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 this bill.

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 system.

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 commercial programs.

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 Development.

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 have.

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 and oversight.

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 them.

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 time?

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 financial institutions?

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 books?

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 with CMHC.

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 made public?

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 to know.

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 and oversight.

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 some losses?


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 smaller markets.


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 that?

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 that right?

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 approved?

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 insured.

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 those bundles.

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 underlying collateral.

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 this.

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 basis?

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 financial institution.

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 session.

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 Implementation Bill.

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 Corporation.

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 governing legislation.

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 now supervise?

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 ratios.

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. Lee.

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 corporation.

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 liquidity needs.

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 process.

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 come about?


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 has happened?

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 activity?

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 avoided?

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 institutions.

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 for CMHC?

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 institutions.

Senator Ringuette: Could you provide a copy of that to our clerk for members?

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 self-assessments?

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.

The Chair: So noted.

(The committee adjourned.)