Finance Committee on June 18th, 2020

[The Chair, Liberal, Wayne Easter]

We will call the meeting to order.

Welcome to the first panel of meeting number 38 of the House of Commons Standing Committee on Finance. Pursuant to the order of reference from the House, we are meeting on the government’s response to the COVID-19 pandemic.

Today’s meeting is taking place by video conference, and the proceedings will be made available via the House of Commons website.

With that, I would like to welcome all our witnesses. We have with us a number of bank economists and others today. We really appreciate your appearance. We have had some interesting discussions over the last five or six weeks on the COVID-19 pandemic and the challenges that are ahead.

I would ask people to keep their remarks to about five minutes, if they could. It will allow more time for questions.

We will start with Scotiabank and Jean-François Perrault, chief economist.

Mr. Perrault, the floor is yours. Welcome.

[Jean-François Perrault, Chief Economist, Scotiabank]

Thanks very much for organizing this and giving us a chance to speak.

I suspect you're going to hear a lot of overlap between what I say and the others, so I'll try to keep it brief in the hope that I won't steal too many people's thunder.

As I think you all know, we are dealing with an economic contraction of historic proportions. There is no other way to characterize it. COVID is leading to essentially as close as we're ever going to get in economic terms to a sudden stop in economic activity. The government—you guys—has basically switched the off-switch on a range of sectors and that obviously comes at a significant economic cost.

The good thing is that, despite the very significant contraction that we're seeing, the containment efforts—the harm that's been caused—seem to have been working in the sense that the virus is beginning to be under control. We've flattened the curve. That is allowing provinces, and it's allowing other countries as well, to start reopening their economies.

As we think about the year, for instance, it's very important to think about it in two halves: the first part of the year as a tremendously damaging economic scenario, and the second part of the year, obviously, as a very significant rebound as we reopen. We're seeing evidence that the reopening is coming with very significant rates of acceleration in certain sectors. We're seeing that in auto sales. We're seeing that in the housing market. In the U.S., we're seeing that in the retail sales activity reports, which came out. We've seen that in the labour market.

These are all indications that the economy is on the path to normalizing as we reopen, but it shouldn't be read or interpreted as the economy going back to where it was. The reality is that when you go from very, very low rates of economic activity to something that's a little bit higher, you're going to get a very strong growth rate, but it still means you're very far away from where you were.

As we think about it, for instance, in our forecast, we have a pretty significant decline in growth this year, about minus 7%. We think it's going to take about a couple of years to go back to where we were at the end of 2019. The depth of the hole that we are currently in takes a long time to unwind, even with very strong growth rates. That's under the assumption that the virus remains under control, there is no second wave, there is no reactivation, there are no further shutdowns and there is no additional shock that hits us. This is, in a sense, the best-case scenario.

One can debate how quickly we rebound—and others have different views on that—but that's generally how we see things.

It's important to keep that in mind because there is a very significant distinction between growth rates and levels, and in this context, that really matters. If you go back to a normal recession, a normal historical economic shock where you'd lose 2% or 3% of economic activity, those used to be big, big shocks. Now we're talking about a scenario where you lose 7% or 8% and it takes you a long time. This time next year you're still down 2% or 3% relative to where you used to be, so it's just this tremendously powerful economic drag.

Of course there has been a tremendous number of policy responses on the federal side and the provincial side. Generally I think they've been managed reasonably well. It was clearly an environment where nobody was going to let perfection be the enemy of the good, and I congratulate governments for doing that. Of course, things could have been done better, but you know that after the fact to some extent.

The result is a very significant increase in deficits—an unbelievable increase in deficits—which we think is largely warranted and we're not particularly worried about because we're starting from a reasonably good fiscal perspective.

That doesn't mean to say it is going to remain the case. If the virus comes back in the fall and we have to throw some more money at it, then at some point you start to really worry about the fiscal dynamics, but at present I think the starting point was good, we acted in roughly the right dimension and we're on a track for sustained recovery if the virus remains reasonably well contained.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Perrault.

We'll move to the Dominion Lending Centres with Ms. Cooper, chief economist.

The floor is yours.

[Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres]

Thank you, Mr. Chairman, and thank you, members of the committee, for this opportunity to meet with you this afternoon.

None of us has any experience in dealing with a medical emergency that has become an economic crisis, and none of us knows how long this will last, or how the endgame will play out. I think we all agree that this is a dilemma like no other, freighted with profound uncertainty.

Economic theory and econometric modelling do not provide a specific road map. Unlike previous postwar recessions, today's is not an endogenous shock triggered by huge imbalances.

To be sure, medical considerations should outweigh economic ones. The job of policy-makers is to mitigate the financial burdens caused by doing the right things on the medical side, which I applaud the authorities for doing.

How do we navigate the coming months? In my opinion, this is a question to be answered first by the medical experts. To assess the next steps from an economic policy perspective, the government needs to explain its view on the likelihood of a vaccine and antivirals over a six-month, one-year and three-year time frame.

A sober assessment of the outlook for Canadian growth suggests that while the second quarter might be the bottom of the cycle, the economy will only crawl back to full employment. Those hardest hit will be those who can least afford unemployment, exacerbating already unequal income distribution. Small businesses, which account for more than 40% of the private sector jobs, are by now hard hit and in many cases might have already received a death blow. Undeniably, some of these lost jobs are gone for good.

The hope is that the waves of stimulus doled out by the government and the Bank of Canada will eventually bolster the economy and spark a revival in hiring. The risk, though, is that the pandemic is inflicting a reallocation shock, in which some firms and even entire sectors suffer lasting damage. Lost jobs in these sectors don't come back and unemployment remains elevated. Traditional fiscal stimulus and traditional monetary policy do not address this kind of shock.

An estimated 30%, in my view, of the jobs lost from February to May could be the result of this permanent reallocation shock. The labour market will initially recovery swiftly, as we saw in the May data, but then level off with still too many people unemployed.

Workers in the hospitality industry, accommodation and food, are among the most at risk alongside inessential retail, leisure, travel and education. Most of these people, or many, cannot work from home.

In many cases, the pandemic has increased the challenge of bricks and mortar companies facing off against e-commerce platforms, such as Amazon, accelerating a pre-crisis trend in which Canadian companies have woefully underperformed.

The unique shock of the virus means that governments may need to do more to support businesses and protect workers than they would in a typical recession. This puts the government under pressure to craft policies that help viable cash-strapped firms to survive, and displaced workers to navigate to different jobs, but which, ideally, do not prop up companies that are no longer sustainable.

We have already seen evidence which shows that high COVID unemployment benefits can encourage layoffs, discourage work and delay productive reallocation. We need to know the proportion of Canada's job losses that come from lockdown and weak demand. Those will diminish quickly in response to stimulus and reopening. The part generated by high unemployment benefits encouraging workers to stay home requires a gradual reduction in income support. The most intractable group of unemployed suffers the permanent fallout from the reallocation shock. For them, the government should provide the training that gets workers ready for the next phase of the technology revolution.

The pandemic has accelerated structural shifts that will remain. The efficient response to these shifts requires, among other things, widespread enhanced broadband and computer access for all households—and that's children and adults—reduced government land use restrictions and occupational licensing restraints, and the removal of regulatory barriers to business formation and interprovincial trade restrictions.

These fault lines were there before the virus, but they are now exposed and need a new social contract between government and its citizens.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Ms. Cooper.

We'll now go to the Desjardins Group, with Mathieu D'Anjou, director and deputy chief economist.

Go ahead, Mr. D'Anjou.

[Mathieu D'Anjou, Director and Deputy Chief Economist, Desjardins Group]

Good afternoon. Thank you for inviting me to appear before you today.

It's clear that the COVID-19 pandemic is having dramatic human consequences around the world and is posing many major challenges for our society. We have already raised some of them. It's a health crisis, first and foremost, but the economic consequences are as dramatic. That's what I'm going to focus on today in order to give you some perspective.

