Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 18 - Evidence - May 16, 2012

OTTAWA, Wednesday, May 16, 2012

The Standing Senate Committee on Banking, Trade and Commerce met this day at 1:02 p.m. to examine the subject matter of those elements contained in Divisions 2, 10, 11, 22, 28 and 36 of Part 4 of Bill C-38, An Act to implement certain provisions of the budget tabled in the House of Commons on March 29, 2012, and other measures.

Senator Irving Gerstein (Chair) in the chair.


The Chair: I call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order.

Senators, as you know, on April 26 the government introduced Bill C-38, the jobs, growth and long-term prosperity act. A number of Senate committees have been authorized to undertake a pre-study of various elements of the bill in order to facilitate its eventual consideration by the Senate.

The Standing Senate Committee on Banking, Trade and Commerce has been tasked with six divisions of Part 4 of the bill. In order to give us an overview of these six divisions, as well as other aspects of the entire budget implementation act, we are very pleased to welcome the Hon. James M. Flaherty, P.C., M.P., Minister of Finance.

I know that I speak for a majority of the members of this committee in expressing our thanks to you for your efforts in helping to create jobs, growth and long-term economic prosperity for Canadians.

Honourable senators, the minister is with us for one hour, after which departmental officials will remain for a further hour to answer any questions. Minister, the floor is yours.

Hon. James M. Flaherty, P.C., M.P., Minister of Finance: Thank you, chair. I am here with officials in case there are some particularly technical questions.

I am pleased to be here. Right off the bat, I want to thank the chair and acknowledge the work he did at the Standing Senate Committee on National Finance, in particular the study of the penny in 2010. It was very helpful and instrumental, actually, in the decision taken to eliminate production of the penny, which we took in the budget this year.

On behalf of small business owners who hated them and still do, and the dresser drawers that so frequently were weighted down across Canada, I thank Senator Gerstein. I will try to make my comments brief on this appearance today and have plenty of time for questions.

I also want to thank the chair, deputy chair and all on the committee for the work that has been done on the parliamentary review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. I understand it has been a comprehensive review, and I look forward to receiving and reviewing the upcoming report, as its findings will be helpful to Canada's framework in these important areas.


But before I speak to that study, I would like to thank the committee for agreeing to review elements of Bill C-38, the Jobs, Growth and Long-term Prosperity Act, targeting financial sector reform and other related issues.

As you know, Bill C-38 seeks to implement the main measures of the 2012 economic action plan, measures that will fuel the next wave of job creation and position Canada for a secure and prosperous future. Even though Canada has one of the best records in job creation and economic growth, implementing this plan is critical.


Canada faces a fast-changing global environment with increasing competition from emerging economies and the global economy recovery that remains fragile and uncertain, especially in Europe. It is by reinforcing and supporting Canada's relatively solid underlying economic, fiscal and financial fundamentals that we can help Canada capitalize on the challenges and opportunities of tomorrow.

Indeed, one of Canada's biggest strengths during the recent economic turbulence has been the strength of our sound financial system. Clearly, Canada's well-regulated financial system has been a model for countries around the world in recent years. Unlike the United States, the United Kingdom and Europe, Canada did not have to bail out, nationalize or buy equity stakes in banks.

As The Economist magazine has noted:

Canada has had an easier time than most during the recent global recession, in part because of a conservative and well-regulated banking system.

In fact, for the fourth straight year, Canada's financial system has been ranked as the soundest in the world by the World Economic Forum.

Moreover, earlier this month, Canadian banks led the annual Bloomberg report of the world's strongest banks. According to the report:

No other country dominated the list as did Canada . . . Canadian banks invoke their strong capital levels . . . and strict regulatory oversight under a single supervisor as reasons for their showing.

These endorsements were not the results of simple good luck, but rather the best regulatory and supervisory system in the world. I often say at international meetings that most of the banks that failed — in fact, I think all of them in the United States, United Kingdom, some German regional banks and others in Europe — were regulated. In my view, it was the absence of appropriate supervision, which we have done very well by the Superintendent of Financial Institutions and her office in Canada.

We cannot rest on our laurels. We cannot be complacent, especially when it comes to a key aspect of our financial system, and that is the housing market. As senators are well aware, our government constantly monitors the housing market, ready to take prudent steps to ensure its ongoing stability, when necessary.

This has been clearly demonstrated in recent years by our responsible and measured approach, specifically on three occasions since 2008. We have adjusted the rules for government-backed insured mortgages. These targeted and proactive steps have helped strengthen the housing market and helped Canadian households from becoming overextended. These adjustments have included requiring a minimum down payment of 5 per cent for owner-occupied, government-backed insured mortgages and 20 per cent on speculative properties; reducing the maximum amortization period to 30 years for mortgages with loan-to-value ratios of more than 80 per cent; and lowering the maximum amount Canadians can borrow in refinancing a mortgage to 85 per cent of the value of their homes. We also withdrew government insurance from backing home equity lines of credit.

Today's act represents a continuation of our government's responsible and measured approach to strengthening the housing finance system. Principally, the proposal that is in the bill — the proposal you are reviewing — would enhance the governance and oversight framework for the Canada Mortgage and Housing Corporation to ensure that its commercial activities are managed in a manner that promotes the stability of the financial system.

As part of this proposal in the bill, the Office of the Superintendent of Financial Institutions would have an explicit role in assessing CMHC's commercial activities, particularly its mortgage insurance and securitization programs. OSFI would review and monitor the safety and soundness of CMHC's commercial activities, and report to the CMHC board of directors and to the Ministers of Finance and HRSDC.

These changes would contribute to improving governance and oversight of mortgage lending practices in Canada, contributing to the stability of the housing market for the benefit of all Canadians.

I note that most independent observers have welcomed these changes, with many characterizing them as long overdue. For instance, the C.D. Howe Institute's Finn Poschmann recently lauded them "important steps . . . to improving the foundation and durability of Canada's finance housing system."


I would now like to turn to another measure in the bill, one designed to ensure all Canadians are protected by the regulatory framework of our financial sector, which is envied the world over. The banking sector has long been the exclusive domain of the federal government. I am indeed referring to the fact that Canada's regulatory banking framework is based on strict prudential rules ensuring that the country's banking system remains safe and sound, and that consumers are protected, prioritizing their right to choice and transparent access to information. In recent years, however, the provinces have attempted to regulate Canadian banking activities in areas that normally fall under the exclusive jurisdiction of the federal government, resulting in fragmentation, duplication and confusion with respect to consumer protection.


For example, under the Bank Act's Cost of Borrowing (Banks) Regulations, when obtaining a credit product, all customers across Canada must receive clear disclosure of interest rates and fees contained in a summary box. However, some provinces have attempted further additional regulation in this area by imposing different disclosure requirements, leading to a system that is confusing to customers, as they will receive two potentially conflicting disclosures of interest rates and fees.

Coordinated and effective consumer protection and financial sector regulation requires a single set of rules and responsibilities for oversight. The preamble to the Bank Act introduced in the legislation that you are reviewing simply reaffirms this jurisdiction and clarifies the intent that all banking activities throughout Canada be governed exclusively by the same high-quality federal standards that have served Canadians so well.

A final proposal in today's legislation that I would like to highlight is our move to level the playing field for Canadian financial institutions competing internationally by improving their access to capital. At present, many countries, including the United States, the United Kingdom and Australia, allow public sector investment pools to invest in financial institutions. Canada provides for only limited access, even though such pools are already allowed to invest in other sectors of the Canadian economy. This places Canadian financial institutions at a competitive disadvantage when raising capital.

Today's legislation will help level the playing field. It proposes to allow public sector investment pools to make investments in Canadian financial institutions. However, eligible investors will be limited to only those that satisfy certain criteria, including pursuing commercial objectives, subject to approval by the Minister of Finance. As with current ministerial approvals, investments must be in the best interests of the financial sector and will be subject to a national security test.

This measure will level the playing field by providing Canada's financial institutions with access to new sources of stable, long-term investment, helping promote financial stability.


