Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 18 - Evidence - May 17, 2012
OTTAWA, Thursday, May 17, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day
at 10:30 a.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 Parliament on March
29, 2012, and other measures.
Senator Irving Gerstein (Chair) in the chair.
The Chair: Honourable senators, this morning we continue our
pre-study of certain divisions of Part 4 of Bill C-38, the jobs, growth and
long-term prosperity bill. To continue the work we began yesterday with the
minister, we are pleased to welcome two agencies who will be affected by
In this first hour, we welcome Karen Kinsley, President and Chief
Executive Officer of Canada Mortgage and Housing Corporation. She is
accompanied by Sébastien Gignac, General Counsel. Colleagues, we have one
hour for this session.
Ms. Kinsley, the floor is yours.
Karen Kinsley, President and Chief Executive Officer, Canada Mortgage
and Housing Corporation: It is certainly a pleasure to be here today to
discuss Bill C-38, the Jobs, Growth and Long-term Prosperity Act, as it
relates to Canada Mortgage and Housing Corporation.
As Canada's national housing agency, CMHC's mandate and responsibilities
have evolved significantly over the past six decades. Nowhere is that more
evident than in the area of housing finance.
In the 1950s, CMHC introduced mortgage loan insurance to make home
ownership more accessible to Canadians. Our securitization programs began
with the introduction of mortgage-backed securities in the 1980s, followed
by Canada Mortgage Bonds in 2001.
More recently, we played a role in improving liquidity in credit markets
by implementing the Insured Mortgage Purchase Program, a temporary measure
introduced by the government at the height of the global economic downturn.
These securitization programs help ensure a ready supply of low-cost funds
for residential mortgages.
Over the years, CMHC has indeed evolved into a large financial
institution in Canada. Together, our mortgage loan insurance and
securitization programs, which operate on a commercial basis, are essential
components of Canada's strong and well-functioning mortgage financing
One of the key ways in which CMHC contributes to a stable housing system
is by addressing gaps in the marketplace. In fact, we are the only mortgage
loan insurer for large, multiple-unit properties, and a significant
percentage of CMHC's insured, high-ratio homeowner loans are in rural areas
and smaller Canadian markets that are traditionally not as well served by
private insurers. Together, these types of loans made up 46.5 per cent of
our mortgage loan insurance business last year.
Like all large financial institutions in Canada — and, arguably, globally
as well — CMHC faces heightened expectations for governance, accountability
and risk management.
As part of the government's continuous efforts to strengthen the housing
finance system, Budget 2012 included a commitment to enhance the governance
and oversight framework for CMHC. Specific measures to implement this
commitment would be enacted through Bill C-38.
For example, CMHC's mandate will now include specific reference to the
stability of the financial system, including the housing market, as an
objective of CMHC's commercial activities.
As well, the Minister of Finance will be provided with legislative and
regulatory authorities in respect of CMHC's securitization programs and new
The Office of the Superintendent of Financial Institutions, OSFI, will be
mandated to conduct examinations, at least annually, into the safety and
soundness of CMHC's commercial activities. OSFI will report its findings to
the CMHC Board of Directors and to the Ministers of finance and Human
Resources and Skills Development.
CMHC's board of directors will be increased to 12 voting members from 10,
by adding the Deputy Minister of Human Resources and Skills Development and
the Deputy Minister of Finance.
As a Crown corporation, CMHC will continue to meet its governance and
accountability requirements under the Financial Administration Act and the
Canada Mortgage and Housing Corporation Act. We will also continue to be
accountable to Parliament through the Minister of Human Resources and Skills
The government also announced, in Budget 2012, that it would be moving
forward with a legislative framework for covered bonds. Such a framework
will support financial stability by helping lenders access new sources of
funding and by making the market for covered bonds more robust.
Bill C-38 will establish CMHC as the administrator of the covered bonds
program. This will include activities such as approving issuers, maintaining
a registry of issuers, programs, guarantors and other information and
ensuring that issuers comply with disclosure and other requirements of the
covered bonds program.
All of these changes contribute to the stability of the housing market
and will therefore benefit all Canadians.
Thank you again for the opportunity to be here. I would welcome any
questions the committee has.
The Chair: Thank you, Ms. Kinsley, for those opening remarks. You
indicated that large, multi-unit properties make up a large part of our
loans. As well, a significant portion of CMHC's high-insured loans are in
rural areas because they are not served as well. Could you outline for the
committee what the differences are, if any, in the risks that CMHC insures
and those that private mortgage insurers insure?
Ms. Kinsley: Let me speak to multi-unit residential properties as
an example. In this category, you would think of rental buildings and
nursing and retirement homes as examples. There are certainly differences in
the risk profile. Perhaps the most obvious examples are nursing and
retirement homes because they are dependent on health care support in terms
of some of the operating costs. They are special-purpose facilities in the
way that they are constructed. Again, you are as much risking the operation
of that facility as the property itself. This is an area where the private
insurers do not insure any property. We cannot speak to their motivation as
to why they do not, but we can speak to the fact that they are different
types of entities than, let us say, a homeowner loan that we might insure,
which is really the bulk of our business. In smaller and rural areas, the
issues become ones of critical mass, in many cases. Often, the loss that an
insurer would incur in those areas could be higher because the areas are
sometimes rural, smaller markets. The depth of the market, for instance, in
trying to resell a property, can be very small, and, therefore, the loss can
be higher. Those are examples of the differences in the risk profile of
rural smaller markets as well as different types of residential buildings.
Senator Oliver: As you know, over several years this committee did
extensive work in governance. For instance, the committee looked at
corporations with one person as CEO and chairman of the board and said that
was not right and that in terms of good governance, they should be split. It
also looked at audit committees and said that if people are to be on an
audit committee, they should be financially literate, and the chair should
have a designation such as chartered accountant or something similar.
I am interested to know about the new governance requirements for you and
how you will carry them out. Have you put some machinery in place? If so,
what are those steps? What will the changes be in your governance?
Ms. Kinsley: Thank you for those questions. I will first speak to
a couple of the points you referenced. We very much have been following best
practices in governance as you have described. We have a separation between
CEO and chair. I am pleased to report that of the eight members on our board
today, 50 per cent of them have CA designations.
Senator Oliver: Are there any lawyers? Lawyers are always good to
Ms. Kinsley: I make no comment on that, senator. On financial
literacy, as mentioned in my opening comments, we play a large role in this
area. The 50 per cent composition speaks volumes to the seriousness with
which we take those responsibilities. In many ways, we have already embedded
in governance and oversight at CMHC today the types of things you have
described, at least in reference to those two points.
Going forward in terms of what the bill is recommending, perhaps the
biggest area of change in governance and oversight is the provision that
speaks to the new requirement that the Office of the Superintendent of
Financial Institutions provide an annual review of CMHC's activities. That
would be the largest or most significant change in terms of our governance
Senator Oliver: You will be getting two new directors. The board
will increase from 10 to 12 with two senior deputy ministers added.
Ms. Kinsley: Correct. As I mentioned, we will have a deputy
minister from Finance Canada and one from Human Resources and Skills
Development Canada. They will both come on as voting members. They will
increase our board from 10 to 12 members with their inclusion.
Senator Oliver: Have you set some procedures in place to deal with
the new procedures that will have to take place with oversight by OSFI?
Ms. Kinsley: We are ready for that oversight. Of course, until
OSFI comes in, we do not know what the nature of their inquiries will be.
