Finance Committee on June 16th, 2020

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

We're turning to Mr. Julian, who will be followed by Mr. Morantz.

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

Thanks very much, Mr. Chair. I second the motion for a $5 bank note with your face on it.

[The Chair, Liberal, Wayne Easter]

Yes, I imagine.

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

Hopefully I'll get more time.

Governor Macklem and Deputy Governor Wilkins, thank you very much for being here today. We hope your families are safe and healthy.

Congratulations, Governor Macklem. It's great to have you for your first visit in your new role in finance. Certainly, we'll be hearing from you regularly. We appreciate that.

Your earlier quote that the biggest risk to Canadians “is not having a job” is an important one because we are in a situation where, certainly on the ground, and I can tell you, speaking to you from New Westminster—Burnaby in British Columbia, the issue of liquidity is a big problem.

What do you believe the sum total of supports to the banking sector has been from the Bank of Canada?

Second, we asked the same question of OSFI a couple of weeks ago, and they came back with the figure of $750 billion in overall supports for the banking sector, particularly Canada's big banks through the IMPP, through the Bank of Canada and through OSFI itself. However, when we look at other countries where supports have been put in place for the banking sector, that has come with conditions, either through the bank or through the financial regulator—I'm thinking of the Bank of England—stopping things like dividend payments and executive bonuses or making sure there can't be stock buybacks.

Why are there no conditions attached to what is a significant amount of support going to the banking sector, and what is your evaluation of the Bank of Canada's contribution to Canada's big banks and the banking sector generally since the beginning of the pandemic?

[Tiff Macklem]

I'm going to ask Deputy Governor Wilkins to start to answer that question. She was very directly involved in setting up a series of new programs the Bank of Canada has put in place. The scale of those programs goes up every week, and she can give you the latest numbers.

[Carolyn A. Wilkins]

Thank you.

That's an excellent question because it highlights the fact that supporting the financial system is a team effort. The total we've done so far amounts to $341 billion, and that's outstanding. Of course, some of those activities have matured so the peak was somewhat higher than that, but that's how much is in there.

It seems like a very abstract number though, so I can take a second to talk about what that money is doing and the purpose of it. At the end of the day, it's to help households and businesses better deal with the financial hardship they might be feeling right now, but also to pave the way to a sustainable recovery. The governor spoke about that at the beginning.

Our activities range from providing short-term funding to financial institutions, corporations, provinces and municipalities to outright purchases of longer-term assets, so for corporate bonds, it would be corporate bonds with a remaining tender of less than five years. The reason we do that is to support those markets so that the private sector can also participate in a market that's more stable and that functions better. When that happens that means businesses have the working capital they need. It means that if households or businesses need to use their lines of credit, which they have had to do, the banks are there for them as much as they can be and so on. That complements some of the actions that CMHC has made in their IMPP, and OSFI has made in reducing the countercyclical capital buffer.

With respect to the decision on the restrictions to place on banks, their dividends versus their buybacks, that's out of the Bank of Canada's purview. The only thing that I would add before I turn it back to the governor is that's a decision of OFSI. It needs to be taken in the context of the fact that banks always have extra buffer in their capital than what they need as a regulatory requirement and that can be seen as a restriction on dividends the whole time. I'm going to turn it back to—

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

Thanks very much for that.

The concern in the public's mind, of course, is that the big banks have had over $5 billion in profits so far during this pandemic and, anecdotally, businesses are not getting access to liquidity. We're not seeing that trickle down into the community. In fact, in many respects the programs where businesses are accessing loans are ones where the Government of Canada has basically picked up through BDC and EDC 80% of the guarantees. What we have are the banks taking that massive amount of support, an unprecedented amount, and it's not trickling down. The loans they seem to be giving are the ones that have already been guaranteed and underwritten by the Government of Canada.

Does that worry you? This doesn't seem to be working, all this massive amount of support to Canada's big banks, except for them, of course.

[Tiff Macklem]

Deputy Governor Wilkins and I are not here to defend the banks, but let me just say a few things.

First of all, as the senior deputy governor highlighted, OSFI regulates the banks. They have imposed some restrictions. The banks can't increase dividends, and they can't increase buybacks. We're not the U.S. We're not the U.K. OSFI is imposing restrictions that are appropriate for Canada.

With respect to the response of the banks, it's worth underlining that this crisis is very different from the one we faced in 2008 and 2009. That was a financial crisis. Banks, particularly in the U.S. and in Europe, were very much at the centre of that crisis. There was a huge credit crunch, and that's what caused the recession. In the last dozen years since the financial crisis, there has been a tremendous reform effort in the financial system. Hundreds of billions of dollars of additional capital have been built up, liquidity is much reinforced and leverage is much lower. That has put the financial system in a position this time to be part of the solution as opposed to the problem.

I recognize that not every person feels like they've been well treated. They're not happy with the pricing and they found the negotiation with their bank unpleasant, but banks in Canada have deferred 700,000 mortgages. They have increased business credit substantially. Loan growth to businesses is up about 30%. Loan growth to households is down, which really reflects what I was talking about earlier. The government has replaced the income that households have lost. Household savings are going up. They're not shopping as much, certainly not for large purchases, so their credit growth has slowed, but banks have dramatically increased their loans to businesses to help businesses bridge across that.