To begin with, I'd like to remind honourable members that Desjardins is the largest co-operative financial group in Canada and that it offers a comprehensive approach to its seven million members and clients, including over 360,000 businesses. Desjardins's strengths in responding to the challenges of the crisis revolve around a democratic proximity governance aligned with the interests of individuals and business people. This allows us to maintain close relationships with our members and clients, especially in Quebec and Ontario, the regions most affected by COVID-19.

A good part of my job at Desjardins involves making economic and financial forecasts. I won't hide the fact that it's particularly difficult at this time, when we're going through a crisis for which it's very difficult to find a historical precedent. It's sometimes compared to the Spanish flu, but it's not a perfect comparison, and that took place about 100 years ago, which is quite a long time ago.

What we're experiencing now is more like a recession in war times or during a natural disaster than a classic recession. Prior to COVID-19, the economic outlook was quite favourable and there was no sign of an impending recession in North America. The unemployment rate in Quebec had even reached an all-time low of 4.5% in February. Two months later, it had jumped to 17%. That's unimaginable in normal times, and it's an all-time high.

From a purely statistical point of view, the magnitude of the current crisis exceeds anything that has been experienced since at least the depression of the 1930s. Between February and April, more than three million jobs were lost across the country and the real GDP declined by more than 17%. The magnitude of these declines is about three times larger than the very serious recession of the early 1980s, which lasted six quarters.

In our opinion, and this is an important message, we must still be very careful when comparing the current crisis to usual recessions, since it is completely different. It's an external shock that doesn't reflect existing financial imbalances or economic problems.

For the time being, the drop in activity and in the number of workers can be explained mainly through the containment measures put in place to stop the spread of COVID-19. We can speak of a desired pause in the economy, which is very different from an uncontrolled meltdown like the one experienced in the United States in 2008, for example. Moreover, this economic pause is accompanied by unprecedented support from the governments to limit the financial consequences for households and businesses. Financial institutions have also contributed by providing important relief measures to ensure that the pause in the economy does not result in a rise in bankruptcies. At the moment, there are none.

At Desjardins, we're proud to have been one of the first institutions to implement these relief measures for our members and clients, and we're determined to maintain our support to help them get through the crisis. To date, we've received close to 950,000 requests for our relief measures, which is huge.

Through the various measures offered, the dramatic fall in activity and employment is not, for the time being, accompanied by a general increase in financial distress. In fact, both in the United States and Canada, household incomes are increasing and savings are rising dramatically. It's very different.

The essential support of central banks in the current crisis must also be acknowledged. By mid-March, the situation was threatening to turn into a cash crisis and a financial crisis. The Federal Reserve and the Bank of Canada, however, acted to ensure the proper functioning of financial markets by injecting massive amounts of cash and even buying riskier assets directly. Today, financial markets are functioning well and cash is abundant. This allows financial institutions to continue to play their role, in particular by providing affordable credit to households and businesses.

In my opinion, it's far too early to say that we are experiencing the worst economic crisis in recent decades and that a depression is inevitable. The drop in GDP around the world will be dramatic this year because of the months of pause we've experienced, but if we manage to reopen over the next few months, the consequences for households and businesses could be quite limited. I'm not saying there won't be any, though.

Our forecast is for a strong rebound in activity over the next few months, but the effects on some sectors will last longer. We expect it will take until 2022 before real GDP returns to pre-crisis levels. That's still a long time. In the short term, a decline in unemployment rates is almost certain if reopening continues. We are already seeing it in Quebec, where the unemployment rate fell in May.

In fact, the question is whether Canada's unemployment rate will return to 10%, 8% or 6% in a few months. Then, we'll have to watch the trend of the economy. I think this will depend on the evolution of the pandemic, the distancing measures and the rebound in household and business confidence.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. D'Anjou.

We'll turn to CIBC Capital Markets' Avery Shenfeld, managing director and chief economist.

Mr. Shenfeld, go ahead.

[Avery Shenfeld, Managing Director and Chief Economist, CIBC Capital Markets]

Thank you so much.

I don't think our outlook is materially different from the one we heard right off the top from my friend J.P. at Scotiabank.

In fact, I'm often told that there's a lot of uncertainty out there, but this is one of the times in my career when I would say there is less uncertainty out there than I've seen in my career. That's because—unless you're very picky about the exact numbers—we know what the economy is roughly going to look like over the next year.

