Public Accounts Committee on Feb. 17th, 2011

[The Chair (Hon. Joseph Volpe (Eglinton—Lawrence, Lib.)), Liberal, Joe Volpe]

We'll bring the meeting to order, colleagues.

Witnesses, if you'd be patient with us, we have a brief item of business and then we'll carry on.

You have before you, colleagues, the 18th report of the subcommittee. The Subcommittee on Agenda and Procedure of the Standing Committee on Public Accounts has the honour to present its 18th report.

We met on the 16th--yesterday--to consider the business of the committee and agreed to make the following recommendations. You have them both before you.

Are there any comments or questions on them?

Shall I take that as an indication that we are all in agreement and the recommendations are adopted as presented?

[Some hon. members]

Agreed.

[The Chair, Liberal, Joe Volpe]

So done.

[David Christopherson, NDP, Hamilton Centre, ON]

Are we? Well, unless you're going to talk about the—

[The Chair, Liberal, Joe Volpe]

No, go ahead.

[David Christopherson, NDP, Hamilton Centre, ON]

If you're going to do a report, obviously I don't need to say anything...on the March 10 meeting?

[The Chair, Liberal, Joe Volpe]

I was just going to go there.

[David Christopherson, NDP, Hamilton Centre, ON]

You were about to comment? Fair enough. I thought you were moving on.

[The Chair, Liberal, Joe Volpe]

I want to update the committee members. I gave you an indication that I was going to be speaking with the lawyer who is representing Madam Ouimet. We made several efforts to connect. We did so this morning.

We have a verbal understanding on where we will go. I asked him to send me something first. I said that if I thought it met the wishes of the committee, then I would respond to him so that we could have the confirmation items as per our understanding, and we're in the process of doing that. Okay?

[An hon. member]

That's fine.

[The Chair, Liberal, Joe Volpe]

So thanks for giving me the flexibility that I needed to nail things down as per the committee's desires.

That's it.

Now we have before us several witnesses today. From the Office of the Auditor General of Canada, we have Mr. John Wiersema, deputy auditor general; Madam Nancy Cheng, assistant auditor general; and Mr. Richard Domingue, principal.

From the Department of Finance, we have Michael Horgan, the deputy minister; and Madam Diane Lafleur, director general, financial sector, policy branch. Welcome.

From the Canada Deposit Insurance Corporation, we have Michèle Bourque, president and CEO. Welcome.

And from the Office of the Superintendent of Financial Institutions, we have with us today Gary Walker, assistant superintendent, corporate services sector. Welcome to you as well.

Each of the four groups are going to be making a brief presentation. Some will be briefer than others, but since all of you are familiar with some of the procedures and conventions of committees, I won't belabour the point about hoping you'll stay within five to seven minutes. Then we'll go to questions. We'll go through all of the presentations first.

Mr. Wiersema.

[John Wiersema, Deputy Auditor General, Office of the Auditor General of Canada]

Thank you for this opportunity to meet with your committee this afternoon to discuss the chapter, “Regulating and Supervising Large Banks” from our fall 2010 report.

As you indicated, joining me at the table are Nancy Cheng and Richard Domingue, who were responsible for this audit.

We conducted this audit following a period when the Canadian financial sector had to cope with significant pressures in domestic and international markets. Our audit objective was to determine whether the Department of Finance, the Office of the Superintendent of Financial Institutions Canada, and the Canada Deposit Insurance Corporation had appropriate processes in place to regulate and supervise Canada's large six banks.

The audit focused on the large banks because they are essential to providing stability to the Canadian financial system.

The audit examined four main areas: first, how the federal organizations share information; second, how they regulate the six largest banks; third, how they supervise these banks; and finally, how they request information from banks.

The audit found that, compared with many other countries, Canadian banks fared well during the recent global financial crisis. Canada's approach to regulating and supervising banks proved robust and effective. No Canadian banks failed.

