Public Accounts Committee on May 19th, 2016

[Nicholas Leswick]

I will say it's internally within the organization. Our internal audit operations would do an annual audit of our debt management strategy. We have international organizations, such as the OECD and IMF, which do an evaluation of our debt management strategy, if not an audit.

Likewise, we do market consultations. We work very closely with the private sector in terms of how our debt strategy plays in financial markets.

[Pierre Poilievre, Conservative, Carleton, ON]

Those are the lenders.

[Nicholas Leswick]

The buyers.

[Pierre Poilievre, Conservative, Carleton, ON]

The buyers, right, who are effectively lending us money.

[Nicholas Leswick]

Yes.

[Pierre Poilievre, Conservative, Carleton, ON]

Their interests are the opposite of ours.

[Nicholas Leswick]

No, I wouldn't say that. The lenders are diverse. There are obviously some lenders who have a lot of appetite at the short end of the curve because they want that one- or two-year term, but pension funds are dying for the long-term paper because they need to match their obligations with the appropriate duration.

[Pierre Poilievre, Conservative, Carleton, ON]

Right, but they want the Government of Canada to pay out more interest. We want the Government of Canada to pay out less interest. If I am a lender, I want more interest. If I'm a borrower, I want less interest. I think there's a limit to how much we want to keep these so-called “stakeholders” happy.

[Nicholas Leswick]

Mr. Chair, I would respectfully say that I don't think it's just the more or less interest argument. I believe that at the long end of the curve, they need the appropriate durations to match against their own liabilities. This stakeholder group of the lenders is diverse across the entire set of the yield curve. There are appetites on both ends.

[Pierre Poilievre, Conservative, Carleton, ON]

The appetite for a government would be to seek shorter-term debt because the interest rate is lower. In the short term, while that government is in office, even if in the long run the cost to the crown is higher by virtue of the fact that it would have to be reissued at higher interest rates later on, how do we protect against the short-term interests of a government trying to minimize its interest costs during the lifetime of that government, balanced against the long-term financial interests of the Government of Canada, which is to keep debt servicing costs down for a generation?

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Poilievre.

[Nicholas Leswick]

Mr. Chair, I'll just say that our debt management strategy is included as part of the budget. It forms part of the budget in terms of how we'll finance our cash requirements for the year, so it is subject to some parliamentary scrutiny.

I would just come back to say that the government acts with integrity to ensure that we're managing both those costs and the risk dynamics so that we're not subject to any sort of rollover risk. We minimize or establish an equilibrium to manage rollover risk.

[The Chair, Conservative, Kevin Sorenson]

We'll move to Mr. Arya and Mr. Harvey on the split.

[Chandra Arya, Liberal, Nepean, ON]

To come to contingent liabilities, we have about $443 billion. I see that a good amount of it, close to $209 billion, is from the Canada Mortgage and Housing Corporation. I know, Mr. Ferguson, that you audit CMHC separately, but have you looked into the risk to the federal government for any problems at the Canada Mortgage and Housing Corporation?

[Michael Ferguson]

Certainly, when we do the audit of Canada Mortgage and Housing Corporation, we would make sure that any contingent liabilities they have are appropriately accounted for and reported.

Again, with a contingent, when you're looking at something that is potentially a liability you have to assess it to first determine how much of it you actually think is a liability, and that would get recorded in the face of the financial statements. Then you also look at it from the point of view of what else there could be that meets all the definitions, according to the accounting standards, of the amount of contingent liability that would have to be reported.

We would make sure that all of that was adhered to when we did the audit of Canada Mortgage and Housing.

[Chandra Arya, Liberal, Nepean, ON]

I was thinking in terms of the financial crisis we had about eight years back. If something like that happens and if CMHC is affected, that will in turn affect the federal government's finances.

[Michael Ferguson]

Again, I think it's very important to realize that the entity of the Government of Canada includes crown corporations that it controls, such as CMHC. Anything that happens at CMHC would be brought into the consolidated financial statements of the Government of Canada as soon as that happens.

That, I think, is the advantage of the way the Canadian standards are established for governments. One of the first things the standards do is say that you have to define what the government entity is, and it isn't just the consolidated fund. It's a consolidated fund plus a number of these crown corporations that the government controls. To the extent that there is any impact or any result from the those controlled entities, it also affects the consolidated financial statements of the government.

[Chandra Arya, Liberal, Nepean, ON]

I have a quick question for you, Mr. Matthews. Is there any rule of thumb for providing a contingency reserve? What is the rationale behind it?

[Bill Matthews]

I'm sorry. I'm not understanding.

[Chandra Arya, Liberal, Nepean, ON]

For a contingency reserve, is there some rule for what amount is to be provided as a reserve?

[Bill Matthews]

Is there a rule in general? When you're dealing with specific industries, there might be best practices, but when you're looking at the consolidated entity of the Government of Canada, there's no rule of thumb that we can apply across the board. I do think that—

[Chandra Arya, Liberal, Nepean, ON]

[Inaudible—Editor]

[The Chair, Conservative, Kevin Sorenson]

[Inaudible—Editor] Mr. Leswick had an answer as well on the previous question. We'll get that.

[Chandra Arya, Liberal, Nepean, ON]

Okay.

[Nicholas Leswick]

I'll be very quick.

With respect to CMHC, it does provide, in its annual report, the full detail of its stress-testing scenarios. It takes its own balance sheets and stress-tests them with various economic shocks.

One of the most extreme shocks is a U.S.-style housing collapse, whereby unemployment would spike by 5% and housing prices would decline between 20% and 30%. It shows you an effect on its income statement, a balance sheet, of in and around about $500 million.

That's all to say that it establishes a pretty big contingency or reserve to buffer against an event like that.