We're starting from a position now that is best described as horrible. We've seen a decline in GDP leading up to April, and you really have to go back to the Great Depression to see something similar. I like to say that I'm getting sick of living in this sort of environment; I think we all want to live in what I call “precedented times” again, but we're not there, and we have a long way to go.

The reason I say that it's fairly certain the way the outlook is going to look is that, if we run it out over the next year, and barring a record-breaking vaccine and its deployment among billions of people, we know that, at least over the next year, there are segments of the economy that health restrictions, which are going to remain in place, are going to keep essentially shut down.

The people who used to work at night clubs, wedding halls, private convention centres and so on will simply be shut out of this economic recovery, and then there are other sectors tied to international tourism and even restaurants that are going to have to open at less than full capacity. We can pretty much predict with confidence that these sectors will not be back where they were at the start.

If we add up the share of GDP that is in those industries or the share of employment that's in those industries, you're looking at a pretty substantial gap to where full employment is even a year out, and that's even assuming that we take every step along the way with exactly the right timing in terms of managing to avoid a big second outbreak that causes us to have to do a hasty retreat.

When we define it in terms of unemployment rates, for example, if everything goes well, we might be sitting with an 8.5% unemployment rate a year from now, but remember, full employment is more like 5.5%, and 8.5% is about where we were in the last recession. We're going to recover from depression-level activity to recession-level activity. It's not particularly good.

Beyond next year, it's going take some time for the economy to recover, even if a vaccine is in place at the end of 2021, so we're looking at an extended period with very little uncertainty that the economy is not going to be good, and that spells out what kind of policy environment I think we're in, so let me turn to what I think the role of government is.

I think the initial role of government was exactly what Parliament, in its wisdom, decided to do, which was to band together and make sure that we protected the most vulnerable people right away, try to prevent a wave of defaults and bankruptcies among Canadian businesses that would then disappear and not be able to restart when good times return and also, of course, to protect households and enable them to put food on the table, pay their rent and so on. That was the immediate crisis, and Parliament worked at record speed to get that done, in many cases faster than the U.S. managed to accomplish the same task, so I give some kudos to the government and the civil servants, in particular, who worked hard to get these programs out the door.

When we look ahead, the number one priority for government is on the health side. It's making sure that, in fact, sound decisions are made about what to open, what to reopen and how to do so safely, because we know that the worst possible outcome is a second wave, as we've seen with some prior pandemics, that can't be snuffed out quickly and leads us to have to go back to where we were in April. That's why I think governments have to look at things like making masks mandatory indoors, listening very carefully to what the health authorities are recommending and doing the right thing.

There is no trade-off, and I want to emphasize this, between the economy and health. If we think that, by letting businesses open that are marginally safe, we're doing them a favour, we're not, because, if the virus comes back and people get sick, not only will we take a big step backward on the economy—and I do fear this in some U.S. states more than in Canada—but we'll also tarnish household confidence. If we look at countries like China that are a few months ahead of Canada in getting the virus down to low levels, they have not seen a full recovery in consumer spending, because people have remained cautious and afraid.

We have to make sure that people have an assurance that governments and businesses are taking all the right steps, and in some cases, businesses need the guiding hand of government to guide them to that. That's the single most important criterion for policy.

The second obligation is to really make sure that we don't pull the rug out from under the economy while it's still very weak. We recently had the decision to extend the CERB program for another couple of months. There's also been an extension of the wage subsidy program. As much as some people don't like the idea of big deficits, they're really not that costly when you're borrowing at 0.5% rate of interest. A $300-billion deficit costs the government an extra $1.5 billion in interest payments. It's not really a huge share of government revenue down the road. It's a necessity to make sure that the fiscal stimulus stays in place while we're still wrestling with double-digit unemployment rates in the economy. The last thing we need is a collapse of the household sector and the business sector so it can't reopen when the time is right.