The objective of regulating banks is to achieve a stable and efficient financial system. Around the world, regulations and best practices are rapidly evolving. The regulatory framework for banks needs to be kept up to date to reflect emerging domestic and international developments. We found that the federal organizations monitor emerging trends. For example, the Department of Finance Canada tracks domestic and international issues, and OSFI actively monitors and analyzes economic and market data. Information and emerging issues are regularly exchanged among the federal organizations. These exchanges were clearly a factor that helped Canada during the crisis.

We found that OSFI is implementing a requirement under the 2007 cabinet directive on streamlining regulation to incorporate effectiveness reviews into its rule-making process. However, while the Department of Finance performs some ad hoc reviews of the effectiveness of the bank regulations, significant parts of the regulatory framework are not subject to periodic reviews of their effectiveness. These reviews could support the review of the Bank Act, which takes place every five years, and help the government determine whether successive regulatory changes are working without unintended consequences.

The objective of supervising banks is to assess their safety and soundness and to intervene when necessary. We found that the Office of the Superintendent of Financial Institutions adequately supervises the six largest Canadian banks and that it is well regarded by the banks it supervises. We also found that the growing volume and complexity of its work is increasing the demand on its human resources. In this context, compensation practices and training need to be updated to ensure that it is in a better position to attract and retain qualified staff.

Reports and statistics from the regulated banks are required in order for the regulators and supervisors to perform their duties. Each large bank now submits a very large amount of statistics and information. Both the federal organizations and the banks have a common interest in collecting relevant data in a cost-effective manner. Therefore, information requests need to be periodically reviewed to determine if the data collected is relevant, accurate, and sufficient.

The Department of Finance and OSFI have agreed with our recommendations. We have reviewed the action plan, which I understand has been tabled with this committee today. OSFI's action plan, if successfully implemented, should address our recommendations. While the Department of Finance has considered our recommendation, it has decided, however, not to implement it. The committee may wish to discuss this further with the department.

Mr. Chair, this concludes my opening remarks.

We would be pleased to answer the committee's questions. Thank you.

[The Chair, Liberal, Joe Volpe]

Merci, Monsieur Wiersema.

Monsieur Horgan.

[Michael Horgan, Deputy Minister, Department of Finance]

Thank you, Mr. Chairman.

It's my pleasure to be here today. You have introduced my colleague, Madam Diane Lafleur, who is the general director of the financial sector policy branch in the Department of Finance.

I am pleased to be here to discuss the Office of the Auditor General's report regarding regulating and supervising large banks. I want to commend the office on the quality of the final report.

Overall, it clearly highlights the strengths of the Canadian approach to financial sector regulation and supervision, which contributed to the relative success of Canada's response to the financial crisis.

The Canadian financial sector regulatory approach involves five federal financial sector regulatory agencies with distinct and complementary mandates: the Department of Finance, the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation, the Bank of Canada, and the Financial Consumer Agency of Canada.

The Minister of Finance has overarching authority for legislation respecting the financial sector under federal jurisdiction and responsibility for the overall stability of the financial system. Each of the agencies has specific responsibilities and powers set out in their enabling legislation and in the four acts that govern federally regulated financial institutions: the Bank Act, the Trust and Loan Companies Act, the Cooperative Credit Associations Act, and the Insurance Companies Act.

As found in the Auditor General's report, there are well-established mechanisms to ensure collaboration among these agencies. In addition, information-sharing requirements and confidentiality provisions that are enshrined in legislation allow information to flow efficiently between the organizations.

The financial institutions supervisory committee, or FISC, under the chairmanship of the Superintendent of Financial Institutions, ensures collaboration on prudential issues. The senior advisory committee, or SAC, provides advice to the Minister of Finance on policy issues affecting the financial sector, and I chair this committee as the Deputy Minister of Finance.

These coordination mechanisms have provided for collaboration among Canadian regulators, which has allowed a responsive approach to monitoring and managing the broad range of financial sector policy issues as they evolve. We agree with the Auditor General that “This ongoing exchange of information contributed to Canada’s relative success in responding to the recent global financial turmoil....”

The Auditor General's report recommended that formal terms of reference be established for one of these committees, the senior advisory committee, and that these terms of reference include development of plans to perform effectiveness reviews of the regulatory and legislative framework to ensure that significant parts of the regulatory framework are periodically assessed.