For the Bank of Canada's part, by lowering our policy rate and by embarking on large-scale asset purchases that have lowered yields at the curve, the cost of those loans to businesses has gone down. The interest rate of business loans is reduced by an average of about 140 basis points.

It's not perfect, but they are providing part of the solution.

[The Chair, Liberal, Wayne Easter]

Thank you, all. We are quite substantially over on that round.

We have Mr. Morantz, and then we'll go to Mr. Fragiskatos.

Marty, you have a five-minute round.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Congratulations on your appointment, Governor.

I want to circle back to the question of interest rates. The reason I want to do that is, when it comes to the relationship, if you will, that millions of Canadians have with the Bank of Canada, whether they realize it or not, it comes down to the interest rate, because that's what affects their pocketbooks.

You said at the beginning that the overnight rate at 0.25% was the lower boundary of the rate. You also said that you don't anticipate rates going up at all. Are you of the view, basically, that it's going to be 0.25% for a long period of time? How long might that be?

[Tiff Macklem]

We're not here today to take monetary policy decisions. As I indicated in my opening statement, the focus in the initial months of the crisis was very much on restoring orderly market conditions. We are pleased to see that market conditions are normalizing.

With that, we are turning our focus more to monetary policy. An important step in that regard will be the publication of our monetary policy report in July where we will provide an outlook for the Canadian economy, recognizing there is still a lot of uncertainty, particularly around the evolution of the pandemic. I imagine it's going to be more of a scenario, possibly with some risk scenarios around that. It will provide us a planning scenario that will be important for the calibration of monetary policy, because as you're aware what we do today affects inflation, with some lag. We have to look forward.

That's the next step in the process to determine how much monetary stimulus will be needed and help us figure out for how long.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Is your inflation target still going to be 2%, or are you going to be changing that target?

[Tiff Macklem]

I'm going to ask Deputy Governor Wilkins to say a word about our research program related to the renewal. The target has been 2% for close to 30 years now, and it has served Canada and Canadians extremely well. One of the strengths of our inflation targeting regime is that we review it every five years. We are in the process right now of reviewing it. We are and will be consulting with a broader range of Canadians on that.

I'll ask Senior Deputy Governor Wilkins to say a few words about our research in that area.

[Carolyn A. Wilkins]

Sure. I'll be brief because we've spoken at length about this in different venues.

We're conducting an extensive research program that is doing, if you like, a horse race among different monetary policy frameworks, one of which is the one we have today: 2% inflation targeting. Another example is a dual mandate, something similar to what they have in the U.S. that looks not only at inflation but also full employment, price-level targeting, among others. We have a set of clear criteria for choosing which one seems to be best, knowing, as the governor just said, that 2% has served us extremely well. Those criteria are how well they served Canadians in terms of stabilizing the labour market, stabilizing production and if they will stand the test of time in different kinds of environments, like the one we have today.

We're expecting to consult widely with Canadians. You'll start to see our research work out there. The objective is to have an agreement signed with the government in 2021.

[The Chair, Liberal, Wayne Easter]

Mr. Morantz, go ahead. We'll give you another minute, Marty.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you.

Back to the governor, I'm having a little trouble understanding exactly what the reticence is around discussing interest rates. You seem not really quite ready to go there. You have said, in this meeting, that you've no plans to raise them. They're at the lower bound. Are interest rates going to stay at that lower bound, or do you think they're going to rise?

One of the other things that play into this is—and you mentioned this earlier with the mortgage deferrals—many people have described what they see as the “deferral cliff”. I don't think we're anywhere near the end of this crisis from a monetary perspective. How long can the bank keep this up and not have to deal with the possibility of inflation?

[The Chair, Liberal, Wayne Easter]

Governor, the floor is yours, but we don't expect you to come to this committee and get into speculation. I do not believe this is the place for it.

[Tiff Macklem]

Thank you, Chair.

I can give you either a very long answer or a very short answer, but I think the chair wants me to give you a short answer.

Our—

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Sorry, I just want to say, Mr. Chair, that this isn't speculation.

Your immediate predecessor in this committee only a few weeks ago said that interest rates will certainly go up. Pardon me if this isn't a real question that I think you should be answering. Do you think they'll certainly go up as well? That's not speculation. That's the opinion of your predecessor. What do you think?

[The Chair, Liberal, Wayne Easter]

We are over time.

Go ahead, Governor.

[Tiff Macklem]

Someday, we will have gotten through this, the economy will be recovered and interest rates will start to move back to more normal levels, but we're in a deep hole and it's going to be a long way out of this hole.

[The Chair, Liberal, Wayne Easter]

With that, thank you all.

We'll turn to Mr. Fragiskatos and then to Mr. Cumming.

Peter.

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

Thank you very much, Mr. Chair.

Governor, congratulations on your appointment.

Deputy Governor, it's great to have you back at the finance committee.

My friend Mr. Poilievre talked about insolvency. I want to ask you about insolvency but in a different way, and indulge me if you can. It is a hypothetical question. I realize that, but I think it's an important question.

[Tiff Macklem]

I don't like hypothetical questions. I'll tell you that up front.