We have publicly stated for many years that we follow OSFI's guidelines
today as they relate to capital management and other OSFI governance
guidelines. We are familiar with the expectations that OSFI would impose on,
for instance, private mortgage insurers; and we follow many of those
guidelines. In some ways, we have a pretty good sense of key areas that they
would be looking at. However, until they come in and do the work that they
are expected to do, and I am not sure where that will lead, we are open and
pretty good at responding to requests.
Senator Dawson: Before following Senator Oliver's line of
questioning, I want to draw attention to an email that I sent to the chair
earlier. I will quote the document from the Quebec bar in French. They wrote
to Senator Joseph A. Day to be heard on Bill C-38, but said that they would
like to be heard by other committees. I forwarded the letter to the chair
and informed them that Senate committees were already studying the bill if
they any had comments to make. The letter said:
At the very least, the Barreau du Québec is making a formal request
to be heard by the parliamentary committees in the Senate and House of
Commons that will be examining the provisions of Bill C-38.
I did not have the clerk's email, so I sent it to the chair. I forwarded
it to myself because I am Chair of the Standing Senate Committee on
Transport and Communications. I had not received it but was informed that
they wanted to be heard, so I forwarded it to other committee chairs.
Along the same line of questioning on governance issues, you clearly
accept that OSFI is overseeing your activities. Should they not have the
same responsibility for the EDC and the BDC?
Ms. Kinsley: Perhaps that is a question to pose to OSFI. I do not
know what their mandates and requirements are. I believe they are coming to
the committee next. Maybe I can recommend that you pose that question to
Senator Dawson: In that case, I will try to come back for that.
The Chair: They will be here for the second hour of this meeting.
Senator Dawson: I will ask them later.
The Chair: Was that your question?
Senator Dawson: That was my question.
Senator L. Smith: In your presentation and through the documents
that we received on the bill, there is the issue of covered bonds. Will this
replace the guarantee? Would you give us a little insight about the covered
bonds and what this means for CMHC and for consumers?
Ms. Kinsley: With respect to the first part of the question about
whether this will replace the current securitization programs that CMHC
guarantees today, Canada mortgage bonds and mortgage-backed securities, the
answer is no. Covered bonds are intended to be a new way of accessing funds
for the mortgage market distinct from the programs that are in place today.
The big distinction between these two programs is in the case of Canada
mortgage bonds and mortgage-backed guarantees. The underlying loans, or
mortgages, are all insured either by CMHC or a private insurer. The
guarantees offered to investors that they will be paid back at the end of
the day are guarantees offered through CMHC on behalf of the government.
That is one structure that operates today.
The distinction and why covered bonds are a new way of accessing funds is
the proposed legislation prescribes two major differences: First, the
underlying assets will not be insured; and, second, the guarantees to the
investor that they will be repaid are offered by the issuing entity backed
by the underlying assets. In essence, there will be three programs. We
currently administer two of them, which have insured underlying mortgages
and government guarantees to investors; and they will remain the same. The
third program is the covered bonds, which have no government guarantee
related to the assets or to the repayment of the bond principle and
interest. The mechanisms are different and will remain in their different
forms going forward.
For consumers, there are two basic impacts. First, each of these programs
increases the access of institutions to an ample supply of funding for
mortgage lending. In 2008, we saw the circumstances around that when access
to credit was severely restricted as a result of the global economic crisis.
These programs will allow for the facilitation of some access to mortgage
funding for our domestic mortgage market.
At a broad level, consumers will benefit from the access to credit
through these individual programs. At a more precise level, it will affect
the cost that consumers pay through interest rates on the mortgages they
assume. These costs of funds, whether through the guaranteed programs or the
covered bond program, can reduce costs to lending institutions as compared
to their other sources of funds. That cost typically gets passed off in a
competitive marketplace to consumers through lower interest rates. There is
a supply question, an access to funding in the first instance, and a cost
question, which are the resulting costs to consumers through interest rates
that are charged.
Senator L. Smith: Will mortgage-backed guarantees change over
Ms. Kinsley: As a result of the introduction of covered bonds?
Senator L. Smith: Right.
Ms. Kinsley: No, because with covered bonds, again, the
legislation would provide the underlying mortgages can only have a maximum
loan value to 80 per cent. In our language, that refers to low ratio loans.
The Bank Act today, which is something separate from anything we are talking
about, requires that any mortgage above that threshold of 80 per cent must
be insured either through us or through our private sector competitors.
While the provision of the Bank Act is still in place, there will always be,
by legislation, a need for insured mortgages. Those mortgages are not
eligible to be part of the covered bond program.
Senator Ringuette: Basically, Ms. Kinsley, this new covered bond
program that you will be administrating is to provide more liquidity for
Ms. Kinsley: That is correct.
Senator Ringuette: What will be your cost for this new structure?
Ms. Kinsley: We do not have that determined yet. Of course, we
have a fair amount of work to do, assuming the legislation moves ahead, to
identify what the terms and conditions and the detailed operating procedures
will be. The legislation does provide that the cost that CMHC incurs would
be passed on to the issuers by way of fees. It does prescribe that fees
would be set as a result. It is a little premature until we go through that
legwork of fleshing out what the terms and conditions in the context of the
legislative parameters will be and what those fees and costs will be.
Senator Ringuette: These fees will be set by the Minister of
Finance, if I read the legislation right?
Ms. Kinsley: The Minister of Finance has the legislative ability
to set the fees. We will be determining what we believe the fees to be as a
result of the costs that we believe we will incur.
Senator Ringuette: There is no guesstimate at all for the cost of
this program from CMHC?
Ms. Kinsley: Not at this point, senator.
Senator Ringuette: I find it pretty odd that we would put in an
entire piece of legislation to give you the authority to issue bonds to
provide liquidity to Canadian banks and there are no cost estimates involved
with regard to this process at all.
Ms. Kinsley: I want it to be clear: We are not issuing bonds. It
is actually the institutions themselves that are doing that. To the second
part of your question, we do not have an estimate at this point.
Senator Ringuette: Okay. You know that OSFI will be reviewing your
Ms. Kinsley: Yes.
Senator Ringuette: OSFI is in the cost recovery with regard to
their supervision role.
Ms. Kinsley: Correct.
Senator Ringuette: Do you have an estimate of the cost to CMHC of
the review role of OSFI?
Ms. Kinsley: We do not. This will be set by OSFI based on what
they believe the work is that will be required. We do not have a sense of
that. I dare say OSFI may not either, until they get in and get familiar
Senator Ringuette: You certainly, from my perspective, are
insuring non-profit housing for seniors and families. With regard to the
percentage of your portfolio, when you indicated earlier that rural areas
and smaller markets and so on are 46.5 per cent of your insurance portfolio
as of last year, where would the non-profit group be in that portfolio?
Ms. Kinsley: I would like to clarify what we do in this area. For
non-profits, generally that is a subsidy program as part of our
appropriation funding. The government would provide through CMHC
appropriations on an annual basis to allow for the construction or subsidy
of new affordable housing. That is not part of our commercial mortgage
insurance operations. However, there are not-for-profit projects that can be
insured on a commercial basis to the extent that they can be seen to be
commercially viable projects based on the mix of their —
Senator Ringuette: Housing co-ops and so forth?
Ms. Kinsley: They would be an example, perhaps, but not all
co-ops. Again, it depends on the individual properties. We could consider
them for insurance. I can tell you that would be a very small part of what
we do in the area of affordable housing. It is largely, if not the majority,
subsidy appropriation based.
