Public Accounts Committee on Feb. 17th, 2011

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Perhaps you could find out for us.

As part of the G20 discussions, recommendations have been made to standardize minimum values on reserves in order to be able to offer more guarantees to the banking sector. Could you comment on that and on complex products in particular?

From the study on commercial paper, I learned that it was possible to have mortgage-backed paper. And this is about complex products. Do you think that banks should have to publish or explain the risk associated with these types of complex products? I am talking about high-risk assets. This issue has been on the G20 agenda.

[The Chair, Liberal, Joe Volpe]

Ms. Lafleur, it is Mr. Young's turn now. So you will have some time to think about it. You can perhaps answer the question during the next round.

In terms of the answers to the previous question, I would ask that you send them to the clerk. Thank you.

[Terence Young, Conservative, Oakville, ON]

Thank you, Mr. Chair.

Mr. Horgan, I'm fascinated with this senior advisory committee. I've never seen anything like it in government before; I'm not saying it hasn't existed. It seems you go from a macro-supervisory role--and you can go micro pretty quickly--meeting when you have to meet and advising the government of the day. Is this a unique model, outside of the private sector?

[Michael Horgan]

I don't know whether it's unique. I think it's probably pretty unusual. I asked the other day how long it has been in existence in Canada. It has been in existence for a long time. It's a supple mechanism. There are only five principals. At the meeting we have other people, but we can be very quick, very nimble.

One thing the committee does not do, because it is handled by the Superintendent of Financial Institutions through the other committee, the FISC, is that we do not get into individual company situations. That is a matter for the Superintendent of Financial Institutions. As it turns out, we all participate in the financial institutions supervisory committee, but that's under the auspices and the rules of confidentiality that the superintendent must follow.

So you have a small, nimble body that can address any of the financial issues confronting Canada and provide almost real-time advice to the minister.

[Terence Young, Conservative, Oakville, ON]

How did this work in, say, November 2008?

[Michael Horgan]

I can't answer that question because I only became Deputy Minister of Finance in September 2009. I'm told that the committee started to meet quite regularly. The financial crisis was unfolding in real time and all of the institutions, including SAC, had to respond to this crisis on a daily basis.

Diane, you were there when I wasn't.

[Diane Lafleur]

It's safe to say that back in 2007, when the ABCT problem started to appear, SAC started to meet on a much more frequent basis. At the height of the crisis, it wasn't uncommon to have two meetings a day.

[Terence Young, Conservative, Oakville, ON]

That's interesting. I know one large private sector company that during the worldwide recession would get all 12 of their vice-presidents to meet every Saturday night, either on a conference call or personally, to go through their plans to get through the crisis.

Would you feel comfortable commenting on how that model might work if Canada wants to address the sale of derivatives, for example, and how they affect banking?

[Michael Horgan]

The standard practice for SAC would be to meet at least on a quarterly basis, but we meet more frequently when required. During the financial crisis, as Diane said, sometimes there was a meeting a couple of times a day. We have a very flexible agenda. We have some long-standing projects that we at SAC are looking at, and we have subcommittees of officials who are looking at various medium- to longer-term issues that are reported to SAC at our regular meetings.

But there are issues of more immediate importance that we may have to consider more quickly. For example, there are the changes the Minister of Finance recently announced with respect to mortgages. The SAC met a couple of times and talked about the issues surrounding the housing market. We invited the Canada Mortgage and Housing Corporation to sit in and provide us their assessment of where the housing market was, and we took some decisions about what our advice would be to the minister. Ultimately, it's the minister who makes the decision, but we worked over several meetings to provide advice to the minister on what we thought should be done.

Our agenda is very flexible. The members are free to add items to the agenda that they think are of importance to the committee, and we have a thorough thrashing out. I'll be honest. We all come with our different points of view. We all have something different that we bring to the table, because of our different perspectives. But I think the committee works well, and generally speaking, we can work it out and come to a consensus on what the advice to the minister should be. I'm not saying the minister always takes the advice. That's his prerogative, obviously.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Horgan.

Mr. Christopherson, I'm back to you, but I'm wondering whether you wanted to use some of your time to allow Madame Lafleur to finish off the answer to a question raised by Madame Faille.

[David Christopherson, NDP, Hamilton Centre, ON]

I will be able to, because I only have one quick question, and it's all but a throwaway question.

[The Chair, Liberal, Joe Volpe]

Wonderful.

[David Christopherson, NDP, Hamilton Centre, ON]

Madame Bourque, you mentioned on page 2 that in 1996 a member institution failed. I was just curious about which one it was and what the repercussions were.