In short, the measures I talked about today are not just meaningful, but also necessary if our financial system is to run smoothly and meet the needs of Canadians, while supporting our economic prosperity going forward.

Thank you.


I and my officials here today will be pleased to answer questions from the committee.

The Chair: Thank you very much, Mr. Minister.

You have just remarked that Canada is doing well as the world recovers from the global economic crisis. We are seeing moderate growth in Canada as anticipated in the budget. We have seen increased business confidence. We have seen the strongest job creation in the G7, including the strongest back-to-back monthly job gains in the last three decades in March and April.

However, by the same token, we are reminded of the fragility of the global economy when we hear reports from Europe as to political instability and derailing attempts to solve problems, particularly the last few days in Greece.

Can you kindly comment on the situation in Europe and its potential impact on Canada's financial sector, and how Budget 2012 might address this situation?

Mr. Flaherty: The situation in Europe is a significant concern. It has been a concern of ours for several years now — throughout what economists are calling "The Great Recession." There has been insufficient action in the eurozone to address this issue. We have been encouraging our friends in the eurozone for several years now to take overwhelming action to address the problem. This approach was done with trillions of dollars by the government of the United States in late 2008 and early 2009 in order to overwhelm the serious banking situation in the United States at that time. It was successful in re-establishing the credibility of the financial institutions in the United States.

This is not so in the eurozone now. We see even today the European Central Bank ceasing doing business with several banks in Greece. These are not good developments. This can create a shock that will affect Canada. Our financial institutions have a relatively small exposure directly to the Greek banking system.

However, as you know, global banking is interrelated, and shocks in the eurozone banking system can have negative effects outside of Europe on the American banking system and on the Canadian one as well. Therefore, our banks are strong, but we are not completely immune from the state of the global economy.

We can do what we did back in 2006, 2007 and into 2008, and that is ensure we move to a balanced budget, pay down public debt, ensure our regulatory and supervisory system is strong and in place and that we are persistent in that area so we protection Canada as best we can for shocks that come from outside.


Senator Hervieux-Payette: Welcome, Mr. Minister. I have three short questions for you.

First off, why were pieces of legislation that have no financial bearing on the budget included in the budget?

Second, I still do not quite understand the decision to place the Canada Mortgage and Housing Corporation under the supervision of the Office of the Superintendent of Financial Institutions. And in that case, will the U.S. corporation — Genworth, I believe — whose mortgage loans the government also secures — be covered, and in the spirit of free market, will it lose the power to secure all mortgages?


Due to the recent failure of J.P. Morgan, I was wondering if you are planning and if there are measures in your budget that will prevent our banks from being exposed, those that are tempted to hedge on what is going on in the international financial sector.


Mr. Flaherty: Thank you for your three questions.


Your first question is a large one regarding whether we are including in the bill matters that have no relation to budgeting. The budget is not just a document about tax policy. The budget of our government and the governments before us is the general policy statement of the government. This is a large budget, but we have had large budgets before. We have had budgets with many more pages before this one, including budgets by our government and others.

All of the measures included in the budget relate to the overall economic plan, which is fundamentally this: sound fiscal policy in the medium term, balanced budgets and taking the necessary steps to ensure we have a fiscally sustainable plan for Canada for the next generation. There are then the pillars of the budget dealing with trade, our financial institutions, innovation and R & D, making sure we have an adequately skilled population so we can address the shortage of workers we will have in Canada and other fiscal fundamentals for the good of the country in the long term. It is all under that umbrella of jobs, growth and long-term economic prosperity.

With respect to your second question on OSFI, I will be brief. OSFI already regulates the other mortgage insurance companies, Genworth and one other one, that do business from the private sector. What we will do now is add that part of CMHC to the supervisory function of the Office of the Superintendent of Financial Institutions.

With respect to J.P. Morgan and that $2 billion loss the other day, that was proprietary trading. They were trading in their own book at J.P. Morgan. There is very little of that in the Canadian financial system. There is some, but it is subject to the supervision of the superintendent, and it is relatively small compared to the American phenomenon.

Senator Oliver: Welcome, minister, and thank you for coming.

I would like to ask you a question about the national security regulators. I am aware this is not something actually referenced by the act before us today, but it is raised in your Economic Action Plan 2012.

As you know, Canada has 13 different regulators with 13 different sets of rules and different levels of enforcement. This has long been a headache for investors, businesses and law enforcement agencies. We now have, in Canada, a fragmented regulatory structure.

An article in The Globe and Mail earlier this month talked about the problems and actually said this is preventing the emergence of new, innovative ways to better raise capital in Canada. They referred to a system in the United States called "crowd funding." They quoted a man who was born in Edmonton and now runs a company in the United States who probably will never move his company here because of this fragmentation. This is what that man said:

Canada needs to understand the value of central regulator. It provides legal certainty and clarity for all market participants and leads to much more robust markets that are easier to access and easier to police. Unfortunately, we're not there yet.

Minister, we know the matter went before the Supreme Court of Canada and there was a negative result from that decision. Can you bring this committee up to date on the government's efforts to improve securities regulation in Canada?

Mr. Flaherty: Thank you, Senator Oliver. I will try to be concise.

We have negotiated with the provinces and worked with the provinces and territories since we were elected back in 2006 on this subject to try to get to a common securities regulator for the country, for the same reason that the Office of the Superintendent of Financial Institutions, to which we have been making reference here this afternoon, has been so effective in uniform regulation across the country.

Right now, in terms of the market, depending on where you live in Canada, you may or may not get to see certain opportunities for investment because of the unwillingness of some IPOs to bother paying all the fees across the country. A lot of the provinces do not have as much expertise as others in this area, which is natural.

We have had the cooperation of a critical mass of the provinces and territories in moving toward a common securities regulator for our country. There was some disagreement about this, of course, with a few of the provinces. There was a reference to the Supreme Court of Canada. Interestingly, the decision of the Supreme Court of Canada urged the federal government and the provinces to work together. We have been working together and are continuing to work together. We are certainly trying to get to an agreement.

The Supreme Court of Canada said that the provinces have jurisdiction in this area and also the federal government has jurisdiction in this area. Exactly what they said was that the common ground that emerges is that each level of government has jurisdiction over some aspects of the regulation of securities, and each can work in collaboration with the other to carry out its responsibilities.

In particular, the Supreme Court said that the federal government had a systemic responsibility for the system. You can imagine, this is not easy to work out, but we are trying and we have had more meetings with the provinces and territories. There remains a critical mass willing to try to work this out. We will continue our efforts to try to get to common ground for the good of the country.

Senator Massicotte: Thank you, Mr. Minister, for being with us this morning. Before I ask my question, let me thank you for the clarification you made to my colleague as to why this bill is so comprehensive, to explain all these other amendments. However, my reaction was I presume this will be the only bill proposed this year, because your definition is so large it will include all the bills the government will propose. That is not my question.

Let me talk about CMHC. We are talking about a very macro subject. I think you made a comment some time ago that the government would consider privatizing CMHC or part of CMHC. Can we briefly chat about that? The suggestion is that the original creation of CMHC had a specific purpose in relation to debt in our country. Has CMHC satisfied that and could a privatized mortgage insurer adequately satisfy the needs of Canadians relative to mortgage insurance?

Mr. Flaherty: Thank you for the question. When I was recently asked that, it was in the mortgage insurance context. That is, is it inevitable that the government, the people of Canada, will always own a residential mortgage insurance company? The answer to that I think is no, it is not inevitable that that will be forever owned by the people of Canada, because it is not an essential service. That service of mortgage insurance can be offered, and in fact is offered, by others.

CMHC, as you may know, senator, was created after the Second World War with the intention of helping veterans have affordable housing in Canada. It has a social, affordable housing mandate — I am expressing my own view here — which I think properly is a role for government. That part of CMHC, I think, is a separate mandate from their financial institution mortgage insurance mandate that they are exercising. That mandate in mortgage insurance has grown tremendously over the years, and we are very mindful of that. We have done quite a bit of work in the last year with the Superintendent of Financial Institutions and with other advisers to try to choose the best path forward for CMHC. What we are doing in the bill, as I say, deals with governance and supervision of that part of CMHC that is in the mortgage insurance business.

