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.