Senator Tkachuk: Welcome, Ms. Kinsley. Page 2 of your presentation
says that OSFI reports its findings to the board of directors, Minister of
Finance and Human Resources and Skills Development. Will these findings be
Ms. Kinsley: My understanding is no. In fact, there are provisions
specifically addressing this in the bill. Like other reviews and work that
OSFI does, that information is confidential. In the bill provisions here, it
is intended that those same provisions apply to the reviews they will
undertake for CMHC.
Senator Tkachuk: You make an annual report.
Ms. Kinsley: We do indeed.
Senator Tkachuk: Will any of those OSFI findings or any of that
information regarding your financial ability to meet your obligation be
included in your annual report, or at least information from the findings?
Ms. Kinsley: We in fact include that today in our annual report,
and not only this year's which was tabled in the house a week ago. In
previous annual reports, we provided extensive information on the quality of
our mortgage loan insurance portfolio, on our capital framework, on the
stress testing that we do and the results of that stress testing and
confidence intervals, et cetera. That will continue. That may get enhanced
if there are other things through the course of OSFI's review they think are
worth us disclosing and reporting on. It certainly can be added to.
I would say to you, yes, we will continually ensure that our public
documents reflect the information that parliamentarians and Canadians need
Senator Tkachuk: CMHC is a government-owned operation, a Crown
corporation, and it has large banking instruments to it as well as the
social housing part. OSFI also, of course, looks after the federally
regulated banks, which are private. Is there any difference in how OSFI will
report to the public on CMHC versus, say, the Royal Bank? For example, if
the Royal Bank was having problems, there would be an alert of some kind. It
would be public.
Ms. Kinsley: Again, I would say to you that there is a difference
in terms of our accountability regime because we are a Crown, and I spoke to
that a bit in my opening remarks. We must follow the FAA and a variety of
other legislative requirements that the private sector obviously would not
be subject to.
In terms of the question of confidentiality around what OSFI will report
or will not as a result of its reviews, we are expecting that it will take
the same view of that with respect to CMHC as it does for the reviews that
they carry out in the private sector, not having been privy to any of these
cycles. You may want to probe a little more with them.
Senator Tkachuk: As head of the Crown corporation, from your own
point of view, in order to be recognized as a financial institution, do you
think the information from OSFI should be made public?
Ms. Kinsley: As I said in my remarks, I think we have to be held —
and we welcome being held — to heightened levels of governance and
oversight. We have to meet that bar, as a Crown institution, no different
than the private sector must meet that bar. When it comes to disclosure of
information, explanations, transparency, and oversight, as was mentioned by
Senator Oliver, these expectations we take on board frankly independent, but
not distinct from, what OSFI would raise. These are expectations that we
must meet. OSFI will help us in that regard, I am quite sure, in being able
to give us insights on best practices and other things. This is an
obligation we have, regardless, in the broader context of risk management
Senator Harb: Thank you for your presentation.
You have a very good track record. How much money did you generate in the
past fiscal years in terms of profit to the Government of Canada?
Ms. Kinsley: In 2011, $1.5 billion.
Senator Harb: That is above and beyond all the expenses you had?
Ms. Kinsley: That is our net income, yes.
Senator Harb: My colleague asked questions about the oversight in
the presence of government deputy ministers on your board, and we will be
asking the next witness whether or not other agencies have the same kind of
representation on their board. If not, it strikes me that you are almost
being shackled and muzzled, and losing the semi-autonomy and flexibility you
had in the past, by not only having government on your boards but also fees
being set by the minister in certain cases.
My question deals with the covered bond program. Who now administers the
covered bond program?
Ms. Kinsley: Today, covered bonds in Canada are issued by the
individual institutions themselves on a contractual basis. I will explain
the difference between that and what is being proposed here. It is the
institutions themselves, through entities they have created, that currently
administer their own covered bond programs.
What is being proposed in the legislation today is that while the process
and guarantees being offered under the covered bond programs today will
remain the same going forward, what the legislative framework does is allow
for standardization and certainty to investors looking to buy those bonds in
terms of what happens, for instance, in the event of default or insolvency
of one of those issuers.
Today, investors have to look to the contractual arrangements within the
covered bond programs of the issuers themselves. In future, they will be
able to look to the legislative framework and the provisions of that
framework to get certainty on how their investment would be treated, for
instance, in the event of insolvency.
The policy objective, as outlined by the government in introducing
covered bonds, was not only, as I described earlier, to provide access or
another access to credit and liquidity, but also to improve the robustness
of the programs by creating that legislative underpinning and greater
certainty for investors looking to invest in this area.
Senator Harb: It strikes me as not diluting but adding more
responsibility to your agency, which is great. Who decided that you should
be the one who administers these bonds? Was it the government who decided,
or have you consulted with stakeholders and found out that the agencies or
entities that are doing it now are not doing a good job; or there is risk,
and therefore you recommended to the minister that, "Minister, maybe we
should administer that"? How did that come about?
Ms. Kinsley: Very simply, the government decided. They did have a
consultation paper, which was made public, on the whole area of covered
bonds. That paper asked many questions, only one of which was the question
of how this should be administered. I am not privy to the responses from the
consultation, but as a result of that process, the government announced that
we in fact would be the administrator.
I do want to clarify a point. It is important to recognize that it is not
because there is anything wrong with the programs that are in place today.
Many investors around the world are even prohibited from investing in
covered bonds unless there is that certainty of national legislation to
protect their interests. This is a question of enhancing an instrument that
is out there through a legislative framework.
Senator Maltais: You say in your report that 46.5 per cent of
CMHC's lending is in the regions and more remote areas. Compared with urban
centres, how difficult is it in the regions, where you said there have been
Ms. Kinsley: I would say again that the key difference between
smaller markets and urban centres really comes back to critical mass. In
smaller markets, if you think of a lender who takes back a home that has
been insured by us, they have to provide services while that home is being
resold: cut the grass, shovel the snow. It becomes, in many cases, more
expensive just to hire people in some of the smaller, more rural areas, in
addition to the fact that the market to sell that home ultimately is less
deep than you would find in an urban centre. As a result, the costs
associated with losses can, in fact, for those reasons, be higher in the
Senator Maltais: Was it not one of the goals of the Canada
Mortgage and Housing Corporation, at the time it was created, to allow as
many low-income Canadians as possible to buy property without being squeezed
by interest rates, which, at the time, were somewhat exorbitant, because the
banks really had no presence in the regions, and there were very few lenders
there? That is why CMHC was created.
Now when you are talking about resale value, you have to look at the
construction value. Do you have standards in place with respect to a small
town, for example, on a street where houses are worth $100,000 and someone
builds a $450,000 house at the other end of the street? Even if the person's
income would warrant that, when it comes time to resell the property, I do
not think it would be possible to secure that price. Do you monitor that
kind of thing?
Ms. Kinsley: Yes, absolutely.
Again, for clarity, we were actually created back in 1946 to house
returning war veterans and to create housing for that generation of
veterans, so our housing finance role actually did not evolve until the mid
to late 1950s. We actually began as a provider of affordable housing and a
builder of communities, if you will. That is just a little history on that.
I noticed you said "la centrale," so you are close to our roots,
because I think most people in Quebec have changed the name. You are
absolutely right; we do look at the value of a home when we are insuring it;
and you are correct that homes in smaller and rural areas cost less for
construction; and the market will demand less in terms of price than for a
similar home, let us say, in downtown Toronto.
With every loan we adjudicate, on a loan-by-loan basis, both we and the
lender determine whether that property is being valued in its proper market,
at the right level, before we agree to insure it. If we have a $400,000 home
on a street that is $100,000, needless to say we would have significant
questions to ask as to whether that made sense in the context of that market
before we would even offer insurance on it.