Senator Massicotte: If I could go back to the point that probably the most significant threat in our economy today is the euro problem. It is a significant issue. You have commented on that issue for the last couple of years, obviously with much merit, because your concerns are proving to be accurate.

While we can criticize their situation, what specifically are you recommending they do? Are you suggesting that Germany and the other countries assume joint and several responsibilities for the debts of Greece and Portugal? You can always make suggestions, but could we find out exactly what you are recommending they should do?

Mr. Flaherty: Fundamentally, this is for them to do; it is not for us, as a non-European country, it seems to me, to dictate to them what they ought to do. However, one thing I recommend they not do is come and ask the IMF to ask its non-European members to put more resources into the IMF to bail out countries in the eurozone.

It seems to me that if you are going to have an economic entity like the eurozone, you have to be prepared to stand up for your neighbour in the eurozone. They have a common currency, as you know, the euro, but they do not have a common treasury. They did not create a treasurer or a department of finance for the eurozone. They have a free trade union as part of their economic alliance.

I think it is a fundamental issue for the eurozone about whether they intend to keep the eurozone together, whether they intend to keep all of the members in the eurozone. If they are, will they bail out some of these states that have unsustainable public debt, and banks that need re-capitalization? Will they bail them out with their own resources or not? If not, then certain consequences will follow from that. I think it is a turning point, clearly, for the eurozone.

Senator Massicotte: They would respond that they have responded and they have provided quite a bit capital, many billions of dollars of their capital, to guarantee those debts. However, it has not been adequate. It has not been overwhelming, as the term you used earlier, that the Americans did in 2008. I presume what you are really saying is that you should integrate even further and that, therefore, a liability of one should become a liability of all.

Mr. Flaherty: Or not.

Senator Massicotte: Or not, or break up the euro.

Mr. Flaherty: That is a question for the eurozone members to decide.

Senator Massicotte: Thank you, minister.

Senator Greene: Thank you very much. It is wonderful to see you again.

Could you explain why you felt it was necessary in the bill to reinforce the divisions between insurance companies and banks with regard to the retail of insurance?

Mr. Flaherty: The federal rules of the Bank Act for a long time have maintained the separation between bank products and insurance products, or at least tried to. Quite frankly, the banks find the insurance business quite attractive and profitable and would like to do more insurance business. We try — for competitive reasons and for choice reasons for Canadians — to maintain the distinction between banking products and insurance products.

The rules are quite clear about the prohibition on banks offering insurance products in their branches. More recently, naturally, we have had the phenomenon of websites and the Internet, and so on, it being less clear on some of the websites for financial institutions that this clear distinction that is followed in the bank branches is being followed in the world of the Web. This bill moves forward with proposed reforms to prevent banks from offering annuities-like products that complement other recent measures we have taken with respect to the selling of insurance. The basic premise is that banks ought not to attempt to do indirectly that which they are prohibited from doing directly.

Senator Greene: I would like to ask a supplementary to Senator Massicotte's questions. I like what you are saying about the IMF and our position on the IMF, et cetera, but can you imagine a time when we might have to contribute?

Mr. Flaherty: Senator Greene, this started in August 2007. I remember Hank Paulson — who was then the Secretary of the Treasury of the United States — calling me at home on a Sunday afternoon in August. We had all talked about there being too much liquidity in the world, too much cash in the system, and about where the problem would arise. He said, "Well, I know where the problem is now. It is in sub-prime mortgages in the United States."

Since August 2007, we have had continuing challenges in the world of credit, and then, of course, in the real economies with the Great Recession. This is still evolving, the issues in Europe today.

I would say that we need Europe to stand up to the plate fully before there can be any consideration to additional resources coming from other places. In this area, the United States shares the same view. I can tell you from our most recent IMF meeting that the view is generally shared also by the emerging economies. There were times when the IMF had to bail out various non-European countries, and the help came through the direct activity of the IMF, not by other countries flowing more money through the IMF to those countries.

Senator Ringuette: I am staying on the same subject of the IMF.

In Bill C-38, your budget bill, under Division 13, you have a provision there to take our commitment to the IMF from $6.4 billion to $11 billion. When you answered to Senator Massicotte that the eurozone should not ask Canada to put more money into the IMF, it is quite puzzling that, in the current budget bill, you are seeking to almost double the current commitment of Canada to the IMF. Could you explain?

Mr. Flaherty: Thank you, senator, for the question.

This goes back to an agreement made by the members of the IMF by the board, of which Canada is a member, representing not only Canada but Ireland and the former British colonies in the Caribbean — some are still in the Commonwealth — to deal with the quota issues.

This is a major concern of the emerging economies, that their share of the quota, which is the voting power at the IMF, is insufficient given the relative size of their economies as they grow. What we are asked to ratify here, what we are asking through the bill of Parliament, is to support that agreement we made with respect to quota increases, which primarily affects the emerging economies. It is a matter of fairness, as economies grow, that the older economies that are not growing as much cede some voting power to the BRIC countries and other large emerging economies.

Senator Ringuette: When was that specific agreement arrived at? Can you remember?

Mr. Flaherty: I may have to correct this. My memory tells me 2010.

Senator Ringuette: Minister, when I questioned your official this week with regard to this issue, not only were we told in this budget bill that our commitment was going to $11 billion, but we were told that the actual commitment of Canada to the IMF with regard to this quota issue was $24 billion, four times $6.4 billion.

These are commitments with regard to maintaining your voting power at the IMF. Is $24 billion of Canadian tax dollars worth that voting power?

Mr. Flaherty: I will have to check those figures, senator. I am not sure what official said what to you on that subject. It is actually not part of the bill being reviewed by this committee.

Senator Ringuette: Exactly. It was when I was questioning the official from your department that the Finance Committee was told about that particular issue, that actually we were going from $6.4 billion to your current commitment to the IMF of $24 billion. Either your official did not supply the correct information to the members of the committee, or there is an issue there, too.

Chair, I have another question.

The Chair: Go ahead.

Senator Ringuette: On April 25, in front of this committee, I asked the Governor of the Bank of Canada, Mark Carney, what our foreign exchange reserve was and what it was five years ago. Five years ago our foreign exchange reserve was $30 billion; it now stands at $60 billion. I want to understand why we would double that reserve in the last five years, and what exactly are the securities? What composes that $60 billion-worth of reserve? Do we have some eurozone security bonds or currency, or gold? What do we have in there? It is $60 billion-worth of Canadian tax dollars that should be accounted for, especially as it has doubled in the last five years.

Mr. Flaherty: You are actually asking a question that is properly addressed to the Governor of the Bank of Canada since you are talking about areas of his responsibility and monetary policy.

The bank has responsibility in monetary policy and I have responsibilities as Minister of Finance in fiscal policy.

Senator Ringuette: I asked the exact question of Mr. Carney, and Mr. Carney responded to me:

There is a strict investment policy, and there is an annual attestation of the consistency of the investments in the reserves to that investment policy signed off by the Minister of Finance. These are the Government of Canada's reserves, not the Bank of Canada's reserves. We manage them on their behalf . . . they are invested in high-quality securities . . .

When I asked specifically to Mr. Carney, he said he was not at liberty to disclose because he only manages this. This is managed for the Minister of Finance. You are the Minister of Finance, and I am asking you the question.

Mr. Flaherty: What is the question?

Senator Ringuette: First of all, why in the last five years have we doubled our reserve in foreign exchange from $30 billion to $60 billion? What is the composition of the $60 billion? Are they securities? Are they bonds? Are they foreign currency? Do they come from —

The Chair: Senator, we will let the minister respond.

Senator Ringuette: Well, it is the second time I have asked the question.

The Chair: You have asked two questions.

Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance Canada: There are two parts to your question, senator. First of all, why have the reserves increased in value over time? It is a combination of two things.

One is the explicit decision of the Government of Canada to increase the amount of foreign reserves. The foreign reserves are used to provide part of the prudential liquidity of the Government of Canada and any foreign currency financing needs that might arise. The government's view is it makes sense for the reserves to grow over time as the economy grows.

The other reason the value of the reserves has gone up relatively quickly is because the assets are in foreign currencies and the Canadian dollar has been appreciating relative to both the U.S. dollar and the euro. As a result, the same stock of foreign currency denominated assets — even if the actual assets do not change — the Canadian dollar value has risen over time. We are reporting these —

Senator Ringuette: About 5 per cent?

Mr. Rudin: It is the combination of those two things.

As the governor mentioned, there is an annual report to Parliament about the foreign reserves. It does describe, at a high level, the holdings of the reserves. They are principally in U.S. dollars. There is a substantial euro denominated component as well.

The government, like governments around the world, does not make it its practice to list the individual securities because that would be against the commercial interests of the government and therefore, the taxpayer. You do not want your counterparties to know what you are holding, precisely, so that you do not have to pay more if you wish to build up your holdings or accept less if you wish to diminish some of them.

The Chair: Thank you, Mr. Rudin.

Senator Moore: Thank you, minister and other witnesses, for being here.

You know, minister, you have come a long way. I am listening to you extolling the virtues of the Canadian banking system. I remember you and your colleagues in opposition about deregulating and merging, so I am glad to hear that you have accepted the policies of Mr. Chrétien and Mr. Martin that gave us the strong base that we have today.

You mentioned in your remarks that during the recession we did not have to bail out the banks. It seems to me, and I remember in this committee, taxpayers' monies were used to purchase hundreds of millions of dollars of mortgages from the banks. Is that not correct?

Mr. Flaherty: That is right.

Senator Moore: I think you were before us then.

Mr. Flaherty: We made a profit.

Senator Moore: We made a profit, and this is good. We had to do it.

Mr. Flaherty: It was no bailout.

Senator Moore: Well, we got lucky. We made a profit. This is good.

Mr. Flaherty: We did not get lucky. We made a good investment. We made $2.5 billion.

Senator Stewart Olsen: Good answer.

Senator Moore: Okay. With regard to that bailout — which it was at the time, we got some money out of it and at the end this is nice — tell me about the bailout of the Canadian banks by the Federal Reserve Bank of United States and excess of $100 billion they got. Did you know about that? Do they keep you advised when they are in trouble in another country?

Mr. Flaherty: In the United States we —

Senator Moore: It was TARP money, I think. I do not know if you knew that.

Mr. Flaherty: I can remember the conversation with the Secretary of the Treasury and the other G7 Ministers of Finance at 7 o'clock in the morning Eastern Standard Time on October 14. The Secretary of the Treasury told us the very large amounts that were going to be poured into the American banking system on terms that were so attractive that they would have to take the money. This was a decision that the Secretary of the Treasury took with the support of President Bush.

Senator Moore: That tells me about the money that went into the big banks in the U.S. I know that because a friend of mine is the chairman of one of them. What about the Canadian banks in the U.S. who got in excess of $100 billion?

Mr. Flaherty: Yes, which they paid back, senator.

Senator Moore: Yes, I know that. I know that, but my position is they were in some difficulty. It is not like —

Mr. Flaherty: They were finance —

Senator Moore: Go ahead.

Mr. Flaherty: I am not sure what your question is, but the banks were financially sound. There was a liquidity problem. We already insured these mortgages through CMHC, and so they were a liability for the Government of Canada in any event. We purchased them, a lot of them, so that there would be more liquidity in the system. We got all of that money back, plus a profit of $2.5 billion.

Senator Moore: Yes, I heard that.

Mr. Flaherty: That is no bailout.

Senator Moore: Well, it is good that we did because it was Canadian taxpayers' money. It was not your money. It was not your government's money; it was the people's money. I do not think anybody in Canada knew that our chartered banks were receiving TARP monies from the Federal Reserve Bank of the United States. I do not remember seeing that in any financial pages. That only came out about two months ago from Bloomberg. Nobody talked about that. I do not remember you stating it or any of the banks saying it, and I think we should know that. I think it is important that we know that.

Anyway, you have been asked about the EU and what may or may not happen there.

However, there are two other things that I find troubling. One is the fact that our average household debt is now 152 per cent of disposable income. I would like to know what your thoughts are on that.

Second, to me, the real elephant in the room is the $16 trillion debt of the United States, with daily running interest charges of $4 billion. Given the fact our economies are so intertwined, I would like to know what your thoughts are on that and what, if anything, we are trying to do to preserve the Canadian economy in the event that they do not get their financial situation in better balance. They have a December 31, 2012, deadline for a chunk of it. I would like to have your thoughts on that, please.

Mr. Flaherty: The situation in the United States fiscally has deteriorated over the last several years. When we were first elected in 2006, discussions took place about what we could do to protect the Canadian economy, given the deficit and debt situation in the United States. The answer was to run balanced budgets, pay down public debt and ensure our house is in order.

Then the recession came. We did the first part of Canada's economic action plan and decided very quickly to run large deficits to try to avoid massive unemployment — millions of people being unemployed in Canada — and a deep, dark, long recession. That worked. The recession was only three months here. We never got into double-digit unemployment in Canada.

This bill and the budget that will follow it in the fall will lay out the path so that we protect Canada as best we can over the course of the next several years.

I gave a speech to some banking people in New York recently and talked about the good things about Canada: our sound financial system, regulation, supervision, our banks, and so on. One of them came up to me afterwards and said, "You did not mention one thing about Canada that you really should have mentioned to us." I said, "What is that?" He says, "You have a government that can make decisions and implement them."

Senator Stewart Olsen: Hear, hear.

Mr. Flaherty: Political gridlock is a very serious problem in the United States and something that many Americans feel. They cannot take steps to deal with their deficit and debt issues. Whatever steps those might be that they should take — obviously I think they should reduce them — but they are in a political gridlock position, as I say.

Senator Harb: Thank you very much, minister and your team, for appearing before us.

My first question deals with the amendment to the Trust and Loan Companies Act. When we talk about life annuity-like product — effectively life annuities — can you give us a little bit of a background in terms of the rationale for this particular amendment? Clause 205 goes all the way down to clause 208 in Division 2, Part 4.

I wanted to know specifically whether this was in response to specific banks in Canada that have decided that they wanted to introduce this product, for example, for people who are over the age of 55 who might benefit from some sort of a pension mechanism that they would set up? What is the rationale for it?

Mr. Flaherty: The rationale is the reason I gave earlier: The law in Canada is that there is a separation between banks doing banking products and insurance companies doing insurance products for the purposes of competition and choice for Canadians. Yes, we have seen from the banking sector products that are, in our view, life annuities, which are insurance products, not banking products.

Therefore, to comply with the law as it is, we will make it clear in the bill, if it is accepted by Parliament, that they are insurance products to be sold by insurance companies, if they choose to.

It also affects the regulatory regime, because the regulatory regimes are different for insurance companies than for banks.

Senator Harb: My second question deals with the same thing again, which is the rationale for now allowing certain federal entities to buy equities in banks. That was not allowed before. Now we will allow them, so obviously there was a reason why we prohibited these entities from buying shares in banks. Now we would allow them. What is the rationale behind that?

Mr. Flaherty: The rationale is that our financial institutions are at a competitive disadvantage internationally. Most of our competitors allow public pools to invest in their financial institutions within their own countries. As I say, this lets Canadian financial institutions that might welcome that kind of investment to increased capital, for example, to do the same as their competitors in other countries.

Senator Harb: I have a final quick question about the requirement for employees and employers to table their collective agreement.

Mr. Flaherty: Oh, yes.

Senator Harb: Why do you want them to table their collective agreement? If so, would that be subject to the Access to Information Act? In other words, could a collective agreement between an employer and an employee eventually be made public?