As chair of the SAC, I have first-hand experience of the contribution this forum makes to ensuring that the minister is kept abreast of key developments in the financial sector and is provided with advice on ensuring that the legislative and regulatory framework is responsive to those developments.

As you know, we have recently been through very challenging times in terms of financial sector issues. We have gone through an unprecedented global financial crisis that identified a number of gaps and weaknesses in financial sector oversight in a number of countries. And we are now going through an unprecedented period of change as a result of international efforts to address those weaknesses in a coordinated way.

SAC has played a critical role throughout, meeting quarterly and more often as needed, particularly during the financial crisis, and harnessing the strong relationships between the Canadian financial sector regulatory agencies that were key to Canada's relative success. A key finding in the Auditor General's report was that Canada's information-sharing framework is effective and that its coordination mechanisms work well.

SAC was key in advising the minister on issues that arose during the crisis, often in ways that could not have been foreseen. SAC has also played a key role in developing Canada's response to the G-20 financial sector reform agenda, advising the minister on potential priorities for reform and on the impact of international proposals on the Canadian regulatory and supervisory approach. And SAC continues to play this role.

More recently SAC, for example, invited the Canada Mortgage and Housing Corporation to help form advice on ensuring the long-term sustainability of Canada's housing market. With the benefit of this advice, the government introduced adjustments to the rules for government-backed insured mortgages aimed at supporting the long-term sustainability of Canada's housing market.

We considered whether formal terms of reference for SAC would improve the functioning and effectiveness of the committee. As I've noted, SAC has proven to be a very effective forum for managing responses to financial sector developments and has been tested through an unprecedented period of crisis management and major reform. It has the flexibility to address issues as they evolve over time and the scope to provide advice to the minister on the full range of issues affecting the financial sector.

SAC's broad scope also allows the department to respond positively to the second part of the recommendation, to periodically assess the effectiveness of the regulatory and legislative framework.

It should be noted that the financial sector legislative and regulatory framework is already subject to regular review. The financial institution statutes have a built-in sunset date, which leads to a process for review of those statutes every five years. This five-year legislative review involves broad public consultations with stakeholders and in practice has resulted in both legislative and regulatory changes and changes to the enabling legislation for regulatory agencies. As noted in the Auditor General's report, “the legislated five-year review provision helps keep the regulatory framework current and provides banks with the flexibility they need to react to changing times”.

The next five-year review must be completed by April 2012. In keeping with that, the Minister of Finance issued a call for consultation for the 2012 legislative review in September of 2010. Conducting a five-year review of the statutes that govern our federally regulated financial institutions ensures that Canada remains a global leader in financial services and sets us apart from almost every other country in the world.

There are also regular international assessments and, as a result of recent G-20 commitments, periodic peer reviews of specific issues. Canada participates in the International Monetary Fund and World Bank financial sector assessment program, FSAP, which assesses Canadian adherence to international principles for financial sector regulation and supervision every five years. Canada has also been a major proponent of enhancing the Financial Stability Board's peer review process, which reviews findings from the financial sector assessment program as well as lessons learned from the financial crisis. We in Canada have volunteered to be an early candidate for peer review, beginning this year.

SAC plays an ongoing proactive role in ensuring the effectiveness of the legislative and regulatory framework, in discussing emerging risks and issues, identifying priorities, analyzing impacts, and discussing options for legislative and regulatory change. SAC discussed the new and strengthened legislation and regulation developed during the financial crisis and in response to the G-20 financial sector reform effort.

SAC has also been the forum for discussion of legislative and regulatory initiatives in response to stakeholders' interests, such as a legislative framework for federal cooperative banks, consumer protection enhancements, and a credit and debit card code of conduct.

In summary, the pace of change in the financial sector requires regular proactive risk-based assessment of the effectiveness of the legislative and regulatory framework. The current flexibility of SAC has allowed us to carry out such reviews in a timely way and make sound recommendations to the Minister of Finance on the need for new or more effective legislation and regulation in key areas of priority.

Thank you, Mr. Chairman.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Horgan.

Madame Bourque.