If I think about how these various policies have to shift over time. though, we do need,as we get more jobs coming back, to look at building in some nuances in some of these programs to make sure we're not providing disincentives for people to work where there are jobs available. It's important to distinguish that. For example, in the EI program, we have different weeks of eligibility depending on your region and what the background level of unemployment is. Those are steps designed in that program to ensure we don't create inappropriate disincentives. That wasn't important when these policies were first announced because we had millions of people losing their jobs—there were no jobs available—but it will become more important over the next year or so as the economy opens up.

When I think of the work that's been done to let businesses tide themselves through this period of almost hibernation for the economy, many of these programs have worked quite well. I think there's still some work to do, though, in taking a look at small businesses within cities, particularly the retail sector, and so on. We don't want to end up with our main streets across Canada, for example, with just a forest of vacant outlets a year from now. We need some of these businesses to hang in there. I think we have to look at making sure we've benchmarked the support correctly across that sector so that they can hang in there through this period. We won't save them all, but we don't want to have our cities look like downtown Detroit. We want them to look like downtown Vancouver and Toronto did before this started, or Montreal for that matter. I think that's very important.

I think municipal governments are going to be very constrained. They, unlike provinces and the federal government, can't just simply run a deficit. They have to balance the books to some extent. They have reserve funds they can draw on, but they've lost a lot of revenue. A lot of that came from land transfer taxes. Subway fares in some of the major cities, and so on, all dried up. I think making sure the municipal sector doesn't have to start a major fiscal restraint program while the recession conditions are still in place is another thing that the government has to look at.

Overall, I would say the outlook that's been presented to you today by the various economists is a realistic one. We're probably through the worst, but saying the best is yet to come and the spectacular growth rates we're likely to see off these very low levels of activity shouldn't deter you from the focus on the fact that even if we make tremendous progress, we may still have an 8.5% unemployment rate a year from now. GDP will be well below where it would have been had we grown at 1.5% or 2% a year. The job of government to fill in the cracks, keep the economy in a state where it can reawaken when the time comes, is still very much with you. I'm encouraged by what I've seen so far. The government's willing to work across party lines to get things done and hopefully we continue to see that.

I'll be happy to take your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Avery.

We go now to Catch Capital Partners Inc., Mr. Wareham, CEO.

Mr. Wareham, the floor is yours.

[Jeff Wareham, Chief Executive Officer, Catch Capital Partners Inc.]

Thank you, Chairman Easter.

First of all, I would like to take a moment before making my comments to express some gratitude that I think a lot of Canadians share.

My friend and mentor, and a former colleague of many of you, a gentleman by the name of the Honourable Ed Holder, once told me there is no higher calling than commitment to public service. Quite frankly, our political class has been put through a fair bit over the last few months, and I would like to thank everyone for their service.

I have spent 30 years, as of today actually, in the financial services business, starting in insurance, then banking, then moving to the vice-presidency of an investment dealership and ending up as director of a Canadian mutual fund company. So I've had a somewhat diverse experience around the financial services sector. In my semi-retirement, I've also had the unique opportunity of sitting on boards of not only a couple of Canadian companies but also a couple of U.S. companies. I'd certainly welcome questions at the end of the presentations on the difference in the experience as a director between Canada and the U.S., and some of the different programs they've implemented.

Hopefully our nation is embarking on the recovery phase of the crisis. I believe it is critical to take a look at two really important historical cornerstones of our economy. The first is obviously our strong, stable, globally recognized banking system. The second is the entrepreneurial community that has been a part of Canada's history from our establishment.

Canada is recognized for both of these things, but, quite honestly, although we're recognized for both, I'm not sure these things always move well in parallel. In the best of times, commercial credit can be difficult for small and medium-sized entities, and these are certainly not the best of times. So as I said, these two realities—that success we have with entrepreneurship and business development and the success of our banking sector—are, in fairness, not always closely related.

Canadian banks, as I said, are recognized globally for their strength and sound banking practices. Much of the western world in the 2008-09 credit crisis had disasters on their hands, and between some very strong leadership at the federal government level and some strong leadership at the banking level, we were able to navigate that crisis better than just about any other nation in the western world. That said, there were still some bumps and bruises.

