Finance Committee on April 20th, 2023

[Adam Chambers, Conservative, Simcoe North, ON]

Okay. That's fair enough.

You brought up B‑20. It's your first time being here in a while. We've had a bank failure, multiple bank failures, in the U.S., and some challenges even in our own mortgage market, which I understand OSFI is following very closely, extending amortizations.

Do you think financial institutions need to be more transparent about the amount of their books that have mortgage amortizations extending well beyond 30 years? Some banks have been forward with this information and others, to my understanding, have not been as public with the risks that are now increasing.

[Peter Routledge]

In our view, transparency is a risk mitigant and not a risk accelerant. As superintendent, I don't want to presume to guide boards of directors and senior executives on what to disclose and what not to disclose, but I will say that sunlight is a very effective way to mitigate risk.

In general, if I look at Canadian bank disclosures on mortgage risk and I compare them to those in other systems and to the risks we see, they're pretty balanced. They can always do better, but it's not a major issue from our perspective.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

In the last budget, there was a section on code of conduct for extending amortizations. Did OSFI consult prior to that appearing in the budget?

[Peter Routledge]

That code of conduct would be put into place by the FCAC, financial consumer affairs.

[Adam Chambers, Conservative, Simcoe North, ON]

That's fair enough. The question—

[Peter Routledge]

We talk to them all the time and sit on FISC.

[Adam Chambers, Conservative, Simcoe North, ON]

Were you aware of it before it ended up in the budget?

[Peter Routledge]

I wasn't aware of what was in the budget, just to be clear.

[Adam Chambers, Conservative, Simcoe North, ON]

You were consulted on it, though. Okay, that's fair enough.

[Peter Routledge]

We talk about those issues every day with the FCAC.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

Is it fair that someone who does not have a mortgage today is not able to get a 50-year amortization by walking in off the street, but someone who has a mortgage today, who has qualified, can get that unilaterally from their financial institution? Is that fair?

[Peter Routledge]

My job is to ensure that Canadian banks manage their risk. I'm going to try to give you a straight answer. My job is credit risk, liquidity risk, climate risk and all that.

[Adam Chambers, Conservative, Simcoe North, ON]

Right, but you also set amortization rates, don't you?

[Peter Routledge]

When you're thinking about amortizations and you're talking about lengthening amortizations, that is a feature of a particular product that goes by the name of “variable rate mortgage with fixed payments”. As those variable rates—

[Adam Chambers, Conservative, Simcoe North, ON]

I understand how they work. I'm asking whether it's fair that you're preventing people from obtaining that same mortgage product.

[The Chair, Liberal, Peter Fonseca]

You're out of time, Mr. Chambers, so you're going to need a very short answer.

[Peter Routledge]

As superintendent, it honestly isn't in my mandate to determine what's fair. Lengthening amortizations increases risk to a mortgage, and we require a higher capital for that.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Chambers.

Now we're over to the Liberals with Ms. Chatel, please, for five minutes.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much, Mr. Chair.

Mr. Routledge, thank you for being here with us today.

I would like to go back to something you mentioned earlier. You said in English:

“climate has emerged as a...real financial impact...on [the] financial [sector].”

Canadians are wondering what will be the true impact of the climate change crisis on the financial system. Do you have any examples to give the people who follow our committee's work?

[Peter Routledge]

The risks that flow from climate change, which would be physical risks or transition risks, add costs, ultimately, to a financial institution. High risk usually means some form of higher either credit loss or investment loss, unless it's managed appropriately.

The earlier and more effectively financial institutions adapt their risk management policies to reflect climate risk, the more likely it is that those costs will be lower. An example would be flood insurance policies. As floods become more prevalent, flood insurance costs go up; however, the earlier an insurance company identifies flood risk and begins pricing its products to reflect that reality, the more likely it is that consumers and homeowners will incorporate those higher costs in their home-buying decisions, and then the less likely they are to be susceptible to that risk. The earlier, the better, always.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.

The Office of the Superintendent of Financial Institutions and the Bank of Canada are members of the International Network for Greening the Financial System, which is an important initiative. According to the coalition of finance departments, central banks and supervisors:

“continual nature loss could have severe and sudden impacts on the economy, and hence on the financial system.”

We have spoken at length about risks linked to climate change, but it has also been recently established that the risks linked to the loss of biodiversity are just as great. What will be the major impacts on the banking system?

[Peter Routledge]

We have done some initial internal work on the risks of biodiversity, and our view is as follows. It is still a fairly underquantified risk, not just in terms of our technical focus, which is credit risk, liquidity risk and all that, but in terms of its impact on the economy. As the Bank of Canada progresses its work into biodiversity laws, we'll have to think about that and do some scenario work to determine how biodiversity laws might have second- or third-order effects.

I'll leave it there.

[Sophie Chatel, Liberal, Pontiac, QC]

In the second chapter of the guideline, we find principles on the disclosure of financial information that is linked to climate change.

There's a lot of work going on on taxonomy right now. You mentioned the Sustainable Finance Action Council. Can you tell the committee about the progress that has been made in this field? How did you get involved in the important work of taxonomy, which will help the residents of my riding who are looking to invest in sustainable or green products avoid being taken in by greenwashing?

[Peter Routledge]

I will ask my colleague Mr. Tardif to answer this question.

[Stephane Tardif]

There's a huge ecosystem around disclosures and taxonomy as a classification of investments and assets around the whole spectrum of ESG.

What you've seen in B-15, in chapter 2, is that we point specifically to updating B-15 once the ISSB publishes its final standards, which are expected this summer. That's the link to ISSB. We will point to ISSB.

We are also very supportive of the work to develop a sustainable finance taxonomy in Canada. We think that any efforts to better classify and categorize investments will help, ultimately, with prudential risk management. Although we're not involved in the development of a taxonomy, we support that work.