Senator Maltais: I have a question about "social" housing, an
area where you have regular involvement. I am of a certain age and I have
never seen a government issue a budget that met the demands of social
groups. Is that just a habit or is that just the way they work? Is the
government investing enough in social housing projects for low-income
Canadians or seniors? Is the government investing enough in cooperative
projects with the provinces, or will we continue to hear forlorn complaints
from social groups after every budget, for centuries to come? If you build
30,000 units, they want 60,000; if you build 60,000, they want 90,000, and
so on. How far can this go? Is there any sort of median standard in place to
guide you, where you could say: "We are setting this amount of money aside
and that should be enough for everyone to have housing?
Ms. Kinsley: We look at the question of need through what we call
core housing need statistics. We have a very precise definition of people
who are unable to afford housing with their own resources. It is normally a
30 per cent measure, and Statistics Canada, through the Census information,
provides us with what percentage of Canadians fall into that group.
When we talk about the level of need out there, it actually is a very
precise number, distinct from what some may think should be provided.
To your second question around what the government is providing or doing
in this area, I can tell you that, on our appropriation side, we get
appropriations that approximate $2 billion per year in this area. Of that $2
billion, $1.7 billion relates to subsidies for the existing social housing
stock. That is an annual amount that continues, and it supports just over
600,000 low income Canadians. In addition to the subsidy of the existing
stock, the government has announced a framework for new affordable housing,
totalling $1.4 billion over the next three years. That is cost shared 50/50
with each of the provinces and territories. I am pleased to say that we have
now got unanimous agreement from provinces and territories to enter into and
begin to deliver that new framework, under those terms and conditions, so
they will add their 50 per cent to the federal government's 50 per cent. Of
course, the last significant point that I would make, with respect to
funding, is that, through Canada's Economic Action Plan, CMHC was given a
further approximately $2 billion to deal with renovation of existing social
housing and construction of new housing. These are significant amounts of
money that are being spent in partnership with province, territories,
nonprofits and co-ops.
The question of need is actually a very precise measure.
Senator Maltais: I have one last question; I think it is an
important one, and I do not know whether you will be in a position to answer
me. For 20 years now, we have observed a phenomenon in Canada, in the large
cities, known as the "homeless". It is an urban phenomenon, because you do
not really see it in the regions, or not very often, only in exceptional
cases. Is there any way CMHC, working with the provinces and territories,
could resolve this homelessness problem once and for all — I do not know how
many people are affected, as I do not have any statistics on it — that we
hear so much about? I find it rather inhumane that people, whoever they are,
should be forced to sleep outside in the winter on subway air vents or in
public areas, with no heat or sanitary services available. Will it be
possible some day to find a solution to that?
Ms. Kinsley: First, the whole issue of housing for the homeless is
not part of the mandate of CMHC but is part of the portfolio of Human
Resources and Skills Development. They do have an initiative called the
Homelessness Partnering Strategy. We are very close to that because, as you
can imagine, housing is a continuum from those who do not have a home right
up to the market housing that we are talking about, by and large, today.
The Homelessness Partnering Strategy is an initiative that the department
runs in 60 communities across the country, in conjunction with local
communities, municipalities and stakeholder groups in provinces. I think
they would suggest to you that they have made good progress over the years.
The question of whether you can eliminate homelessness completely is a
difficult thing. Many people, even when there are shelters, will, for
various reasons, choose not to use them. It is a very complex issue because
it deals not just with the lack of housing but also, in many cases, with
other issues around mental health, addiction and so on.
I do not pretend, in that complex world, to understand it all, but I
certainly understand its dynamics as it relates to housing.
Senator Moore: Thank you, witnesses, for being here.
My first question was covered by Senator Tkachuk as I, too, thought that
reports dealing with the activities of agencies handling public funds would
be made public. I do not know why it was put under OSFI. I hope that was not
done to avoid public scrutiny. I do not know that you have answered the
senator's question about what you will include in your report in terms of
what OSFI found. You may be limited in what you can say; I do not know. We
will have to wait and see how that unfolds. Do you know how that will work?
Have you had discussions with OSFI as to how much you will be able to say in
your report with respect to their findings?
Ms. Kinsley: Not at this point, senator. Again, I would suggest
that OSFI can give a more fulsome answer on this. I would expect that they
will treat us similarly to how they would treat others they review, and the
recommendations, to the best of my knowledge, are not particularly
attributed to OSFI in annual reports and so on. That is not to say that the
findings or the recommendations that they make will not be taken on board
and will not in fact find their way into the annual report, corporate plans
or other public documents. As to whether it would say that OSFI recommended
this and CMHC did that, I do not believe it will be that specific.
Senator Moore: There is quite a difference between CMHC and the
senator's example of the Royal Bank. Anyway, we will see how that unfolds.
I had two questions. On the second last paragraph, on page one of your
presentation, you say that CMHC's mandate will now include specific
reference to the stability of the financial system, including the housing
market, as an objective of CMHC's commercial activities. How will that
unfold? How does CMHC focus on that, and what do you look at? The housing
market should be an objective of your commercial activities?
I guess you are not doing that now. Maybe you are. Could you explain
Ms. Kinsley: Certainly. In the National Housing Act today — and
they will remain in it — we have objectives with respect to our commercial
activities, for instance: to increase the supply of funding to mortgages and
the accessibility of housing for Canadians and to improve the general
functioning of the housing market.
These new objectives in the bill add precision to that in the context of
heightened expectation for clarity and transparency, governance and risk
management. It is saying that the things CMHC does in the commercial area
must be done with due regard, consciously and explicitly, to issues around
stability in the housing market and as that relates to stability in the
overall financial market.
The bill elaborates that a little bit further and says with respect to
the broad objective at 7.1:
(a) to promote the efficient functioning and competitiveness
of the housing finance market;
Arguably, that would be seen in our objectives today.
(b) to promote and contribute to the stability of the
financial system, including the housing market; and
That broader reference to the financial system is not in our objectives
today and is being added explicitly.
(c) to have due regard to the Corporation's exposure to loss.
We have to balance our public policy mandate and commercial activities
with what is seen to be appropriate in the context of a stable housing
market and, ultimately, its support to a stable financial system.
Senator Moore: The housing sector seems to be one of the main
topics of discussion in terms of the stability of the financial sector. Is
Ms. Kinsley: Yes.
Senator Moore: Do you have ongoing discussions with the main
person in charge of that: the Governor of the Bank of Canada?
Ms. Kinsley: We do share information continuously.
Senator Moore: That is a very important one.
Ms. Kinsley: Yes, extremely important, and also sharing info with
the industry at large.
Senator Moore: You mentioned that the covered bonds program will
include activities such as approving issuers. What will the standards be?
How will you gauge whether an issuer satisfies and is appropriate to be
Ms. Kinsley: The proposed legislation actually outlines some of
the applicant criteria that will be expected for issuers under the program.
It is found in clause 356 of the bill, which says that an application must
contain a description of the loan, a description of the assets, information
on credit worthiness and on the entity that will guarantee this issuance
information — who will service these loans and who the backup servicers are.
There is a fair amount of information prescribed in the bill as to what we
would look at.
Senator Moore: You said that insured mortgages are not eligible.
Ms. Kinsley: That is correct.
Senator Moore: Yes. What sort of institutions do you anticipate
making application to be issuers?