[Michèle Bourque, President and Chief Executive Officer, Canada Deposit Insurance Corporation]

Thank you. Mr. Chair and honourable committee members, good afternoon.

Mr. Chair, honourable members, good afternoon. Thank you for the opportunity to appear before you.

Since the Canada Deposit Insurance Corporation is not often called to this committee, I would like to begin my remarks by providing you with a brief snapshot of the work of the Canada Deposit Insurance Corporation, the CDIC. I will then comment on the role of CDIC as part of the Auditor General's fall 2010 report on the regulation and supervision of large banks. I will keep these opening remarks short and would direct you to additional information in our written submission.

CDIC is an independent crown corporation that is fully accountable to Parliament through the Minister of Finance. CDIC currently has 84 member institutions consisting of banks, trust and loan companies, and one retail association. The corporation is funded by premiums paid by these members and does not receive any parliamentary appropriations.

CDIC insures eligible deposits at each of our member institutions up to a maximum of $100,000 per depositor in each of seven categories of deposits. These include eligible funds held in basic accounts, joint and trust accounts, along with registered retirement savings plans, registered retirement income funds, and tax-free savings accounts. As of April 2010, we insured over $600 billion in deposits.

In addition to the provision of deposit insurance, CDIC contributes to the stability of the financial system in Canada. In order to achieve this part of our mandate, we work closely with all of the federal financial safety net agencies. The report of the Auditor General attests to this very effective working relationship with my fellow panelists from the Department of Finance and OSFI, along with the Bank of Canada and the Financial Consumer Agency of Canada.

I can add, from an international perspective, that the Canadian model of financial safety net agencies working together is the envy of many deposit insurers around the world.

CDIC was pleased to participate in this review by the Auditor General of the federal agencies responsible for the regulation and supervision of large banking institutions.

In speaking to the three recommendations in the fall 2010 report, CDIC factors indirectly into the first and third recommendations. Recommendation number one relates to the work of the senior advisory committee, or SAC, chaired by the Department of Finance. From a CDIC perspective, this committee and its numerous working groups provide invaluable and effective exchanges on a number of topics of importance in the financial sector. Coordination bodies such as SAC, the FISC, or the financial institutions supervisory committee, chaired by the superintendent and the CDIC board of directors, have proven vital during the financial crisis to stay ahead of emerging issues and to coordinate actions.

The third recommendation in the report addresses data and information requests to financial institutions. Given the compact size of CDIC, there is no duplication with regard to information requests of our members. We rely primarily on data collected by OSFI and through the umbrella of the financial information committee to carry out much of our risk assessment work. CDIC's specific data collection activities are associated with statutory and bylaw provisions, in particular those involving the collection of premiums from our member institutions.

This concludes my opening remarks. I would of course be pleased to answer any questions.

This concludes my opening remarks. I would be pleased to answer any questions. Thank you for your attention.

[The Chair, Liberal, Joe Volpe]

Thank you, Ms. Bourque.

I give the floor to Gary Walker.

[Gary Walker, Assistant Superintendent, Corporate Services Sector, Office of the Superintendent of Financial Institutions]

Thank you for inviting me to appear today to speak about the Auditor General's report.

I believe that copies of my remarks have been distributed by the clerk, so to respect the members' time, I will only cover the key points now, but trust they will become part of the public record.

In brief, I'd like to thank the Office of the Auditor General for their work. We are glad the report confirms that the large Canadian banks are well supervised. We are implementing the recommendations contained in the report. OSFI had identified similar issues to those identified in the Auditor General's report through our own auditing and risk management processes. We believe we have processes in place to effectively mitigate potential risks identified.

To give a bit of context, it may be helpful to give you a brief overview of OSFI and its mandate. OSFI is responsible for prudential oversight of about 450 financial institutions in Canada and approximately 1,400 private pension plans. Currently we have approximately 570 employees working in offices in Ottawa, Toronto, Vancouver, and Montreal. OSFI is tasked with overseeing the solvency of federally regulated financial institutions in the interest of depositors, policy holders, and members of federal private pension plans.