Mr. Flaherty: In the Speech from the Throne in 2010, the government announced that it would look at ways to better protect workers when their employers go bankrupt. In this bill, we are committing to require federally regulated private sector employers ensure that they have long-term disability plans that they offer to their employees. They will have to insure those plans, so we want to see the collective agreements.

Right now, if we want to see a collective agreement or they do not want to give it to us, we have to prosecute them in order to get it. We think it will be more efficient to make it a legal requirement that the collective agreements be deposited with the Minister of Labour.

Senator Tkachuk: Welcome, Mr. Minister, and thank you for your answers to date.

The job numbers have continued to grow over the last couple months. I think that is positive for the country. However, you have an opportunity in front of the Canadian people and in front of us to comment. Can you tell us what you think are the most important two or three policies that you believe are responsible for this economic growth?

Mr. Flaherty: That is a good question.

I would say a sound fiscal foundation for the country; sound economic and fiscal fundamentals. Canada, quite frankly, is the envy of most of the advanced economies now in the world because we have sound fiscal and economic fundamentals, despite the fact that we made massive investments of taxpayers' dollars and borrowed a lot during the Great Recession. That was a conscious choice that was made in order to protect Canadians from the worst consequences of a recession that came to us from outside of our country. I think that is fundamental.

I think it is also fundamental that we plan for an adequately trained workforce and enough people in the workforce so that our economy will continue to grow in the future. Again, that is part of this budget implementation bill, and is part of the one that will come in the fall also — it is part of the overall budget plan that is laid out in the budget and the budget document.

That is fundamentally important to avoid stagnation in our economy going forward. That affects not just some amendments to the Employment Insurance provisions that are disincentives to employment, but it also positively affects persons with disabilities who wish to work in the workforce — and many do — to be able to do that and fulfill their wishes to engage in the workforce. It also supports seniors, who wish to continue to work in the workforce, of whom many do. We are living longer and healthier, thank goodness. It also supports Aboriginal people via training, especially young Aboriginal people who want to enter the workforce. All these well-paying jobs are available, particularly in Western Canada. That is another major component of the economic plan.

I would stop there.

Many countries do not have a sound fiscal plan. It is not only that we have it, but we show as a government that we can implement it and stick to our guns and stay the course.

The Chair: Thank you. That completes round one. We have one question in round two. It will have to be very precise.

Senator Ringuette: Thank you, Mr. Chair.

I want to come back to the foreign exchange reserve and Mr. Rudin's explanation. First, the Canadian economy has not doubled in the last five years.

Second, the Canadian dollar valuation has maybe increased by more or less 5 per cent.

Third, you indicated to us that we had euros in that $60 billion reserve. What is the percentage of euros in that fund? The current situation in many European countries is at risk of going down in value drastically, therefore putting the Canadian dollar at risk and decreasing its value.

Mr. Flaherty: That is an interesting question that I know Mr. Rudin really wants to answer.

The Chair: Mr. Rudin, the floor is yours.

Senator Ringuette: You deflected my first question to him.

The Chair: Tight response, Mr. Rudin.

Mr. Rudin: I have not brought all of the figures about the exchange fund account with me. I do know that the two dominant currencies are in this order: the U.S. dollar, which is more than half of the portfolio; the euro, which is most of the remainder; and there is a small amount of yen.

The one thing I would mention in terms of taxpayer exposure is that the way the government funds its foreign reserves is that it raises debt in foreign currency and the debt that is used to then purchase the foreign assets is closely matched to the underlying assets.

For example, the government issued a euro denominated bond a couple of years ago. I cannot remember exactly the term, but whatever the term was, it was then invested in euro denominated assets. As the value of the euro denominated assets fall, the value of the matching euro denominated liabilities falls at almost the exact same rate. Similarly, if the value of the U.S. dollar denominated assets rise, the U.S. dollar denominated liabilities rise at almost the exact same rate.

The Chair: Thank you, Mr. Rudin.

On behalf of the committee, I would like to express our appreciation to you, minister, and your associates for appearing before us today.

We will suspend the discussions at the committee for 10 minutes to allow members of the committee to go up to the chamber and check in and then please come back.

We will reconvene at ten past two, where we will continue with witnesses from the Department of Finance.

(The committee suspended.)

(The committee resumed.)

The Chair: Members of the committee, we will now turn to the various divisions. I ask that we take it division by division, with a brief opening statement on each of the divisions, and then open for questions from the committee. We will start with Division 2, life annuity-like products.

Mr. Rudin, please make your opening comment.

Mr. Rudin: I will expand briefly on the minister's comments in this regard.

The change in Division 2 gives effect to a decision or seeks Parliament's approval of a proposal that was first made public in December of last year, which is to clarify the separation of banking and insurance by making it clear in the legislation that banks are prohibited from issuing life annuities, the reason being that, from a prudential regulation point of view, they ought to be regulated under the provisions of the Insurance Companies Act,not from the provisions of the Bank Act; and that, from a consumer point of view and a choice point of view, these should be marketed by insurance companies and not banks.

The Chair: Thank you. Now for questions.

Senator Ringuette: I understood clearly that the minister said you wanted to establish a standard across the country with regard to federally regulated entities. However, clause 208 also prohibits cooperatives from engaging in life annuities. I was always under the impression that cooperatives were under provincial jurisdiction.

Mr. Rudin: There is a provision, as we just discussed, in the Bank Act; a similar provision in the Trust and Loan Companies Act, which falls only on federally regulated trust and loan companies; and then a provision in the Canada Cooperatives Act, which would fall only on federally regulated cooperatives. As you say, the vast majority of cooperatives at present are provincially regulated.

Senator Ringuette: All the cooperatives, such as Desjardins and the Acadian caisses populaires in New Brunswick, will not be touched by this provision?

Mr. Rudin: Correct.

The Chair: We will now move to Division 10, financial institutions.

Mr. Rudin: Again, I would amplify briefly the minister's remarks in this regard. Here the government is proposing that the legislation governing federally regulated financial institutions be altered such that certain public-sector investment pools, sovereign wealth funds and public pension funds in general — but within that only a subset, potentially — would be allowed to invest directly in a federally regulated financial institution, which, under the current regulations, is not permitted.

The acquisition of shares would be subject to the approval of the Minister of Finance for this particular category of investments. Also, these investment pools would have to satisfy certain criteria. In particular, they are designed to ensure that these pools of capital are being invested on the basis of commercial objectives. The reason, as the minister laid out, is that this would provide additional sources of long-term and stable capital investment for Canadian financial institutions.

Senator Harb: I asked the minister, and he was kind enough to give me the first part of the answer I was expecting. I would expect you to give me the second part of the answer I am expecting. Why were we previously not allowing these funds to invest in banks?

Mr. Rudin: I will do my best, noting that I am not a historian of the Canadian legislative framework.

What I can tell you is that, to me, it is clear enough from the history that we begin with a strong and pretty much blanket prohibition against government ownership of federally regulated financial institutions; that that applies to Canadian governments, both at the national and sub-national level, and to foreign governments as well; and that, over time, these have been relaxed in a fairly controlled and deliberate way.

One of the relaxations was to allow financial institutions that are owned by foreign governments to have wholly owned subsidiaries in Canada under federal legislation. We have some of these, such as the State Bank of India in Canada, for example, although that is not the only one. An exemption was prepared in that regard.

Subsequent to the deepening of the financial crisis, the government proposed, and Parliament approved, a provision for the federal government to be able to purchase shares in federally regulated financial institutions, but only for the purposes of supporting the stability of the Canadian financial system. It was a specific measure, and fenced in, but there had been a blanket provision against that.

In Bill S-5, the government proposed, and the committee will have discussed, somewhat of an expansion of the opportunities for financial institutions that are owned by foreign governments, beyond having wholly owned subsidiaries. It has been a progressive but targeted and controlled liberalization over time, starting from, if not a blanket prohibition, something close to it.

