries.

[The Chair, Liberal, Wayne Easter]

Thank you for that, and thank you for that question, Annie.

Mr. Cooper, could we keep it to about four minutes?

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

Thank you, Mr. Chair.

Thank you, Mr. Rudin and Mr. Gully.

I want to first of all ask about the current covered bond limit.

I know that OSFI has provided that the banks are permitted to exceed the current covered bond limit. It's now 5.5%. How long do you anticipate that will be in place?