The Auditor General's report mentioned that OSFI is fulfilling its mandate and that we should update our human resource planning to be better able to attract and attain qualified staff. We are addressing this recommendation by ensuring that our training programs and resource planning support business plan objectives and emerging risks, and by updating our compensation structure.

Training is very important to OSFI. Annual training plans are developed and prioritized as part of our annual HR planning and business plan process. The executive committee of OSFI monitors progress and provides direction on training priorities through quarterly updates. Individual divisions and units have access to training budgets for specialized training.

We also have plans to update our compensation structures to ensure that our salaries are competitive with those in the financial services industry, the market from which we source the majority of our talent. This would provide OSFI with greater ability to hire and retain the skills and experience that we need.

To respond to the Auditor General's recommendation on data collection from banks, OSFI, along with other members of the financial information committee and in partnership with the industry association, plans to use the annual housekeeping exercise to more thoroughly confirm the relevance and the continued usefulness of the data being collected.

As Mr. Wiersema suggested in his remarks, our action plan, once implemented, should adequately address the recommendation contained in the Auditor General's report. We believe that our plan will allow OSFI to remain a world-class regulator and supervisor so that we can continue to protect the interests of Canada's depositors, policy holders, and private pension plan members.

Thank you for your time. I look forward to any questions you may have about OSFI.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Walker.

First on my list I have Monsieur D'Amours.

[Jean-Claude D'Amours, Liberal, Madawaska—Restigouche, NB]

Thank you, Mr. Chair.

Thank you all for being here and for your presentations.

I am going to start with a simple question to the Department of Finance representative.

Mr. Horgan, during the financial crisis, did the Government of Canada help financial institutions through the crisis directly or indirectly?

[Diane Lafleur, General Director, Financial Sector Policy Branch, Department of Finance]

As you may know, we put in place a wide range of extraordinary measures during the financial crisis to help the financial sector through the crisis and to assure ourselves that Canadian companies have access to capital so that they can continue to operate and to grow. All those measures were contained in the 2009 budget.

[Jean-Claude D'Amours, Liberal, Madawaska—Restigouche, NB]

Could you explain them a little, because it almost seems as if nothing happened in Canada and the federal government had no need to provide support to the banks.

My next question goes to the superintendent of financial institutions, or anyone else who would like to answer.

The federal government put measures in place. At the same time, I recall that, because of the risk, financial institutions said that times were hard and they had to increase some interest rates. I recall what happened to home equity lines of credit. Beforehand, the rates were at prime, and then, all of a sudden, they went up to prime plus one per cent because of the crisis.

The federal government was there to support financial institutions. Some people feel that the crisis is over. So how is it that financial institutions are still charging their customers the same interest rates? The federal government was there to help them, but, at the same time, they imposed a surcharge, not on businesses, but on homeowners with home equity lines of credit, that is, a line of credit based on the mortgage on their homes.

[Michael Horgan]

Well, factually, interest rates and mortgage rates are among the lowest they have been historically, so I don't know that that is the case.

It is true that the Government of Canada came in with extraordinary measures to help support the financial system in the midst of a world financial crisis, where interbank markets were tightening up. We put in a number of measures to help support the Canadian financial system.

But I think the reality has been that interest rates are at a historically low level in Canada primarily because of the response of the Bank of Canada, in monetary policy terms, to--

[Jean-Claude D'Amours, Liberal, Madawaska—Restigouche, NB]

Mr. Horgan, perhaps the superintendent of financial institutions can help you to answer the question. At the same time as the federal government was helping the financial institutions, those institutions were ringing all kinds of alarm bells about the financial crisis.

It is a bit like gas prices. Along comes the weekend, up goes the price. Along comes a crisis, up go the rates at the same time as the federal government is helping those same financial institutions.

Today, when people are telling us that things are going better, taxpayers are not seeing the quid pro quo. Who is in a position to make decisions, or to conduct an audit of the financial institutions, to make sure that they are not taking advantage of these supposed crises to raise rates and to take more money out of taxpayers' pockets?

[Diane Lafleur]

I would just point out that, during the crisis, the financing costs that the institutions had to pay went up significantly.