Finance Committee on April 20th, 2023

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Chatel.

Now I will go to Mr. Ste-Marie, please, for two and a half minutes.

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

Thank you, Mr. Chair.

Mr. Routledge, my questions are about the relationship between zombie firms and the financial institutions that manage them, and the links between zombie firms and climate risk management.

You are no doubt aware of the study on zombie firms conducted by the Bank for International Settlements which was published in 2020 and updated in 2022. We can see a higher prevalence in Canada, due to the type of operations and their location. Many financial institutions are struggling to manage the debt of zombie firms.

How can financial institutions make good on their transformation and integration efforts linked to climate risk management? What will be the byproduct?

[Peter Routledge]

By “zombie institutions”, do you mean non-bank companies that are affected by climate change or banks affected by climate change? It's just a point of clarification.

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

What I would like to know is how financial institutions are going to manage climate risk given the fact that many of their creditors are zombie firms, i.e., firms that are on life support.

[Peter Routledge]

The phenomenon of what is referred to as “zombie institutions” is institutions that have financial statements that indicate they're a going concern when they are not, in fact, a going concern. In terms of managing that risk for financial institutions, assume for a minute that the zombie institution in question is turned into a zombie by some form of climate risk. A financial institution has agency. It has the ability to deem that loan to a zombie as non-performing and then leverage the courts to work it out.

What it takes at the financial institution is a will to act. Our job in putting together bank regulations, whether in respect of climate risk, credit risk or what have you, is to create a series of expectations and principles that cause our institutions to identify problem credits and work them out faster.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. Ste‑Marie.

Now it's Mr. Blaikie, please, for two and a half minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

As data reporting and analysis of climate risk improve over time—not just for particular investments but also for economy-wide impacts—do you think it would be through the kinds of principles-based guidelines OSFI issues or more organically within institutions themselves that we might see an effort to push for the creation of products to help mitigate that economy-wide climate risk?

For example, could we make a case that when consumers are getting a mortgage, financial institutions could make it easier for, or consult proactively with, mortgage clients who are purchasing a new home? Could they, for instance, try to increase the insulation of the home or change to an electric furnace or a geothermal heating system as a way of reducing those economy-wide emissions and climate risks? Do you think the focus will continue to be on a particular business for itself—its own emissions impact and climate risk—or will there be ways of getting to use this data and these better practices for economy-wide impacts?

[Peter Routledge]

What we would focus on is simply our banks quantifying their exposure to climate risk, then building it into their risk management. As a result of that analysis or other work, individual financial institutions—be they banks or insurers—may incorporate that into their product design and pricing. That wouldn't be unusual. For example, typically, if homeowners put in place a security system, they have a lower insurance premium.

Could that happen as sophistication around our understanding of climate risk improves? Yes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much for that.

Very quickly, I'm interested in the conversation you're having with banks right now about these extended amortizations, from the point of view of what both financial institutions and consumers should be doing to prepare for the renewal period.

If interest rates haven't gone down significantly—or even if they have—in order to get that amortization back down to what it ought to be at renewal, there would presumably be significant hikes in the fixed payment.

[Peter Routledge]

Briefly, we know what it would take to bring the amortizations back into line, and so do the banks. What we ask them to do is to get ahead of that early. Many of these mortgages were written just a year or two ago, so there are three years.... Typically, they're five-year contracts, so we have some time to get this handled. We ask them to get on this early, as does the FCAC. Their mandate is more to ensure consumer fairness in adjudicating that issue.

[The Chair, Liberal, Peter Fonseca]

Thank you for that.

Thank you, Mr. Blaikie.

Next, we have Mr. Chambers for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thanks.

I'd like to follow up on Mr. Blaikie's questions.

How much of the mortgage market does OSFI regulate today, as a percentage? Isn't it about 80%?

[Peter Routledge]

Yes, it's roughly 80%. It's probably $1.8 trillion total and, in the institutions we regulate, about $1.5 trillion. Those are broad numbers.

[Adam Chambers, Conservative, Simcoe North, ON]

At the last appearance, we had a brief discussion on shadow banking. Are you any closer today to understanding some of the risks that exist in that sector, which you currently don't have a full line of sight on? Do you have more insights into what's happening on that side?

[Peter Routledge]

By “shadow banking”, are we talking about unregulated lenders in the housing market, as opposed to mortgage securitization and all of that?

[Adam Chambers, Conservative, Simcoe North, ON]

That's correct.

[Peter Routledge]

Through the data gathering of the Bank of Canada and Statistics Canada.... I would say we can capture and measure probably 80% of unregulated lenders through periodic data gathering. That tells us that part of the sector is still about 1%.

[Adam Chambers, Conservative, Simcoe North, ON]

Do you know what is happening with amortizations in that sector, or how those institutions are dealing with the same issues the banks you regulate are dealing with?

[Peter Routledge]

Many of those entities you're talking about raise money from the public and make some form of disclosure in terms of what they're doing. From what we've been able to gather so far, they are tending to be less prone to flexibility.

[Adam Chambers, Conservative, Simcoe North, ON]

Isn't it more likely than not that a large financial risk event to the system comes from the 20% of the market that you actually don't have a great line of sight on or influence over?

[Peter Routledge]

Of the 20% you talk about, 1% of it would be these unregulated lenders—mortgage investment corporations. Most of the rest are credit unions, which are regulated by provincial regulators. While provincial regulators don't perfectly and identically adopt OSFI guidelines, they're pretty close. I talk to provincial regulators semi-annually and—

[Adam Chambers, Conservative, Simcoe North, ON]

You're comfortable with the current—

[Peter Routledge]

I'm comfortable with the 19%. The 1% is worth watching, but it is still small.

[Adam Chambers, Conservative, Simcoe North, ON]

Do you think the new B-20 guidelines are going to push more people into the 20% space or the 1% space if they become more onerous?

[Peter Routledge]

The evolutions for B-20 that we're currently considering are still in development. We're consulting with the institutions we regulate to ensure that type of unintended consequence does not happen. That's why we do consultations.