Senator Harb: When the government assumed the liabilities, through CMHC and the banks, to remove the $55 billion off the books of the banks so they can provide them with liquidity, I hear you saying that if the legislation was in place at that time, the government would not have needed to do that; they would have gone and invested money in those banks and made a killing. Is that your understanding?

Mr. Rudin: I would draw an important distinction between owning shares in a bank, which has the effect of injecting capital into the bank and putting the government in an ownership position, and lending money to a bank or other financial institution, or purchasing assets from a bank. It is a common, I would say, worldwide function, usually ascribed to central banks, to lend money to financial institutions when they are under stress. The rule needs to be — and it is pretty much regarded worldwide — that you lend to a solvent institution on good collateral. This is a long- standing power of the Bank of Canada, and this was much used in the course of the financial crisis.

The Insured Mortgage Purchase Program has certain elements of that spirit, but it amounted to a purchase of assets rather than a loan. Again, it is not a purchase of shares in the institution; it is a purchase of assets. The impact is similar to, although not exactly the same as, the lending against collateral that central banks were doing around the world.

Senator Ringuette: You must have done an evaluation or you must have an estimate of the public pool, the amount of money that can be invested in a bank. What is the estimate?

Mr. Rudin: There is an important aspect of this that I would bring to your attention before I speak to your question. Unlike many other investors, for a public pool of capital to own shares in a federally regulated financial institution, the only circumstance under which that is allowed is if they purchase the shares directly from the financial institution; primary issuance. The law is not there to allow them to purchase shares on the secondary mark.

The financial institution will do this when it is looking to increase its overall capital, which it might do for a variety of reasons. Institutions hesitate to increase share issuance because it dilutes the existing shareholders, so they need to have a particular reason to do so. Then they enter into a specific agreement with a specific pool of investors to do so.

The overall amount of funds in public pools of capital worldwide is very large. I do not have that figure handy. There is no particular way of predicting which, if any, of these transactions will take place because you need to have a Canadian regulated institution that is both seeking to raise additional capital and wishes to bring a public pool of capital on board.

Senator Ringuette: This measure is to be brought forward in a budget bill. I cannot believe you do not have an estimated amount of dollars for either Canadian pools or foreign public pools. That is very difficult.

My concern with regard to all of this is that over last number of years we have seen our Canadian banks declare new heights in profits and bonuses to CEOs. Currently, the Canadian public pool of investment that we have is mostly used for the private sector to boost their commitment to the economy. I do not see why we should put manufacturers or other Canadian contributors to the economy, or why we should have them compete for those public pool dollars with our Canadian banks. That is my concern about all of this. It is opening up a new market for Canadian public pools and creating an additional stress to the private sector that needs funds to expand for productivity measures, to purchase equipment for capital investment and so forth.

I hope you understand that including Canadian banks in these public pools will have an effect on our manufacturing sector for access to this capital. Do you understand that?

The Chair: Is that the question?

Senator Ringuette: Yes.

The Chair: Do you understand that, Mr. Rudin?

Mr. Rudin: I believe that I am following your point, senator. I do not think that I share it, however.

If I understand, you are saying that other Canadian enterprises would like to get investment from public pools of capital and at present — because the public pools of capital are not able to invest in federally regulated financial institutions — they need to direct their Canadian investments to other sources. Canadian investing in a federally regulated financial institute will be very attractive and it will divert investment from other areas.

Senator Ringuette: Yes, you understood.

Mr. Rudin: I understand. I do not share that feeling for a couple of reasons. First, this is a relatively restricted opening. Public pools of capital can by and large invest on the primary or secondary market in Canadian publicly traded or private companies more or less without restriction, other than in telecommunications or if they are going to take a controlling interest, which would trigger the Investment Canada Act. There is quite a liberty that will not exist here because secondary market investment would not be permitted. Again, you need to have both the agreement of the federally regulated institution and the minister as well. It is quite a hurdle to get over.

In addition, as you were pointing out, there is quite a lot of capital available in public pools of investment and Canada is a relatively small proportion of the investment universe. I do not think we have to be concerned that foreign public pools are already overweight on Canada and cannot afford to increase their exposure to Canada in that way.

Senator Tkachuk: By extending tier 1 capital, does it not extend the ability of the banks to lend to manufacturers and other businesses?

Mr. Rudin: Yes, in the following sense: We have stringent capital requirements in Canada that our banks respect are established by our superintendent. Our banks are already very well capitalized and are in a good position to equip themselves to manage and extend loans to persons and individuals. This will provide them the opportunity to raise capital when they have a specific need for it. That might be because of stresses in world financial markets or in order to fund an expansion for which they would need additional capital.


Senator Hervieux-Payette: Along the same lines, I agree with my colleague that, despite the claims and figures indicating that the banks have considerable liquidity to lend our small and medium-size businesses, and even our large corporations, when you look at what is really going on out there, you see it is not quite so open; I might venture to say it is even a bit conservative as far as lending to Canadian companies goes.

I would like to know, then, who asked for that change. Did the Department of Finance receive the request and, if so, when? We do need some justification for this change, after all. Who would want to see these changes? Did the financial institutions, the banks, the trust companies and the insurance companies ask for this openness?

Mr. Rudin: There is widespread interest from federally regulated banks and insurance companies. Since 2007-08, when we saw common public funds being heavily invested in large financial institutions, UBS, CD, Merill Lynch and so forth, the industry approached us to ask if they could have the same allowance.

Senator Hervieux-Payette: So the request came strictly from foreign companies?

Mr. Rudin: No, it was Canadian companies, generally speaking, that were interested in expanding their pool of potential investors.

Senator Hervieux-Payette: You are using another approach. Earlier, you talked about a foreign bank with Canadian operations under Part II of the Bank Act. They are already scared. Is the reason that, in their sections, they are not authorized to carry out those operations?

Mr. Rudin: Sorry, I did not quite understand your question.

Senator Hervieux-Payette: I no longer remember the name. I think you mentioned a bank by the name of UBS wanting to make some investments.

Mr. Rudin: As an example, yes.

Senator Hervieux-Payette: My first question has to do with that.

Mr. Rudin: Canadian financial institutions noticed that foreign banks like UBS were free to accept investment of common public funds that were not available to our institutions. We wondered whether the government could authorize them to undertake the same scope of activity as the major financial institutions.

Senator Hervieux-Payette: Do our fellow partners in the G8 have a similar measure?

Mr. Rudin: I would say the other G8 countries provide more open access than we currently do. Some do not have any restrictions that we can identify, others have some, but this kind of investment is not prohibited in the least.

Senator Hervieux-Payette: Since the minister's permission is required, what are the established criteria? They are not in the act. There is no framework setting out the circumstances in which the minister may grant this openness.

Mr. Rudin: Those criteria exist.

Senator Hervieux-Payette: What are the relevant factors?

Mr. Rudin: I will admit that it is not very clear because there are references to other sections in the existing act that are not covered in this bill.

The minister can take a number of factors into account such as the appropriateness of the potential investor, as an owner or investor in a financial institution, including their financial resources, business plan, experience, moral standards, integrity, involvement with financial institutions, the opinion of the Superintendent of Financial Institutions as regards potential issues, the interests of the Canadian financial system, which is always a consideration for the minister, as well as Canada's national security and international relations.

Senator Hervieux-Payette: Thank you, Mr. Chair.


The Chair: Mr. Rudin, I will ask you to comment on Division 11 and Division 36, the Bank Act, as opening statements. Then we will take questions on both of those divisions.

Mr. Rudin: I would be glad to. Again, the minister spoke to both of these. I will just amplify a little bit what he set out.

Division 11 sets out legislative amendments that would strengthen the oversight and governance framework of the Canada Mortgage and Housing Corporation. All of these are limited to the commercial activities of CMHC. As the minister mentioned, the CMHC has other activities, but the commercial activities are currently mortgage insurance and securitization of mortgages.