Ms. Kinsley: We would expect all the large federally regulated
institutions. The bill also provides for provincially regulated credit
unions, for example. We will wait and see, but I imagine that all the large
federal federally regulated institutions today that have covered bond
programs in place would want to come forward and participate.
Senator Ringuette: Two years ago, the Government of Canada
proceeded to buy about $22 billion worth of mortgages. I cannot be sure of
the amount. Was it $55 billion?
Ms. Kinsley: It was $69 billion.
Senator Ringuette: They did it in two transactions.
Ms. Kinsley: You are absolutely right, senator. It was what was
authorized and it started at $25 billion.
Senator Ringuette: We were told that most of those mortgages were
Ms. Kinsley: They all had to be insured.
Senator Ringuette: They had to be insured by CMHC.
Ms. Kinsley: They all had to be insured by either CMHC or our
private sector competitor.
Senator Ringuette: It is a common practice for financial
institutions to bundle mortgages and auction them on the market. I believe
that this bill will prohibit banks from including CMHC insured mortgages in
Ms. Kinsley: That will be only in the covered bond program,
senator. I have been trying to make the difference between the existing
securitization programs in place today that are guaranteed by the
government, and where there are insured loans. Those programs continue. This
particular covered bond program will prohibit insured loans as the
Senator Ringuette: It is guaranteed in a way by the Government of
Canada through this bill.
Ms. Kinsley: No.
Senator Ringuette: It provides the framework, as you said earlier,
for more security for takers.
Ms. Kinsley: There will be more certainty around the framework,
but to be clear, there is no guarantee that this bill is providing.
Senator Ringuette: You indicated that last year your net profit
was $1.5 billion. Were you requested by cabinet to make cuts? If so, I have
four questions for you:
How many employees in your department got a notice letter of layoff, by
province and classification?
How many would have been in the EX and DM categories?
How many staffers in your department are not under the Public Service
Employment Act and under what classification?
What is the cost to your department for program management salaries,
expenses, bonuses et cetera?
The Chair: Ms. Kinsley, we have heard these questions continually
over the last week asked of other witnesses. You are not singled out on
Senator Harb: I am sure Ms. Kinsley will send a reply to all of
those good questions.
I will go back to the government announcement in 2011 on the three-year
$1.4 billion program. In your presentation, you said that the program was
shared 50/50 between the provinces and the federal government.
Ms. Kinsley: Yes.
Senator Harb: All the provinces contribute 50 per cent, so when
you do the program delivery in those provinces, do you also do it on a 50/50
Ms. Kinsley: The $1.4 billion framework announced is federal
funding, and 50 per cent of that amount will be added by the provinces and
territories that chose to adopt the framework.
All the provinces and territories accepted the framework, with two
exceptions with respect to delivery: Yukon and Prince Edward Island, where
they said for critical mass and other capacity reasons, they wanted to
maintain the existing delivery arrangements. All the provinces and
territories said, yes, in principle and that this is where they want to
head. By and large, they are all cost sharing; but we have those two
exceptions that agreed with the principles but, for practical reasons,
wanted us to continue to deliver.
As well, the framework gave flexibility to the provinces and territories
to design and deliver their programs. The view was that the provinces and
territories are in the best position to understand the housing needs in
their jurisdictions and to be able to respond to those needs with the
appropriate program tools.
With the exclusion of those two jurisdictions, the provinces and
territories will decide within the federal principles, how they will
implement programs to serve the needs of their citizens.
Senator Harb: Thank you. So if not 50/50, it could be 25/75.
Ms. Kinsley: No. I am sorry. The cost sharing is mandated at
50/50. There is no latitude on that. They do have latitude on how they
choose to spend that money in terms of program design.
Senator Oliver: Senator Harb asked you in his first question about
your profitability, and you said that in 2011 it was $20.5 billion. I do not
think Canadians understand the extent of your book, your assets, your
holdings, your portfolio. Could you tell us your numbers? How big are you?
Senator Harb: Or how small?
Ms. Kinsley: I would be happy to provide you some stats. Our
insurance in force, which is a big part of our commercial activities, is
$567 billion at the end of December 2011. Our asset base is $291 billion at
the end of December 2011. Our total revenues last year were about $14
billion; net income $1.5 billion. As has been noted, we are a large
The Chair: Following that up, you obviously have a write-off
policy, a manner in which to provide for bad debts, et cetera. At any time
in your history, have you had a significant one-time write-off?
Ms. Kinsley: For bonds?
The Chair: No, for your receivables for the mortgages.
Ms. Kinsley: In our mortgage insurance activity, we provide for
claims. That is the nature of the business. Perhaps I could answer the
question in that context. Have we ever had big losses in our mortgage
insurance business? Is that the right interpretation?
The Chair: Yes.
Ms. Kinsley: Certainly we have had losses. Think of the recessions
in the 1980s and 1990s. Since we have become commercialized, which was in
the 1990s, we have been able to handle all of those cyclical patterns within
the revenues that we collect on premiums and fees.
The Chair: On behalf of all of the members of the committee, I
would like to thank you, Ms. Kinsley, for being with us today.
Mr. Gignac, we did not really have a chance to hear anything from you,
obviously a reflection on Ms. Kinsley's answers to us. We thank you and wish
you all the best.
Honourable senators, in the second half of our meeting, we will hear from
officials also from the Office of the Superintendent of Financial
Institutions. We are pleased to welcome Penny Lee, Senior Director, Property
and Casualty Insurance Group; and Patty Evanoff, Senior Director,
Legislation and Approvals Division. Colleagues, we have one hour for this
Ms. Evanoff, the floor is yours.
Patty Evanoff, Senior Director, Legislation and Approvals Division,
Office of the Superintendent of Financial Institutions Canada: I am
Patty Evanoff, and I am Senior Director of the Legislation and Approvals
Division at OSFI. With me today is Penny Lee, Senior Director of the
Property and Casualty Insurance Group. Thank you for having invited us to
appear before you regarding certain sections of Bill C-38, the Budget
As you have already heard this morning, under the proposed legislative
changes, OSFI would be responsible for reviewing and monitoring the safety
and soundness of the commercial activities, meaning largely the mortgage
insurance and securitization programs, of the Canada Mortgage and Housing
OSFI would review and assess the elements that we typically look at in
federally regulated financial institutions that do the same business. We
currently supervise three private sector mortgage insurers. In those
institutions, we look at areas such as risk management around the use of
their internal financial models, the adequacy of reporting to senior
management and the board of directors, the documentation of underwriting
decisions and the adequacy of their stress testing programs.
At the same time, it is important to recognize that CMHC is a Crown
corporation with a social policy mandate, and that is beyond the proposed
scope of OSFI's supervisory role. CMHC is also subject to governance and
accountability requirements, as was discussed this morning, set out in its
In addition, the government establishes rules governing CMHC's
activities, such as its size and shape and, of course, sets the rules on the
boundaries around insured mortgages.
If Bill C-38 were to receive Royal Assent, OSFI would begin a program of
reviewing and assessing CMHC's commercial operations, and we would report
our findings and recommendations to the CMHC board of directors and to the
Ministers of Finance and HRSDC for their follow-up.
This responsibility for OSFI is a new one. Given the size and complexity
of CMHC, it will take some time for OSFI to fully assess its commercial
operations, as would be the case for any new private sector institution
supervised by OSFI. We are currently considering our operational plans with
respect to this new role.
Ms. Lee and I would be happy to respond to your questions, senators.
Thank you very much.
The Chair: Thank you for your opening remarks, Ms. Evanoff. You
obviously would have a regulatory process for supervising mortgage insurers.
