Evidence of meeting #134 for Public Accounts in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was cmhc.
A video is available from Parliament.
Conservative
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
My questions are all to you, Mr. Siddall, and to your chair if he wants to answer.
In your 2018 corporate plan, you reduced your reserve from 220% in 2016 to 165% from 2017 to 2022. On page 14 of the special examination report, the Auditor General's office said that they “noted that the Corporation not quantify how much internal capital it should set aside in case reputational and strategic risks were realized.”
How did you make the determination, then, to go from 220% to 165%, if the AG's office said that in your controls internally you had a weakness to determine your capital management needs?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
The change in 2018 from 220% to 165% was as a result of a change in methodology at OSFI. It's as if accounting rules changed and we had to restate. It's a comparison of apples to oranges and it would be inaccurate to suggest that we decreased our capital. As a result, it's just a different measure.
We did have some hedge or contingency capital that we'd held for general matters, largely relating to model validation—a slightly technical matter. There was nothing with respect to, as you said, reputational risk in particular, and strategic risk. That is now part of our own risk insolvency assessment process this year—Derek may want to add to this—and we will be advising the board of our views on capital, but we have used a stress test now for those activities.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Can I ask you, then, a question because you have now been directed to pay dividends that are coming out of the reserve? For the premiums paid by homeowners who are purchasing a home and getting a policy for the banks, because it covers lenders, that dividend is now going to you. However, based on the Auditor General's report here, they are saying that there was a weakness in the controls, the capital management, the stress testing internally to determine whether you have enough money set aside to cover big scenarios, which you do post online.
How do you know the right amount of dividends you should be paying out when you've already paid out...? Last year, I think in 2018, public accounts documents showed $5.675 billion was paid out.
I'm just a little concerned. If there was a weakness going into the time period where those dividends were set to be paid, and now going forward you're paying it, can you give me some assurance that you've done the homework to ensure you have the right amount of capital? On the testing scenarios that you now post publicly, all you do is post percentages. You don't actually post the methodology as far as I know.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
We had a lot of excess capital, and it's an effective discipline on management that management would operate with finite resources. Defining just how much excess capital we have is a problem at the margin when we're a little unsure as to what our capital should be or when the Office of the Auditor General says we haven't gotten it quite right. That's not enough to say that we shouldn't pay a dividend. It means that we may want to keep a little extra buffer to be sure and that's exactly what we did.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Can I just interrupt you? You said, twice now, “excess capital”. Does that mean that your premiums were set too high?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
In hindsight, it would mean that our premiums were set too high for the economic cycle that in fact occurred, but we set our premiums to adjust for an economic cycle that could be good or bad. We've had strong economic growth that's persisted and no downturn. As a result, looking backward, we've had excess capital. Looking forward, we're pricing quite similarly because business cycles go up and down.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Most businesses, in the good years, try to build a reserve that then they're expecting to use in the down years. This is why you would then stress-test internally to make sure that in the scenario, say a major earthquake in Vancouver or a very deep downturn, you have a reserve.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
Yes.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
However, the Auditor General's report says that there was a weakness internally. Now you have, supposedly, going forward, an internal method, and those scenarios, you said, will be posted. Will the methodology be posted, as well, online?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
We won't post the methodology. We debated that. We've gone quite a distance towards publishing our stress testing. It's actually a relatively complicated series of models, which we view to be proprietary. Commercially, we wouldn't publish those.
I should tell you that with respect to the payment of dividends, this is a matter that we debate—economic capital methodologies of the board—practically every meeting and certainly every time we pay a dividend. I should tell you that the 165% number includes a cushion, so it's at 100% of regulatory capital that we would have to stop underwriting new business. We have a capital of 65% on top of that, and we've paid the dividend in excess of that. I can assure you, sir, that we have, very much, sufficient capital to survive an economic downturn.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
That's not quite what the report here says. On page 14, with regard to the weakness of stress testing, it talks about the “what if” scenarios: the termination of reserve and how much reserve you should be keeping. How do you set the 100%? They're saying that there's a weakness in how you assess those various scenarios, and then when creating the cushion on top of it, you need to have the proper models.
That, then, leads me to my next question. The CMHC is going to be asked, going forward, to take on a new program, a commercial program called the FTHB incentive, which will provide shared equity mortgages. Have you done internal stress testing then, using new models based on the Auditor General's report to you, to make sure that you keep enough spare capital on hand in case some of these FTHB-incentive shared equity mortgages go under?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
The answer to that question is no because we will administer that program on behalf of the Government of Canada, and we will not be required to hold capital against it. It'll be a charge against the consolidated revenue fund, so it'll be part of parliamentary appropriation, sir, not a matter for our commercial businesses.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
There's no risk to your reserve. If a shared equity mortgage fails, none of the money will be coming out of your reserve.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
That's correct.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
All the money will be coming out of the consolidated revenue fund.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
That's correct.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Can I ask you about the FTHB incentive program and your capitalization needs? Will internal staff of yours be used to run this program?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
Yes, that's right.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Have you made that assessment already? You just mentioned that you've done a major reorganization at the CMHC, and I think two-thirds of your staff are now reporting to a new leader.
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
That's right.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Do you have a unit now set aside within your staff complement to handle these SEM programs?
President and Chief Executive Officer, Canada Mortgage and Housing Corporation
Yes, we do. In fact, the spending associated with that program is included in budget 2019, so you can refer to that for that information. It will come from parliamentary appropriations. In fact, because we just completed this reorganization, we were much better set up to drive a client-oriented business. We did add some new staff, but we also dovetailed it within the recently reorganized functions.
Conservative
The Chair Conservative Kevin Sorenson
Thank you very much. Our time is up, unfortunately.
Now we'll move to Mr. Christopherson for seven minutes.
NDP
David Christopherson NDP Hamilton Centre, ON
Thank you, Mr. Chair. It's the first opportunity that I've had since your public announcement. I just want to welcome you to what Nathan Cullen is now calling the “lame duck caucus”. I hope your retirement is as fruitful as you deserve. You've had a great career. We're very proud of the work you do.