Right now, Canadian banks are faced with an unbelievable combination. Coming out of that credit crisis, we've had a lengthy period of real estate appreciation, and tagging along with that has been a massive expansion of consumer debt; and now we're looking at a total decimation of the commercial real estate sector, massive job losses and the potential of a mortgage cliff a few months out that will certainly impact the banking sector.

Coming out of this I certainly don't believe our strong banking system is going to be able to extend credit or more generosity to small business. I believe that's a real challenge, and our banks are going to have to do everything in their power to ensure their balance sheets are strong and their income statements are not impacted too dramatically by near-zero interest rates, which I think are with us for a long time to come.

That being said, I think it's important that the committee and the Government of Canada take a look at how it might intervene in the economy, recognizing that, as I believe, it will be very difficult to do that through traditional banking models, with our having essentially half a dozen big, dominant banks in Canada. It's perhaps more difficult in Canada to reach the small businesses than in some other countries where other western nations have more developed alternative finance businesses.

Our tight number of banks and our small collection of large banks does present one challenge that has emerged over the last number of years and was exacerbated in the last credit crisis 20 to 30 years ago when an awful lot of investment products were for entrepreneurs who lacked access to traditional bank lending.

They could go to the capital markets and borrow money either through the IPOs of small businesses, high-yield debt, or go to leasing companies, and there was asset-backed commercial paper. There were a lot of different alternatives for financing, and a lot of these have disappeared. This is not a point of blame; it's just a reality.

In the capital markets world, the syndication desks that look after the issuance of new products for investment clients have essentially contracted as the banks have gobbled up probably 90% of the wealth management assets in Canada, and relatively few, shall we say, innovative or financing products are making it out to retail investors.

There are a lot of good reasons for this. They certainly present higher risk, and there's a desire to protect investors from scams and inappropriate vehicles, from things that don't suit their comfort level with risk. Some of the products, we discovered, really weren't as safe as they appeared to be going into the credit crisis in 2008.

There are valid reasons that these sources of funding may have dried up, but as we enter the recovery phase, it's important to talk about how we can reach out to our capital markets businesses and find alternative solutions that don't put pressure on, for example, the banks to reach out and step outside of their traditional lending mandates that they do very well, but allow our small businesses to access more secure sources of factoring, trade credit, and leasing.

All of these sources ultimately trickle back up to the banks or to bank alternatives, like insurance companies, and in many cases, those sources are just not going to be available with the pressure that's being put on our major financial institutions. The government does have an opportunity to work, whether it's with moral suasion, or with policy, and particularly, with direct support to programs, with innovative entrepreneurs who have capital markets experience, but that may not be a part of the traditional bank model that can come forward with lending and financing solutions.

I've spearheaded a group that has put forward a proposal that has made it to several members of the committee. It's based, essentially, on the principle of the victory bond back in the Second World War. I've read a couple of the commentaries of different economists on this call who have pointed out that we're going through an economic crisis that really hasn't had a precedent since World War II. It's good to look back at what worked through history.

On that note, I certainly would welcome any comments or questions that people have on what I see with regard to the junior capital markets and the opportunities there to work in conjunction with the banks, in conjunction with their syndication departments, and in conjunction with the federal government to make sure that trade credit and financing factoring are available to the small and medium enterprises that are going to be so critical in ensuring that we aren't at 8% or 10% unemployment two or three years from now.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Wareham.

We'll go next to the Canadian Centre for Policy Alternatives and David Macdonald, senior economist.

Welcome back, David.

[David Macdonald, Senior Economist, Canadian Centre for Policy Alternatives]

Thanks so much for that, Mr. Chair, and thanks so much to the committee for their invitation to speak today.

First of all, I would like to congratulate the federal government on its reaction to this crisis, and in particular on the creation of the emergency benefit. It was certainly a highlight of government action in this pandemic, as I've remarked before this committee before.

While the two-month extension to the CERB is welcome, I would encourage the government to start planning now towards a new modern EI system, with a transition strategy to that end. Some of the features of a new EI system should be borrowed from the success of CERB, including its speed, a minimum payment of, say, $500 a week, and, in particular, better coverage for gig and self-employed workers.