With the complexity of what you are taking over, will your usual practices
differ for CMHC from what you do for the private mortgage insurers that you
Ms. Evanoff: We will be applying our risk-based supervisory
framework, which is flexible and focuses on the significant activities
undertaken by a financial institution, to CMHC. Perhaps I will turn to Ms.
Lee for a specific response, given her responsibilities for supervision.
Penny Lee, Senior Director, Property and Casualty Insurance Group,
Office of the Superintendent of Financial Institutions Canada: I want to
add to some of the remarks that Ms. Evanoff made in her opening remarks. In
carrying out our supervisory work, we use an internal supervisory framework.
That is our tool that helps us in terms of executing on our work. We measure
each risk within an enterprise, and we look at the controls in place to
manage those risks. We look at risks such as credit, market risk, as well as
insurance risk and operational risks, to name a few. Our primary focus is on
safety and soundness.
The framework also requires us to be forward looking in terms of risks.
We are looking at ways that we can identify what are developing and
potential risks. We bring that to bear in how we execute our work.
Our work also includes what we call risk assessment reviews, which
consists of on-site reviews at institutions as well as continuous
monitoring. Our work is risk based, so from time to time we will have to
adjust our priorities in terms of our work,
Our framework covers all of the material elements that contribute to the
risk profile of an institution. We will look at things such as risk
management practice, underwriting practices, risk governance and oversight,
as well as the solvency position of an institution, including its capital
That summarizes the framework, in a very brief overview, of what we do.
Senator Tkachuk: Welcome. I want to follow up on some of the
questions I had asked earlier. I think you were observing what I asked the
previous witness. You mention that you manage three other insurance
organizations. They had said that the reports will go to the minister, but
they will not be made public. When you are doing the private institutions,
what happens to the information?
Ms. Evanoff: The nature of our role very much depends on
confidentiality. That is true not just of OSFI but also of all our global
counterparts. There are two fundamental reasons for that. One is to protect
the institutions commercially sensitive information because it operates in a
world of competition. As we mentioned, CMHC has three private sector
competitors. In addition, equally as important but slightly different,
confidentiality also promotes a spirit of openness with respect to the
regulated entity. If you were to make supervisory findings public, you would
find that you would be getting less important information from the senior
management, et cetera, of the supervised institution. Confidentiality is a
tenet of prudential supervision around the world.
Senator Tkachuk: That was not what I was getting at. I am not too
concerned with the soundness, obviously. You do not want to have private
market information out. However, if there were a problem, what would happen?
What do you do when there is a problem? When there are findings that show
that the financial institution is in jeopardy, what action do you take?
Ms. Evanoff: Our mandate requires that we determine whether
financial institutions are in sound financial condition, obviously. When we
find something that is an issue, we either take action or require that
action be taken by the institution to correct the deficiency. We have a
number of ways of doing that including — and perhaps most importantly —
working with the senior management and the board of the institution, who are
responsible for running it and for taking corrective action. Perhaps Ms. Lee
would like to elaborate.
Ms. Lee: It is great that we only talk about the times when things
are bad. If we go down that route, then we will have to speak about things
that are good, and people can also misinterpret what happens. That is why it
is really important that our information be kept confidential.
Senator Tkachuk: These are questions mostly probably to you, Ms.
CMHC has social housing programs as well as commercial ones. How would
you separate that? How does CMHC separate that? How would you know what is
social and what is commercial? Do they have separate corporations, or are
they all commingled?
Ms. Lee: I believe that, within their commercial operations, they
are actually separate. We do not know enough about CMHC right now to really
understand how it is made up, but my understanding is that it is separate.
Senator Tkachuk: Do they do it with a separate corporation or just
a separate set of books?
Ms. Lee: My understanding is that it is still part of the overall
Senator Tkachuk: Do you have any concerns or see a possibility
that their social programs would jeopardize the financial stability of their
private commercial lending ability?
Ms. Lee: That is a good question. Right now, it would be premature
because we have not really been into CMHC to understand how that would
impact their commercial operations. It is something that we will be looking
at as we work our way through CMHC.
Senator Tkachuk: If the Banking Committee called you every couple
of years to ask about CMHC, would you come and testify?
Ms. Lee: I would gladly come.
The Chair: I will note that.
Senator Tkachuk: Mark that down.
The Chair: Thank you for that question and for that answer.
Senator Dawson: I am a big fan of OSFI, and not many people are
because you are not known. I think you are the Canadian financial system's
best kept secret. I have always been impressed by the quality of your work.
I might be asking the wrong question and asking it to the wrong people, but
you heard me before.
Now that you have CMHC, what about BDC and EDC? If you are inspecting
banks, insurance companies, CMHC and Farm Credit, am I wrong in thinking
that the only two exceptions of that kind are BDC and EDC?
Ms. Evanoff: The government has chosen to add CMHC to our
responsibilities, which, right now, are only for private sector financial
institutions and private pension plans, because of the fact that we regulate
the three private sector mortgage insurers already. We have the experience
that we can draw on to take on this role.
As for the other two government institutions, or perhaps others, that is
really not a question that I can answer because it was a government decision
to give us CMHC.
Senator Dawson: I should have been here to see the minister
yesterday; I could have asked him.
Senator Oliver: I think that Ms. Evanoff has probably just
answered the question I was going to ask because she says that they already
cover the three private insurers. If this bill passes — now that CMHC will
be under your wing and since so much of what you do is risk-based assessment
— will it help your assessment of banks now that you will be supervising
both the lenders who underwrite the mortgages and the mortgage insurer who
insures against default on these same mortgage? Will that help your
assessment of our commercial banks? If so, in what ways?
Ms. Lee: Thank you for your question. I think it actually will
give us a broader view of the housing market.
Senator Oliver: I would have thought so.
Ms. Lee: What we find is that mortgage insurance — debt-insured
mortgages — is certainly applicable to the lenders. That will give us a
broader picture of it, so that should be helpful.
Senator Oliver: Are the three private insurers as big as CMHC?
Ms. Lee: No, they are about 20 to 25 per cent of the market.
Senator Oliver: Getting 75 per cent will really help since you do
so much risk assessment.
Ms. Lee: Exactly.
Senator Hervieux-Payette: You are doing an excellent job. During
the crisis in 2008 and 2009, our Canadian banks, such as CIBC and the Bank
of Montreal, received support from the Bank of Canada, Americans, and the
Canada Mortgage and Housing Corporation.
Given that your role is to supervise the banks, did you advise the
Minister of Finance of these problems? You were the first ones to draw
attention to this and help find a way to ensure the soundness of our
financial system. Did OSFI play a role there?
Ms. Evanoff: During the financial crisis, which, as you know, had
limited impact on Canadian institutions, I think many central banks and
other entities around the world set up liquidity support facilities that
were a little beyond the standard facilities, allowing otherwise healthy
institutions in their jurisdiction to take advantage of them if there were
In terms of what we advised and how we discussed conditions during that
period, I think you have heard from us before about the Financial
Institutions Supervisory Committee, which is chaired by the superintendent.
It has the governor of the central bank, the chair of CDIC, the head of the
Financial Consumer Agency and the Deputy Minister of Finance on it. There
would be regular discussions on what was happening globally.
Senator Hervieux-Payette: Based on the mandate you have now been
given with respect to Canada Mortgage and Housing Corporation, will you be
receiving monthly reports on the process of reviewing the institution's
soundness? Will you be sending people to CMHC to inspect their books every
three months? What process or mechanism is in place to ensure that CMHC does
not present any undue risk and that you are able to keep the Minister of
Finance informed of its financial situation?
