Finance Committee on June 11th, 2024

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

We'll hear questions from MP Morantz for five minutes.

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

Thank you, Mr. Chair.

Thank you for your testimony today, Mr. Routledge. It's been very interesting.

One thing that OSFI regulates is basically the capital reserves of the banks, what I think you would call the domestic stability buffer. It's what ordinary Canadians could think of as money set aside for a rainy day. I note that last year, I assume out of concern for the stability of the banks, you increased that requirement from 3% to 3.5%.

Now, the language you use in your recent report for when people refinance or have these variable rate mortgages and their new payments get locked in is “payment shock”. That's very strong language. You don't use that language unless you're really concerned about something. Today it sounds to me like you've poured a little water on that, because you've narrowed it down to just people who are on the variable rate without locked-in payments.

I have a couple of questions. Are you concerned enough to increase the domestic stability buffer again this year, or are you satisfied that people are coping with their payments sufficiently that you could actually reduce it back to 3%?

[Peter Routledge]

Mr. Chair, we intend to make an announcement on the domestic stability buffer next week, so I won't scoop myself—

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

Oh, come on. Just tell us.

[Voices]

Oh, oh!

[Peter Routledge]

What I can refer you to is that in December of this year we said that the vulnerabilities had stabilized, so there was no need to raise the buffer any further. On empirical data, vulnerabilities have not worsened since that time.

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

Why use that language? It's clearly inflammatory language in a public report.

[Peter Routledge]

Payment shock...?

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

Yes. Why use that language? I mean, you don't use it unless you're concerned about something. It doesn't sound like you're all that concerned, based on your testimony here today.

[Peter Routledge]

I guess we used the language because that's how we talk about it with the institutions we regulate. That's the language they use.

Now, on payment shock, the folks who are exposed to particularly acute payment shock are relatively.... It's not a lot of people. I mean, 170,000, I acknowledge, is too many, but there are five million Canadians with mortgages. The issue we have with that risk concentration is that it will harm the Canadians who have those mortgages if they do suffer that payment shock. It will strain the earnings of the institutions. It is an unnecessary risk concentration that, all else equal, I would rather have avoided.

I used the term because that's what we use in the industry, to be honest.

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

I just want to circle back to a line of questioning that Mr. Chambers was asking about earlier. You admitted that there's an imbalance and that people with uninsured mortgages have to have their credit reassessed more than those with insured mortgages. It really is kind of backwards, as Mr. Chambers pointed out, that people who have better credit and more equity in their homes have to go through that. You're saying here there's an imbalance, but at the same time you said you don't plan to do anything about it.

Are you okay with a certain group of Canadians being treated unfairly when it comes to their mortgages compared to people who have insured mortgages? Is that okay with you?

[Peter Routledge]

I'm okay with banks applying underwriting standards equivalently across the system. If we were to lighten underwriting standards vis-à-vis the MQR, that would come from guideline B-20, which also calls for new credits to have the collateral appraised and to have the income of the borrower checked.

In other words, if you loosen one underwriting standard, you're probably going to loosen more. Our mandate calls on us to be fairly vigilant on this. My recognition that there is an imbalance from the perspective of homeowners who have insured versus uninsured mortgages is one I hold to. From the perspective of those homebuyers, if I were a homebuyer facing that, I would feel like it was an imbalance. The commissioner of competition and I have spoken about that, and I think it is a legitimate challenge to ask OSFI if it can do something different so that the imbalance goes away. We are thinking about it, and I think it's a fair critique.

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

Great. Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Morantz.

For our final five minutes with the superintendent, we have MP Sorbara, please.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Chair, and welcome, everyone.

Peter, it's nice to see you again. I think if I age you and age myself, we would go back about 12 years. I know you've had a number of roles from being a bank analyst at Moody's to, now, this position at OSFI. Congratulations on your career path and your appointments. They're very well-deserved. I still remember listening to you on the bank analyst conference calls with the bank earnings when I was on the bond side and you were on the equity side.

Peter, one thing we know about the banking industry is with regard to liquidity and funding. We know that when there's a banking crisis it always comes down to liquidity and funding. You can even take that to the consumer side as well.

I've read the annual report and I've skimmed over it. On the funding and liquidity risk side, what's your view on that with regard to the Canadian banking system?

[Peter Routledge]

We had a stress test of that in 2023, and I don't think it would be right to say I'm surprised, but I was certainly reassured that, during that period, Canadian banks by and large were safe-haven investments. In other words, they tended to see positive inflows. That would extend to smaller and medium-sized banks that, to be candid, we had extra vigilance over, and we saw very stable funding flows to those institutions.

A safe, regulated system with a lot of capital and liquidity buffers is viewed by international investors as a safe-haven system. It's an asset that I want to do my part to protect.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

With regard to digitization and any sort of digital currency, open banking and portability, which of those things, if I can use this term, keep you up at night and make you think about them? OSFI has a mandate. You can try to quantify risks, and that's the best we can do with arrears and domestic stability buffers and so forth.

How should we as legislators think about that side?

[Peter Routledge]

The risk that keeps me up at night is that you'll get unregulated business models emerging that compete directly with regulated institutions. For example, there are some stablecoin arrangements that, when I look at their balance sheets, look an awful lot to me like banks. They take deposits for a very short period of time and they make long-term investments. Those institutions, if they have balance sheets that look like those of banks, should be regulated like banks. That's what keeps me up.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I also would like to add that, if there's an asset-liability mismatch on those balance sheets, that would obviously be a cause for concern—would it not?

[Peter Routledge]

One needs only look at the crypto winter or the case of Silicon Valley Bank to answer affirmatively yes to that.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Okay.

I have one final question. Regarding arrears in Canada, we know that Canadians' mortgage debt is backed by an asset. It's a very good asset. The arrears, the trends, if I had to qualify them, I'd say they are very stable. Would that be a fair term?

[Peter Routledge]

I wouldn't use “very stable”. I would use very low and deteriorating incrementally and not dramatically.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Chair. I'll stop there and turn it over.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Sorbara.

We want to thank Superintendent Routledge.

Thank you very much for coming before the finance committee on our housing study. We wish you the best with the rest of your day. Thank you. We appreciate it.

Members, we'll suspend now as we transition into our second panel.