However, I would like to focus my comments today on the government's interventions into the financial sector, on which programs have been taken up and which ones haven't, and on how we could improve those interventions.

I think it's worth taking stock of the approximately $750 billion promised in support for the financial sector. By my count, $679 billion of this amount has been deployed. The reduction in the banks' domestic stability buffer has provided them with an additional $300 billion if they choose to use it. The Bank of Canada was initially scheduled to spend $300 billion, although its balance sheet has now expanded to $373 billion, as of last Wednesday. Almost half of that expansion is due to the increase in its repurchase agreements.

On the other hand, the mortgage purchase program through CMHC has managed to buy almost no mortgages, spending only $6 billion of its $150 billion budget, with the last two purchases buying essentially nothing and the next one scheduled for June 22, next week.

In particular, lowering the domestic stability buffer from 2.25% to 1% of risk-weighted assets would free up as much as $300 billion in assets for other purchases for financial actors. OSFI would prefer if those purposes were to provide further loans to businesses or households; however, this assumes that banks can find households or businesses that are both creditworthy and willing to take on another $300 billion in debt in the middle of the worst labour market since 1936.

That $300 billion could be used for other purposes much less desirable than lending. As within any large corporation, money is fungible, and its purposes can change. For instance, it could be used to pay out shareholders or executives, or it could be used to cover loan losses. Thankfully, OSFI has explicitly barred banks from continuing with any existing share buyback programs; however, dividend payments and executive bonuses can be maintained but not increased. In the first quarter of 2020, the banks paid out $5 billion in dividends, and they are on track to pay out $22 billion to shareholders over the course of 2020. In other words, 7% of the gain from the change in the stability buffer could still be paid out to shareholders despite OSFI rules as they stand today.

While senior financial executives will not be able to increase their total pay above what they stood at in previous years, given ever-increasing executive pay in Canada, this is hardly a stringent restriction. In 2018, the top executives at Canadian banks raked in $173 million in bonuses alone, across 31 people. If this is the pay bar that they have to fit under given extraordinary government supports for the sector, it likely won't cause them any difficulty. I would recommend that this committee examine international approaches like those in the EU or the UK that suspended bank dividends and executive bonuses for the period of extraordinary government supports.

A Bank of Canada study released earlier this month found that the deferral of mortgage payments is an important way to keep Canadians who have temporarily lost work in their homes and to reduce the likelihood of a downward spiral of net worth through a rushed home sale. With 14% of all mortgages now in a deferral position, this has been a lifeline to the 4.8 million Canadians who have lost their jobs or the majority of their hours since February.

OSFI's allowing the banks not to have to increase their capital requirements due to non-performing loans makes this crisis of mortgage repayments much cheaper for the banks if they engage in a deferral process. With between 12% to 18% mortgages presently in deferral, depending on the bank, increased capital requirements would have otherwise led to material impacts on the banks' bottom lines.

I'd encourage the committee to request the banks to not charge interest and other penalties over the deferral period of mortgages, but not only on mortgages—also on higher interest products like credit cards and lines of credit. Given the slow recovery so far, I would recommend that the committee also consider extending the loan deferral period from September until the end of 2020. Furthermore, many Canadians simply won't get their jobs back, even by the end of the year, and many will conclude that it isn't financially viable to stay in their present homes. The mortgage cost would just be too high, given job losses.

Mortgages, particularly fixed-rates ones, carry substantial penalties for early repayment. The committee should consider reducing or eliminating these pre-payment penalties, allowing Canadians to more easily sell houses they can no longer afford and get into new houses they can afford without paying extraordinary penalties in the process.

Thank you, and I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Macdonald.

Before I turn to Mr. Porter, I'll give members the lineup for the first round of questions. First up will be Mr. Poilievre, followed by Mr. Fraser, Mr. Ste-Marie and Mr. Julian.

Mr. Porter from the Bank of Montreal, welcome. You had some technical problems like we folks in the country often have. Welcome.

[Douglas Porter, Chief Economist, BMO Bank of Montreal]

Thank you. All's well that ends well.