Ms. Lee: As CMHC is a new responsibility for OSFI, it will take us
some time to understand the key risk drivers within CMHC and how well they
are managed. As I mentioned before, the supervisory framework calls for
continuous monitoring and risk-assessment reviews. Right now we are
assessing what the supervisory plan would be for CMHC and how we will be
executing that. Part of that will be utilizing resources that we have
internally, and we will also need to hire additional resources. At least
once a year, we will be reporting to the board of CMHC, as well as the
Ministers of Finance and HRSDC.
Senator Hervieux-Payette: As for the banks, will you go on site
and examine the books and ask questions, or will you just receive monthly
reports from the institution? Do you physically go to the institution?
Ms. Lee: Physically, we go to the institutions, and we meet with
senior management. We meet with operational management. We meet with even
boards of directors from time to time.
Senator Hervieux-Payette: What would be the difference between
CMHC and the two other private companies in the sector? I suppose that the
portfolio at CMHC in Canada is probably bigger than the portfolio of
Genworth, but all in all, Genworth is an American company and much bigger
than CMHC. You have a system in place. Would you put in a different system
for Canada Mortgage and Housing Corporation, or will all the institutions
dealing with the same kind of business be analyzed the same way?
Ms. Lee: Our supervisory approach for CMHC will be similar to what
we do today for private mortgage insurers.
Senator Hervieux-Payette: My colleague asked this question of the
previous organization. Reporting will be done by whom, to whom and how will
we be informed? You will do the assessment and supervision of the CMHC, and
of course this will fall under the Ministry of Finance. What will
parliamentarians get at the end of the day? It is important that we know
what type of reporting we will get. Will it be like an annual report of a
corporation, like a Genworth report, or a different report?
Ms. Evanoff: The legislation provides that we report to the two
responsible ministers and to the board of directors. The ministers and the
board then become responsible for acting on any recommendations that we
have. I believe the legislation also provides that CMHC has to develop a
plan to respond to any such recommendations through its corporate planning
As we noted this morning, we would not have our supervisory findings made
public because of the importance of confidentiality with respect to our
mandate and the mandate of any similar global regulator. However, Ms.
Kinsley said this morning that CMHC does provide financial disclosure as
well as other commentary through its annual report.
Senator Hervieux-Payette: The figures that we will get from her
will be the same figures, except we will not have the recommendation.
Ms. Evanoff: Not the specific recommendations, no.
Senator Hervieux-Payette: It is the same figures about where the
money went and which programs and so on are in place. We receive an annual
report from CMHC every year. I wanted to know what will be done with regard
to the Canadian public and also parliamentarians with regard to the kind of
reporting mechanism. Will it improve the information that we get? Will your
supervision end up just saying that maybe some ratios are out of line with
the ones established for this kind of business?
Ms. Evanoff: Senator, I think it would be similar to that of a
private sector situation in that we would expect institutions to act on our
supervisory recommendations, to the extent that we have any, which will make
their underlying risk management systems more robust and then, perhaps, lead
to improvements of various kinds that would potentially be reported out
through their public disclosure.
Senator Hervieux-Payette: Were you asked as experts when the $69
billion were given as help to the banks to go through the liquidation
crisis? Were you asked for your opinion as to whether this was something
that could put CMHC at risk? Someone somewhere certainly said, "Yes, let us
go ahead," and it came from the Ministry of Finance, which would have given
permission for CMHC to buy back $69 billion of mortgages.
Ms. Evanoff: There would have been consultation among the
agencies, no doubt led by the Department of Finance, on any programs that
were being put in place at the time. Those, again, were allowing our
financial institutions to get liquidity or funding if they needed it.
Senator Hervieux-Payette: But it was not your unit that did the
assessment of the risk?
Ms. Evanoff: With respect to CMHC, no.
Senator Maltais: I would like to come back to the three insurers
that you are supervising. Rest assured that I will not be asking their
names, but I would like to know what prompted you to step in and supervise
these people? Did you receive negative reports? Were there any indications
to suggest that things were not as clear as they should be? How did this
Ms. Evanoff: We regulate all federally incorporated financial
institutions in this country. However, we only have three federally
incorporated mortgage insurers, but we are responsible for them all. We were
not given them; they are quite naturally subject on to our supervision under
the Insurance Companies Act.
Senator Maltais: I see. I have another question. You say in your
brief that Canada Mortgage and Housing Corporation is a Crown corporation
with a social policy mandate. The officials who appeared before you clearly
explained their mandate and actions with respect to social policy. Does
social policy present more of a risk than an ordinary business policy? Would
social policy with respect to social housing for disadvantaged Canadians,
seniors or people living in remote areas be any different from policies
applied by any other insurer?
Ms. Lee: Until we actually get into working with CMHC, it is hard
for us to really give you an opinion right now on their book of business. It
is very difficult because we do not have enough information on it.
Senator Maltais: Perhaps we could make some suggestions. I would
like social policy to be seen in a different light from the usual business
policies. I believe a comprehensive view is needed of what this could mean
for the citizens of this country. Social housing policy must remain a
priority. I imagine that you will bear that in mind when the time comes to
look at their books. When you carry out your review, I suggest that you
consider the social impact.
Ms. Evanoff: I would like to emphasize, however, that OSFI has
been given this role so we can use our expertise around the business that
private mortgage insurers are doing and our supervision of that business,
and bring it to bear on CMHC's business. That really is with respect to
their commercial operations. The social mandate operations of CMHC are
really beyond the scope of the role that we have been given.
The Chair: I think that the committee would concur that we would
not want you to deviate from that approach.
Senator Harb: Thank you very much for your presentation. These are
very difficult questions that you are faced with in that CMHC does not have
only a commercial mandate but it also has a social housing mandate. In your
assessment, how would that differ say, for example, from the Auditor
General, who goes into departments and agencies and does assessments, value
for monies and other reporting?
Ms. Evanoff: The Auditor General looks beyond the pure financial
activity of an entity to the extent they have them. It really is there for
value for money and whether the government entity is meeting its mandate,
whether there are any improvements it can make on how it meets its mandate
and so on. We are doing something different. The thinking we are bringing to
bear on CMHC is as a financial sector supervisor and as a prudential
regulator concerned with the safety and soundness of a financial institution
determining whether financial institutions are in sound financial condition.
We are not examining its activities in totality.
Senator Harb: You mentioned earlier you still do not know how you
are going to get around it. There must be someone who knows. Did this
initiative come from your agency or was it a government initiative or was it
a CMHC initiative? Who came up with this idea?
Ms. Evanoff: It is a government initiative, senator.
Senator Harb: There must have been some discussion with your board
in terms of the background, what caused this to come about. In your answer
to one of my colleague's questions you said that there is an element of
confidentiality when you do an assessment, which makes a lot of sense, and
you deal directly with the organization that you are assessing. In this
particular case you seem to not only go to the board of directors but also
you go to the Minister of Finance and the Minister of Human Resources.
According to the bill that is proposed, in those two departments you already
have two representatives. Why go beyond that? Why not just stop at the board
of directors, since those agencies have already been represented on their
board of directors, so you do not have to confuse yourself? They already
have a reporting mechanism through the board of directors. The Minister of
Finance already has his representative, as well as the Minister of Human
Resources. It strikes me if I were to do it I will treat it like I treat all
of those other agencies. I will deal with them and report to their board of
directors, or whatever management they have, and leave it at that. To push
further, it will create more confusion than anything else.
