Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 6 - Evidence - May 19, 2016
OTTAWA, Thursday, May 19, 2016
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 3, 4, 5, 6 and 10 of Part 4 of Bill C-15, An Act to implement certain
provisions of the budget tabled in Parliament on March 22, 2016 and other
Senator David Tkachuk (Chair) in the chair.
The Chair: Welcome to the Standing Senate Committee on Banking, Trade
and Commerce. My name is David Tkachuk and I am the chair of this committee.
Today we begin our subject matter examination of Bill C-15, the budget
implementation act, 2016, or the BIA and, in particular, Divisions 3, 4, 5, 6
and 10 of Part 4 of the bill.
Honourable senators will know that our committee must report our findings to
the Senate by Thursday, June 9, 2016.
Today's meeting will be composed of two segments. In the first segment we
welcome before us officials from the Department of Finance Canada, the Bank of
Canada, the Canada Deposit Insurance Corporation and the Office of the
Superintendent of Financial Institutions. In the second, shorter segment we will
hear from the Canadian Bankers Association.
Senators will note that of the many witnesses listed on the meeting notice,
only a handful will appear at the table to deliver opening remarks regarding the
applicable divisions of interest to them and answer questions. Should additional
witnesses presently seated at the bank of chairs behind us be required, they
will either take the vacant chair or temporarily replace another witness at the
table to respond to questions.
In these situations, witnesses, I would ask that when you come to the table
you place your name card in the wooden block, and when responding to a question,
provide your name and title for the record.
I think we will have an informative session, and we will try to make this as
seamless as possible. It is a complicated subject. In this regard, when it comes
to questions and answers, we will be as casual as possible. You can go ahead and
ask a question; it doesn't matter what division it is. Then we will just take
the time, if expertise is needed, to bring another witness forward, if needed.
The important thing is that we get the information on the table and on the
I would like to welcome the following officials in the first panel: From the
Department of Finance Canada, we have Glenn Campbell, Director, Financial
Institutions, Financial Sector Policy Branch; and Jeremy Weil, Senior Economist,
Financial Sector Policy Branch. From the Canada Deposit Insurance Corporation,
we have Chantal Richer, Vice President, Corporate Affairs, and General Counsel.
From the Office of the Superintendent of Financial Institutions, we have Judy
Cameron, Managing Director, Approvals and Precedents. And from the Bank of
Canada, we have Steve Thomas, Assistant General Counsel, Executive and Legal
Mr. Campbell, please proceed with your opening remarks, after which we will
proceed with the others witnesses.
Glenn Campbell, Director, Financial Institutions, Financial Sector Policy
Branch, Department of Finance Canada:
Good morning Mr. Chair, senators, and thank you for inviting me and my
colleagues here to appear before your committee this morning. I am Glenn
Campbell, Director, Financial Institutions, Financial Sector Policy Branch of
Finance Canada. I am pleased to provide an overview on behalf of the department
for all five divisions of Part 4, including 3, 4, 5, 6 and 10, being covered
today in your consideration of Bill C-15. As required, the appropriate officials
will move to the table during the question and answer portion to respond to any
questions the committee may have. My colleagues from other relevant agencies are
also available to answer questions within their mandates.
I will start with Part 4, Division 3, which proposes to extend the sunset
date in the statutes that govern federally regulated financial institutions.
This sunset date mandates the renewal of the financial sector legislation by
Parliament every five years.
The amendment would extend the current sunset date of March 29, 2017, in each
of these acts to March 29, 2019. The proposed amendment applies to four
different acts: the Bank Act, the Insurance Companies Act, the Trust and Loan
Companies Act and the Cooperative Credit Associations Act.
The periodic sunset of the legislation is designed to ensure that the
financial sector framework is renewed regularly and kept up to date.
A number of amendments to the framework have been made in recent years, and
some are still ongoing. The proposed two-year extension will provide time to
complete off-cycle initiatives that are under way, as well as time to consult
Canadians and the industry. The goal is to conduct a review that positions the
financial sector framework for the future.
Part 4, Division 4 amends certain provisions of the Bank Act relating to
federal credit unions to address the unique transitional risks credit unions
entering the federal framework may face due to the differences between federal
and provincial regimes.
In addition to two technical amendments, there are three main ones. The first
provides the Minister of Finance authority to exempt an applicant from a federal
technical procedural entry requirement so long as there is substantial
compliance with the requirement.
The second provides the Minister of Finance authority to exempt federal
credit unions from certain technical procedural requirements relating to voting
for up to three years after entry, provided there is substantial compliance with
The third provides the Minister of Finance authority to offer a transitional
loan guarantee to a federal credit union for the purpose of supporting it
through the first three years.