Good afternoon, Mr. Chair and committee members. Thank you for the invitation and the opportunity to speak with you today.

I'll keep my remarks relatively brief because I largely agree with those who spoke on the economic outlook earlier.

Canada has just experienced the deepest and sharpest economic downturn in the post-war era. However, it also now looks to have been the shortest recession ever, as there are plenty of signs that activity, jobs and spending began to recover in May alongside the initial stages of the reopening in many parts of the country and throughout the rest of the world.

While some of the latest economic indicators are no doubt encouraging, there is also little doubt that we're climbing out of a deep valley. Preliminary evidence from Statistics Canada, as earlier mentioned, suggests that the economy fell by 17% in March and April alone, and that may well be revised even higher to a deeper decline. Again, to put that in context, the previous largest decline was in the early-1980s recession when OPEC fell by just a little bit more than 5% over one and a half years.

As economies reopen, we think that a large share of this drop can be reversed relatively quickly. However, it's also apparent that, in the absence of an effective vaccine, certain sectors will remain heavily constrained for an extended period of time, likely constraining the overall economy. Crucially, most of these sectors that will remain constrained do tend to have above-average employment levels. If anything, the employment effect of the constrained sectors will be even more than what the overall GDP numbers suggest.

Even though we currently project this rebound and activity next year after, we believe, a similar decline this year, that would still leave the economy 3% to 4% below where it normally would have been by the end of next year, and the unemployment rate is likely to be two to three percentage points higher than the pre-crisis levels, even by the end of 2021.

Moreover, the economy does face an important challenge: transitioning from the initial reopening phase to the recovery phase. Even as the need for the most extreme policy measures fades, the economy will require, as mentioned earlier, support for a longer period of time. Policy will need to strike the appropriate balance between supporting incomes and not discouraging work incentives.

While we recognize that it is still a highly uncertain environment, the upcoming fiscal snapshot is welcome, as it will help to give us all a firm foundation for future decisions.

Looking further out over the medium term, we are relatively upbeat on the prospects for the recovery. Individuals and businesses are incredibly resourceful, as we have seen in recent months, and they can learn to deal with challenging circumstances. We don't think that we should discount the ability of the economy to recover.

With that, I'll turn it back to you, Mr. Chair. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Porter and all the witnesses, for your presentations.

The first round will be a six-minute round, and we'll start with Mr. Poilievre.

Pierre, the floor is yours.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you very much for your testimony, everyone.

Whichever bank economist wishes to answer this question can jump in. I'm just looking for a number here, not for any commentary. What share of your bank's assets is backed up by the government? By “backed up”, I mean those with guarantees from the government, directly or indirectly, in the form of the CMHC or 90% backups of Canada Guaranty and Genworth, and other forms of guarantees. What percentage?

If you don't have an answer to that question, feel free to just not chime in on this question.

[The Chair, Liberal, Wayne Easter]

Who wants to take it? No volunteers?

Go ahead, Mr. Shenfeld.

[Avery Shenfeld]

I think the silence reflects the fact that we don't run these banks, so we don't always know everything about banking. They don't let me, at least, run the bank.

What I would say is that this share has come down substantially. The CMHC, for example, not only used to guarantee mortgages for people who didn't have the 20% down payment, but it also had a program where basically the bank could buy the CMHC insurance in bulk on mortgages. The buyer didn't require the insurance. Banks were doing that and then using that—

[Pierre Poilievre, Conservative, Carleton, ON]

Yes.

[Avery Shenfield]

That's fallen a lot. Whatever that number is, it's down substantially, but I don't know the number.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay. I don't see any other volunteers. I don't want any commentary on that. I just need numbers.

Do you have numbers, Mr. Macdonald?

[David Macdonald]

Raw numbers. Yes, sir.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay, fire away.

[David Macdonald]

The maximum insurance in force allowed through CMHC is just over $700 billion on residential mortgages. The total residential mortgage value in Canada is roughly $1.2 trillion. This isn't a bank-by-bank breakdown, but seven divided by 12 is your ratio.

[Pierre Poilievre, Conservative, Carleton, ON]

So it's about sixty percentish.