Ms. Evanoff: Again, that was a decision made by the government. In
terms of the reporting framework, I would imagine it simply reflects the
fact that CMHC has oversight by the two responsible ministers for various
parts of its activities.
Senator Stewart Olsen: Thank you for coming. It has been very
interesting. I certainly understand and respect the confidentiality that
guides your whole operation.
I would like to follow up on the reporting mechanisms. You would make
your report to the board and how do you then follow up after that? How soon
would you come back and see if your recommendations had been taken and what
Ms. Evanoff: Ms. Lee has already mentioned our continuous
supervisory approach. I will turn the question over to her.
Ms. Lee: As the part of our continuous supervisory regime, we
would be expecting a plan of action from CMHC and we would be following up
on not only the plan of action but also proposed time lines. That will be
part of our regular, ongoing supervisory work with CMHC.
Senator Stewart Olsen: Then, supposing there was nothing and you
had a good clean report, do you do annual reports? How often do you go in? I
am not referring just to CMHC but any one of your oversight businesses and
banks. How often do you do your reviews?
Ms. Lee: We will go into companies depending on their size, their
risk level and their complexity.
Senator Stewart Olsen: Is it based on risk?
Ms. Lee: It is really their risk profile, and for a large bank it
could be numerous times in a year. With CMHC, we are committed to doing at
least one risk assessment review annually. It may be more than one. That
would depend on what we see as the risks within the enterprise.
Senator Stewart Olsen: This would be a real guess for you because
you have not been in and you do not know the scope. When would you be coming
back with your first report? How long do you think that might take?
Ms. Lee: That is a very good question. I believe we have committed
to doing reporting annually, so we would probably be committed to starting
reporting at least by next year. It would be as soon as we can.
Senator Moore: Thank you both for being here. I believe in answer
to Senator Maltais' question you said that you are only looking at the
commercial activities of CMHC. Specifically, what are those?
Ms. Evanoff: The mortgage insurance program and securitization are
the two best examples and the largest examples.
Senator Moore: That was the mortgage insurance part. The insurance
enforcement is $567 billion, so would you be focused on that part of their
Ms. Evanoff: Yes, sir.
Senator Moore: I asked this question yesterday of people from
Finance and they thought they might be able to get back to us with an
answer, but I will also ask you. We had that asset-backed commercial paper
situation, with Canadian investors at risk for $33 billion. If this
legislation passed and it was in force then, would that situation have been
Ms. Evanoff: I am afraid I cannot really answer that, senator.
Again, it was not bank-sponsored, asset-backed commercial paper that was
ultimately the majority of the problem; it was issued by non-OSFI regulated
Senator Moore: Would you not have had the opportunity to look at
their liquidity and so on because they were not federal?
Ms. Evanoff: That is correct.
Senator Moore: Had they wanted to, if this passes, they could
apply but then they would have to pass CMHC's examination.
What is the budget of OSFI per year; do you know?
Ms. Lee: I am sorry, but I do not know.
Senator Moore: Maybe you could send us that information.
How many employees are there?
Ms. Evanoff: Just over 500.
Senator Moore: Would you have to add anyone to complete this work
Ms. Evanoff: We will have to add some additional resources. We are
currently considering how many. When you consider our 500 and some people,
bear in mind we see 400 and some financial institutions. We have a process
within supervision for determining how to allocate resources to an
individual institution based on various metrics, and we would be doing that
same kind of analysis.
Senator Moore: Please let the clerk know what you come up with
there to give us a feeling for that.
Senator Ringuette: Regarding your supervisory role for financial
institutions, you have a cost recovery schedule. What is the percentage of
your cost recovery for your operation?
Ms. Evanoff: All of our costs are recovered from the financial
institutions that we supervise. There are assessment regulations that
provide a formula for the amount each type of institution pays. I believe
that it differs a little, at the moment, between deposit takers and
insurance companies. One might be based on a different metric. It attempts
to capture with fair justice our supervisory time allocated to individual
Senator Ringuette: Could you provide a copy of that to our clerk
Ms. Evanoff: Yes.
Senator Ringuette: Ladies, you are the lucky winners of my four
bingo questions. I understand that you will not have the answers with you
today but please provide them to the clerk of the committee:
How many employees in your department got a notice letter of layoff, by
province and classification?
How many were EXs and how many were DMs?
How many staffers in your department are not under the Public Service
Employment Act and under what classifications?
What is the cost to your department for program management, i.e. what is
the total for salaries expenses bonuses, et cetera, for management level of
your department and programs?
Ms. Evanoff: We will get you that information, senator. Thank you.
However, we do not run a government program, per se, so the answer to
your third question certainly is zero.
Senator Ringuette: You certainly have management, in that you are
managing a program. You manage the supervision of financial institutions,
which is a program in itself. I understand it is not a government program,
but it is a program within your unit.
Senator Oliver: We heard from our previous witness about the
extent of the magnitude of that business; and it is quite large. You have
indicated that you hope to have a report by the end of the first year, and
that there is an awful lot of work to do because you are unfamiliar with
what they really do. Will it be necessary for you to hire new employees to
supplement your staff? If so, how many employees; have you done a budget;
and how much will it cost?
Ms. Lee: Currently, we are putting together a plan. Until we meet
with CMHC to really get a better understanding, it is difficult to estimate
how many people we will need. We have some expertise internally but we will
need more staff and do not know how many.
Senator Oliver: Would it be 15 to 20 new technical people?
Ms. Lee: It depends on what we plan to do this year versus next
year and the following year. Once we understand how CMHC is organized and
how their programs work, we will have a better understanding of the type of
staff we need and when we will need them.
Senator Oliver: If the new employees and all their benefits and so
on will be in the millions of dollars, where will that money come from?
Ms. Lee: We will recover our costs directly from CMHC as part of a
regular assessment levy.
Senator Oliver: Will it be 100 per cent?
Ms. Lee: Yes.
Senator Oliver: I asked questions about governance of the previous
witnesses. What new things will you be doing in relation to CMHC with
respect to their governance? We know that under the bill there will be two
new members added to their board of directors to total 12. Do you think that
you may be looking seriously at some aspects of their governance structure?
Ms. Lee: Looking at board governance is tricky because we are not
in the board meetings. Part of what we do is to meet with members of boards,
ask questions and elicit how much discussion is going on around risk items
and the various activities that are being reported to the board. We also
look at the board reporting to see whether it is clear or comprehensive.
Those are the things we will need to look at to be able to understand
whether we have recommendations in those areas.
Senator Oliver: Would you look to see, for example, whether the
board meets without the CEO?
Ms. Lee: Yes, if they are in camera with the internal auditor.
There are common governance guidelines that we look at.
Senator Oliver: Do you look at whether the board does
Ms. Lee: Yes. We have a corporate governance guideline to look at
to see how they comply with those guidelines. They are being updated this
year as well.
Ms. Evanoff: We must be respectful of the fact it is a Crown
corporation and the board members are chosen pursuant to a statutory
framework and so on.
The Chair: This concludes our questions. Ms. Evanoff and Ms. Lee,
on behalf of all committee members, I express great appreciation for your
appearance today. I suspect it is more than that and I can speak on behalf
of many Canadians. Your group probably is responsible for allowing more
people to sleep easily at night than any other group in this country,
knowing that you are keeping a watchful eye on our financial institutions.
For that, we express our great appreciation as well and ask you to pass it
on to Superintendent Dickson and your associates. We have great appreciation
for the work you do.
Senator Hervieux-Payette: May I just add that I feel even safer
because they are all women.