These enhancements include the following. It would insert in the relevant act additional objectives for CMHC to govern its performance or acquitting itself of its commercial mandate. These would include contributing to the financial stability of the system, including the housing market, and legislative and regulatory authorities for the Minister of Finance to set regulations regarding the securitization programs. As the minister mentioned, it grants authority for the Superintendent of Financial Institutions to review and monitor the commercial operations of CMHC. It also includes the addition of the deputy minister of the responsible department, which is currently Human Resources and Skills Development Canada, and also the deputy minister of finance to the board of directors of the corporation.

Division 11 also includes a legislative framework for covered bonds. The government announced its intention two years ago to have a legislative framework to govern the issuance of covered bonds, and this legislation would give effect to that. Covered bonds are debt instruments that are issued by financial institutions and secured by a pool of high- quality assets, typically residential mortgages. Canadian banks are active in this area, as is Caisse Desjardins.

They have already issued covered bonds but under a contractual, non-legislative framework. The government has previously announced that it would create a legislative framework and that this would make that market more robust and more stable. This will give effect to that commitment.

The Chair: Can you give an overview of Division 36, please?

Mr. Rudin: Of course.

The minister spoke to this briefly. Division 36 would introduce a preamble to the Bank Act, the purpose of which would be to clarify the intent that banking activities undertaken by banks throughout Canada be governed by the same high-quality federal standards. The objective of the preamble is to reaffirm Parliament's intent, once it is approved by Parliament, that federal jurisdiction over banking should be exclusive.

Senator Harb: I have a couple of questions on Division 11. The government seemed to want to have the deputy minister sit on the board of directors of CMHC. What do we do with other Crown corporations? Do we have the deputy ministers as ex officio members on those corporations?

Mr. Rudin: There is quite a variety of arrangements. I am not an expert in this field, so I might have to correct myself. However, I believe the majority do not have ex officio members, but it is very common in the financial sector. I think the Canada Deposit Insurance Corporation has five ex officio members: the Deputy Minister of Finance, the Governor of the Bank of Canada, the Superintendent of Financial Institutions, the Deputy Superintendent of Financial Institutions, and the Commissioner of the Financial Consumer Agency of Canada. For the Bank of Canada, the Deputy Minister of Finance is an ex officio member.

Senator Harb: Reading the clauses, if I am to remove myself a little bit out of the scenario where I am, it strikes me as if we are just moving with CMHC in order to privatize it? Is that the direction we are going in with these measures here?

You put it under OSFI. You have a board of directors, and are putting all kinds of rules and regulations on them. You want to have a registry. Tell me, please.

Mr. Rudin: The minister spoke to this. He was asked a question about some of his recent remarks in this regard, and he was very clear. Over the very long term, did he feel that having a government owned insurer was the only possible circumstance? He was very clear just today that the answer is no. Similarly, however, is he currently working on that? Again, similarly, he said no.

Of course, I cannot speak more authoritatively than the minister in that regard.

Senator Ringuette: Clause 352 provides for the Minister of Finance not only to approve the guarantees of securities to be sold by CMHC, but it also gives the Minister of Finance the authority to set a fee. Therefore, we have the Minister of Finance setting a fee to a Crown corporation so that Crown corporation can issue security to secure mortgages.

The Chair: What is the question?

Senator Ringuette: The question is, why fees? Why would the Minister of Finance charge a fee to a Crown corporation just to say, yes, please issue some covered securities? What would those fees be? Again, this is in relation to clause 352.

Mr. Rudin: The CMHC securitization programs, so the National Housing Act, the mortgage-backed securities and the Canada mortgage bond, CMHC provides a guarantee to the investor: They will get their principal back and timely payment of all of the interest. This is a valuable thing to investors because they know that CMHC is an agent Crown and her liabilities are Her Majesty's liabilities. It is definitely part of the commercial operations of CMHC.

Senator Ringuette: It always has operated that way in order to get these funds.

Mr. Rudin: This is a business that CMHC operates, and this legislation creates the potential but not the necessity that something be paid into the Consolidated Revenue Fund in respect of that guarantee, just in the same way that financial institutions or insurers that are in the financial guarantee business get a fee. I would point out that there are other circumstances in which Crown corporations pay fees to the Consolidated Revenue Fund.

For example, in the pension area, where pension regulation allows a private corporation to meet part of its solvency deficit using a letter of credit, for which a fee would have to be paid to a financial institution, for Crown corporations that are on a commercial basis the legislation provides the possibility of a fee paid to the Crown to be comparable to the treatment that a private company would have in order to receive the credit support.

Senator Ringuette: How much would that increase the operating budget and the insurance portfolio of CMHC and that increase being transferred in regard to what would be required related to payment from the taxpayer to get that mortgage insurance?

Mr. Rudin: Section 352 refers to the securitization activities of Canada Mortgage and Housing rather than the mortgage insurance activities, and it allows the Minister of Finance to do a number of things, including set a limit on the amount of exposure that CMHC can take on and also then potentially to charge a fee to compensate for the additional or residual risk to the Crown.

Senator Moore: Mr. Rudin, can you or one of your associates or colleagues explain to me and to the Canadian public exactly what is a covered bond?

Mr. Rudin: Yes, I would be glad to.

A covered bond is a bond — a debt instrument — sold by a financial institution. It is an obligation of the institution in the same way that its other unsecured debt is, except that it has a feature that makes it more attractive to investors because it is also backed by a pool of collateral, which is dedicated to supporting that bond. Therefore, if for some reason the institution is unable to make the payments, it goes into default. Rather than having the holders of the covered bond wait in line through the resolution process, they get access automatically to this pool of collateral. The pool of collateral is maintained at a value which is somewhat larger than the expected cost of meeting that obligation.

Senator Moore: Paying out the bonds.

Mr. Rudin: It makes the debt instrument more secure and it allows, for example, a financial institution that does not have a AAA rating to issue a AAA-rated instrument.

The other advantage for investors is that typically, if an institution has a debt instrument and it goes into default, even if it pays it will pay on an accelerated basis. If it is a 10-year bond and they default three years in, they will try to settle up through the restructuring or liquidation process, whatever, right away in a lump sum. Because the pool of collateral is there and it continues to generate cash, the covered bond can live on and, as long as the collateral is sufficient, it will make the scheduled payments at the scheduled time and it will not accelerate. That is also of real interest to investors for whom they are trying to have this asset because they want it to match the time period of some liability. They do not want to run the risk of acceleration.

Senator Moore: In the example we are discussing here, who would administer those assets to make sure that, in the final seven years, the covered bondholders get their money back? Who administers that? Is it the receiver in bankruptcy?

Mr. Rudin: The purpose of having a legislative framework is to set this in stone, so for investors, obviously. I have not got it engraved in my mind yet, but part of the requirement is to have specified who the agent will be that will administer the pool of collateral to provide additional assurance to investors.

Senator Moore: It would not be the issuing institutions, the bank?

Mr. Rudin: No. It needs to be set aside in a bankruptcy remote vehicle.

Senator Moore: A third party.

Mr. Rudin: All of the provisions that will keep this thing going are required in legislation. CMHC is the registrar of the program.

Senator Moore: Is it the only registrar? Because of some things I read in the briefing papers I thought it may be, but is CMHC designated as the sole registrar?

Mr. Rudin: Yes.


Senator Hervieux-Payette: One question on the CMHC and one on Division 36. We all remember Fanny May and Freddie Mac, which all of a sudden became corporations and ended up back in the government's hands after a monumental downfall.

I am wondering whether we should start considering privatizing the CMHC. At this point, we should ask ourselves something: when the CMHC looks to the market for funding, is it not a corporation that can access capital for less in terms of interest rates than private companies, since the Government of Canada does backstop it.

Mr. Rudin: To answer your question, I will start by pointing out that there are two sides, more or less, to the CMHC's operations. There is the commercial side, which includes securitization and mortgage insurance. On the commercial side, the CMHC does not do any lending; it does not have to lend to in turn lend funds to others. Obviously, as far as social housing is concerned, there is a lending component. In that situation, the government is the one lending the money initially and there is a borrowing aspect as well. The cost is exactly the same as that tied to Government of Canada funding. And it works the same way with the Business Development Bank of Canada and Farm Credit Canada.