[Michèle Bourque]

In 1996 it was a small mortgage corporation, Security Home Mortgage Corporation, which had about $50 million in deposits. In terms of repercussions, there weren't many. It was at the tail end of a difficult period that some of the mortgage corporations were having at that time. Depositors were paid very rapidly, and there were no consequences as such.

[David Christopherson, NDP, Hamilton Centre, ON]

Great. Thank you.

Chair, you can use the time as you think appropriate.

[The Chair, Liberal, Joe Volpe]

That's very nice. Thank you very much.

Madame Lafleur, Madame Faille had a series of questions. I didn't want to interrupt, because I didn't want to rush you through it. So I want to thank Mr. Christopherson for giving you the opportunity to address those questions.

[Diane Lafleur]

If I understood correctly, there were two parts to your question. One was about capital standards for complex products and derivatives. In the new Basel Accord, called Basel III, capital standards are obviously stricter for financial institutions with products like that. The Office of the Superintendent of Financial Institutions and the Canadian government have made a firm commitment to apply the new Basel standards to Canadian institutions.

More recently, OSFI released a consultation document proposing a timeframe by which the standards should be in place. The timeframe may even seem a bit rushed. We have every intention to enforce them.

In terms of disclosure, which was the other part to your question, I can take you back to April 2008. At that time, the Financial Stability Forum, which is now the Financial Stability Board, issued a report with, I believe, 63 recommendations on how to deal with the causes of the economic crisis.

There was a series of recommendations on disclosures, especially disclosures related to derivatives and complex products. There was a recommendation on how to make more disclosures. Even a disclosure template was provided. This is all related to the new standards that Canada was the first to adopt. The fiscal year for Canadian banks is from November 1 to October 31. So they ended up making their third quarter disclosures in August 2008, before all the other international institutions. So Canada was first to adopt the new standards, well before all the other countries. They have now become generally accepted standards.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

By applying them, we are making sure that we won't end up in a system like the one we've experienced with the commercial paper. Is that a guarantee?

[Diane Lafleur]

Nothing is ever guaranteed. The disclosure is there, but how investors use it is another story. All we can do is to make sure that the information is available.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

How do you go about monitoring that?

[Diane Lafleur]

The Office of the Superintendent of Financial Institutions does the monitoring. The Financial Stability Board also did a peer review to see to what extent the various member countries of the Financial Stability Board have enforced and complied with these new disclosure standards.

[The Chair, Liberal, Joe Volpe]

Thank you, Ms. Lafleur.

Thank you, Mr. Christopherson.

Mr. Dreeshen now has the floor.

[Earl Dreeshen, Conservative, Red Deer, AB]

Thank you, Mr. Chair.

Mr. Horgan, I just wanted to go back to some of the issues involved in our G-20 commitments. You spoke in your presentation about our participation in the International Monetary Fund and the World Bank financial sector assessment program and the other types of things that are going to be taking place. You also indicated that you're going to be discussing things with them, and there'll be a bit of a peer review. What have been some of the lessons learned? And when you do get together for this peer review, what kind of advice are you going to be giving some of your international counterparts?

[Diane Lafleur]

The way the system now works, the IMF has instituted this financial sector assessment program, or FSAP, program. Canada was one of the first countries to go through an FSAP when it was still a pilot project in 1999. We did an update in 2007-08. The commitment now is for significant financial sectors, including countries like Canada, to do an FSAP about every five years, with regular updates through the article IV process.

Roughly at the mid-point during that five-year cycle, the Financial Stability Board, through its standing committee on standards implementation, will do a peer review, not to rate countries but to check in on what they've done to implement the recommendations coming out of the FSAP. We're about halfway through that five-year cycle, so our peer review will start in May or June of this year and conclude by the end of the calendar year. The focus will be on the recommendations that came out of the FSAP, so it will look at what we've done since we've gotten those recommendations, how we've acted on them. Then it will look at how we came through the crisis, considering the strengths and the weaknesses that we've identified, and we'll have a peer discussion with our colleagues.

There have already been three countries that have been through this process. Italy and Spain just had their peer reviews released. Those were timely reviews, because there's lots to be learned from those experiences.

It's really a sharing of information, but it keeps a country's feet to the fire. You don't have five years anymore to think about implementing the recommendations. You're going to want to have something to say at the midpoint during that peer review, so it forces everybody to raise their game a bit.

[Earl Dreeshen, Conservative, Red Deer, AB]

Mr. Walker, paragraph 5.53 talks about employees with highly specialized knowledge, skills, and experiences to supervise the banks and identify significant issues. What are some of the issues that you see? When you're looking for recruitment of people to come in to help you in this, where do they get that training?

Is there in-house training to make sure that people are up to date on some of the techniques required for investigations? Is there some type of post-secondary recruitment strategy? Where do you go to look for the type of people who are important for your organization?