Part 4, Division 5 proposes amendments that provide a legislative framework
for bank recapitalization or a bail-in regime. Bail-in is the power to convert
certain long-term debt of a failing bank into common shares to absorb losses,
recapitalize the bank and allow it to keep operating.
Implementation of the proposed bail-in regime would give authorities an
additional tool to deal with the unlikely failure of a major bank in a manner
that protects financial stability as well as taxpayers. It would reinforce that
bank shareholders and creditors are also responsible for the banks' losses. The
bail-in conversion power would apply only to eligible long-term debt securities,
and all deposits would be excluded.
Proposed amendments to the Canada Deposit Insurance Corporation Act would
provide the corporation, CDIC, with the power to undertake a bail-in conversion.
The amendments also include updates and enhancements to existing provisions of
the CDIC Act related to managing bank failures to ensure these function
effectively with the bail-in power.
Proposed amendments to the Bank Act would enshrine in legislation the ability
for the Superintendent of Financial Institutions to designate banks as
systemically important, thereby making them subject to the bail-in regime. These
banks would be required to maintain an amount of regulatory capital and debt
subject to the bail-in in order to absorb losses in a failure. This requirement
would be set by the superintendent in consultation with other federal
The proposed bail-in regime has also been the subject of extensive
stakeholder consultations, including with banks, credit rating agencies and
Lastly, these reforms would strengthen our tool kit for managing bank
failures so that it remains consistent with international best practices and
standards endorsed by the G20 following the financial crisis.
Part 4, Division 6 proposes modifying the membership of the Financial
Institutions Supervisory Committee, or FISC, by replacing the CDIC chairperson
with the CDIC chief executive Officer. FISC is a committee that exchanges
information on the prudential oversight of federal financial institutions. FISC
members would benefit from having the participation of the CDIC CEO on the
committee, given this position is accountable for directing the day-to-day
affairs of the corporation and overseeing the effective functioning of its
Finally, Part 4, Division 10 of the budget implementation act will enact two
amendments to the Special Import Measures Act, Canada's primary trade remedy
legislation. Trade remedies address the injury caused to Canadian producers by
imports of dumped or subsidized goods. The first change will ensure that a full
investigation will be conducted, even if there is a finding at the preliminary
stage that dumping or subsidy levels are insignificant. Second, once a trade
remedy measure is in place, it will stay in place longer before we consider
whether the measure should be extended or cancelled. These changes will
strengthen Canada's response to unfair trade and are supported by the main users
of Canada's trade remedy system.
The government has also launched public consultations with respect to a
broader set of potential amendments to the trade remedy system.
Chantal Richer, Vice President, Corporate Affairs, and General Counsel,
Canada Deposit Insurance Corporation: I am Chantal Richer, Vice President,
Corporate Affairs, and General Counsel, Canada Deposit Insurance Corporation, or
CDIC. My colleague, Tara Newman, is here and will help answers questions.
CDIC is the federal Crown corporation that protects deposits in some 80
Canadian member institutions in the event of their failure and contributes to
the financial stability of Canada's financial system.
Our members are banks, federal credit unions, trust and loan companies, and
associations regulated by the Cooperative Credit Associations Act that accept
deposits. Since CDIC was created in 1967, it has dealt with the failure of 43
members, which has affected about two million Canadians.
In our nearly 50 years of operation, no one has lost a dollar of deposits
CDIC protects. We currently ensure close to $700 billion in deposits.
CDIC is Canada's resolution authority. This means we take the lead in
handling the failure of any of our member institutions, from the smallest to the
CDIC has a range of tools to deal with failing members. These resolution
tools include, for example, providing financial assistance such as loans and
guarantees to support a private sector transaction; taking control of a failing
bank for a short period of time to complete its sale; establishing a bridge
bank, which is intended to bridge the gap between when an institution fails and
when buyers or a private sector solution can be found; and arranging for
liquidation and rapid reimbursement of insured deposits.
The choice of resolution tools will be based on our mandate to protect
depositors, contribute to the stability of the financial system and minimize
exposure to loss.
While many of the 43 member financial failures were dealt with by liquidation
and reimbursement of insured deposits, a number of them were resolved by the
assisted sale of a failing bank to a sound member institution. This approach
resulted in no interruption of service for clients and lower losses.
Following the global financial crisis, like other G20 countries around the
world, CDIC and its financial safety net partners represented at this table
considered whether we had the necessary tools to resolve Canada's largest banks.
CDIC also took steps to advance its preparedness to handle the failure of
Canada's largest banks, which were designated by the Superintendent of Financial
Institutions as systemically important for Canada's economy or D-SIBs.
We initially worked on developing a tool, the bridge bank, and on creating a
resolution plan for each of the large banks. Each plan outlines the strategy and
operational plan that would be used to handle the bank's failure.