Senator Hervieux-Payette: In terms of Genworth and the CMHC, is the CMHC's loan guarantee 90 per cent and Genworth's 80 per cent?

Mr. Rudin: Genworth's guarantee and that of the other private mortgage insurance company, Canada Garanty, really depends on the policy holder. Genworth, for instance, insures a mortgage that was issued by a bank and the government's guarantee is that, if Genworth goes bankrupt, the government will reimburse a portion, not the full amount.

Senator Hervieux-Payette: Is it 80 per cent?

Mr. Rudin: There is a 90 per cent, but insofar as the first 10 per cent, calculated based on the principal amount, at the beginning of the mortgage, is not reimbursed by the government. It works differently in the CMHC's case, because it is part of the government. The implicit guarantee is that it must fulfill all the obligations of the CMHC, in other words, 100 per cent. So there is that difference.


The Chair: I want to emphasize to all members of the committee that this is really just for clarification today. We will be having the President of CMHC tomorrow so that we can pursue all of these matters.

Senator Hervieux-Payette: My next question is about the bank. I have a clarification on Division 36. What is the purpose of this? I read the explanation. My feeling is that the way it is being spelled out, the intent is to do indirectly what cannot be done directly, which is applying rules to the banks that would be necessarily applied by a national security commission.

Mr. Rudin: As the minister explained, the purpose of Division 36 is to express the intention of Parliament — if and when it is passed — that the federal jurisdiction over banking is meant to be exclusive. The minister had given the example of consumer disclosure regulations. Currently, some provinces believe they have consumer disclosure regulations which apply to banks, such that banks are in a situation where they face federally mandated disclosure and a provincially mandated disclosure.

It has been argued — not by the federal government, but by others — that there is no conflict between these two sets of rules because technically it is possible to comply with both. One can tell the consumer, "Here is my federally mandated disclosure," and about the same product, "Here is my provincially mandated disclosure." This preamble would apply to that particular area, express the intent of Parliament that there is a conflict, the federally mandated disclosure is meant to be the only disclosure, and that this duplication gets in the way of the federal intent which is to clearly inform consumers. This duplication leads to confusion rather than clarity.

Senator Hervieux-Payette: Consumer question is not a provincial matter?

Mr. Rudin: The position of the federal government is that the jurisdiction over banking is exclusive. Therefore, disclosure requirements that apply to banks apply across Canada and they are the only disclosure requirements.

The Chair: Thank you, Mr. Rudin. We have two more divisions to deal with before 3 o'clock.

Senator Moore: Thank you. I want to touch on one thing. We are on the CMHC schedule, Part 4.

On the $33 billion situation with regard to the asset-backed commercial paper, people are taking the haircut or else they have to wait a long period of time to get their money back. If these rules were in place, would that have been avoided?

Mr. Rudin: It is a very good question, senator. I am trying to think through all the implications.

Senator Moore: Was that part of the mission or intent when you were preparing? Did you think about that when you were putting this together? To me, it is something that has to be addressed. We have discussed it before in this committee at other hearings on other matters. Would it have been avoided? If not, can you tighten this up to make sure it can?

The Chair: Mr. Rudin, would you prefer to respond to this in writing to the clerk?

Mr. Rudin: I think that would be wise.

The Chair: As do we. We will change the witnesses quickly and we have two divisions to carry on. We will have the two opening statements up front and then we can ask for questions.

Anthony Giles, Director General, Strategic Policy, Analysis and Workplace Information Directorate, Human Resources and Skills Development Canada: Thank you very much. My name is Anthony Giles, Director General of Strategic Policy in the labour program of HRSDC. I will speak to Division 22.

Briefly, Division 22 proposes two separate amendments to the Canada Labour Code. The first proposes an amendment to Part 1 of the code that would ensure employers and unions submit their collective agreements to the Minister of Labour. They are currently required to do that, but there is no mechanism to encourage them to do so. This amendment will change that.

The second change in Division 22 is to Part 3 of the Canada Labour Code. Part 3 deals with labour standards. This amendment would introduce a requirement that employers who have uninsured long-term disability plans insure those plans so that in the case of bankruptcy, employees who are on long-term disability at the time of the bankruptcy will continue to receive those benefits as long as they are disabled. That amendment will be for those who begin to receive benefits as of the time the legislation comes into effect. It would not go backwards.

Gerard Peets, Senior Director, Strategy and Planning Directorate, Industry Canada: Thank you. I am here with Patricia Brady, the director responsible for investment policy under the Investment Canada Act.

Division 28 would amend the Investment Canada Act to do two things. The first is to improve transparency by allowing the Minister of Industry or the Minister of Canadian Heritage to publicly communicate more information on the investment review process. The second is to add an enforcement tool to promote investor compliance with undertakings or commitments that they provide as part of the investment review process.

Specifically with respect to transparency, the amendments proposed in section 480 of the bill would allow the minister to publicly disclose the fact that he has sent a preliminary notice to an investor that he is not satisfied of the likely net benefit of the investment. He would also be able to publicly explain his reasons for sending such a notice, provided it would not cause prejudice to the Canadian business or the investor.

With respect to enforcement, the amendment proposed in section 479 of the bill would authorize the minister to accept security from investors for payments of any penalties that could be imposed by a court for breach of undertakings.

The Chair: We have five minutes for questions. I suggest they be very tight. If they cannot be answered quickly, we should get a response in writing to the clerk that can be circulated.

Senator Hervieux-Payette: If this section had been in place, would Nortel employees have been in better shape today?

Would the clarification of the criteria and the publication of it have affected the future of Noranda and Alcan and foreign companies buying these companies in the sense of protecting production and employment? Of course, when they say that they are going to invest $3 billion and they do not, there are significant penalties.

Mr. Giles: Quickly on the first question, no, Nortel employees would not have benefited because this applies to firms in the federally regulated jurisdiction. Nortel comes under provincial jurisdiction.

Senator Hervieux-Payette: Air Canada and so on?

Mr. Giles: Those sorts of firms, yes.

Senator Hervieux-Payette: Thank you. And Noranda and so on?

Mr. Peets: Could you repeat the question?

Senator Hervieux-Payette: I said that with the new criteria that the minister would use — besides being more transparent — would they protect jobs and ensure that the company that is buying complies with its commitments? Very often they say they will invest, and at the end of the day they buy the right to close shop and do their business outside of the country. What kind of guarantee would we have to protect jobs and production?

Mr. Peets: The new measure that relates to compliance is an authority for the minister to accept security. There are no new factors, but the minister can accept security. In the event that a court issues an order, that security can be realized.

Senator Hervieux-Payette: Does it protect jobs in any way or shape? When they make a commitment when they buy, they say to the minister, "We will do that in the best interests of Canada, jobs will be protected and the investment will be made." I do not think you will have a security that would really provide the amount of money that would secure these people's jobs.

Mr. Peets: The compliance with undertakings could include many things, but those are case-specific. I do not know if my colleague wants to add anything.

Patricia Brady, Director, Investment, Insolvency, Competition and Corporate Policy Directorate, Industry Canada: The amendments being proposed with respect to enforcement would not change the types of undertakings that investors offered. Those are offered voluntarily by investors. They are not imposed by the minister. However, they often relate to things such as protecting jobs for a specific period of time and to the other net benefit criteria that are spelled out in the act, which are not changing with these investments.

With respect to compliance with undertakings that they offer, these amendments are intended to promote compliance by allowing investors to offer security. It is a form of backing up the undertakings that they do offer with financial security. It is intended to promote compliance in that way.

Senator Hervieux-Payette: Who fixes the amount?

Ms. Brady: That would be determined by the investor. They would offer it and negotiate it with the minister.

The Chair: To all of our witnesses, those present with us now and those that were here earlier, on behalf of the entire committee, I would like to express our great appreciation. Thank you very much. This meeting is concluded.

(The committee adjourned.)