In Budget 2015, the federal government made D-SIBs responsible for preparing
their own resolution plans, recognizing the important role and accountability of
D-SIBs in demonstrating that they are resolvable.
A current priority of CDIC is guiding and directing the development of the
banks' plans to ensure they are realistic and practical and could be put into
use, if necessary.
This brings me to today's topic. CDIC welcomes the introduction of the
proposed bail-in regime. Bail-in is another important tool that would strengthen
our resolution tool kit and is consistent with global standards.
The regime would enable a failing bank to continue serving its customers,
including depositors, by allowing CDIC to convert certain debt of the bank into
common shares to recapitalize the bank while it remains open and operating.
This would ensure losses are covered by the failing bank's shareholders and
certain investors, and not taxpayers. We think it is important that Canadians
understand their hard-earned savings remain protected by CDIC, as they have been
for nearly half a century.
Judy Cameron, Managing Director, Approvals and Precedents, Office of the
Superintendent of Financial Institutions:
Mr. Chair and honourable senators, thank you for the invitation to appear
before you to discuss these specific divisions within Part 4 of Bill C-15, the
budget implementation act. I am the Managing Director, Approvals and Precedents,
Office of the Superintendent of Financial Institutions, OSFI.
With me today is my colleague Jean-Pierre Girouard who is the director of the
Precedents team within that unit.
As Canada's prudential regulator, OSFI promotes financial stability by
keeping a close eye on the solvency, liquidity, safety and soundness of
federally regulated financial entities. OSFI's mandate is to protect the
interests of depositors, policyholders, financial institution creditors and
pension plan members, while allowing financial institutions to compete and take
I would like to start by confirming that OSFI welcomes the proposals set out
in Part 4, Divisions 3, 4, 5 and 6 of Bill C-15.
These provisions strengthen the financial regulatory framework while
continuing to allow OSFI to deliver its mandate.
In performing its mandate, OSFI is responsible for administering federal
financial institution statutes and plays a substantive role in reviewing the
legislation applicable to federally regulated financial institutions.
Legislative reviews are important to ensure that the legislation remains current
and promotes an efficient, competitive and safe financial services sector.
As such, we endorse the extension of the current review period proposed in
Part 4, Division 3 of the bill, and believe that the adjustment would provide
sufficient time to conduct an appropriate review of the legislative framework.
Part 4, Division 4 refers to certain technical exemptions from federal entry
requirements for transitioning credit unions and federal credit unions, or FCUs.
As you are aware, OSFI's primary role in relation to prospective FCUs is to
conduct a prudential review of a provincial credit union that has applied to the
minister to become an FCU.
In addition, as administrator of the Bank Act, OSFI considers whether the
applicant can meet all of the procedural requirements of the act or whether it
needs any exemptions. Furthermore, OSFI's prudential review and assessment of
the provincial credit union is independent of the Minister of Finance's
authority to provide, depending on circumstance, a loan guarantee.
Part 4, Division 5 of Bill C-15 would allow the Superintendent of Financial
Institutions to formally designate domestic systemically important banks, or
D-SIBs, under the Bank Act.
As you may know, in March 2013, consistent with international practice, OSFI
identified six Canadian banks as being domestic systemically important: RBC, TD,
BNS, CIBC, BMO and National Bank. Subsequently, these banks became subject to
higher capital requirements, greater supervisory intensity and enhanced
Under the proposed legislation, formally designated D-SIBs would be required
to maintain a minimum capacity to absorb losses. This requirement builds on the
concept of regulatory capital with the aim of ensuring that systemically
important banks not only have sufficient loss-absorbing capacity to withstand
severe but plausible losses but also have additional capacity to recapitalize
the bank in the unlikely event of its failure.
In doing so, the requirement to hold a minimum loss-absorbing capacity
supports the resolution of systemically important banks by requiring those banks
to issue financial instruments that could be converted into equity.
OSFI's role under the proposed bail-in regime would be to set, monitor and
enforce D-SIBs' minimum capacity to absorb losses in consultation with other
federal agencies and the Minister of Finance. After a thorough consultation
process, OSFI would revise its existing guidance to be in line with the new
Finally, OSFI is supportive of the proposed amendment to the Office of the
Superintendent of Financial Institutions Act, referenced in Part 4, Division 6.
This amendment proposes a change in membership of the Financial Institutions
Supervisory Committee, or FISC, recommending that CDIC's current member of FISC,
its chairperson, be replaced by its chief executive officer. In our experience,
CDIC's chief executive officer is well suited to play an active role in FISC, as
he or she is responsible for day-to-day decision making in relation to CDIC's
Mr. Girouard and I would be happy to respond to your questions, senators.
Thank you very much.
Steve Thomas, Assistant General Counsel, Executive and Legal Services,
Bank of Canada: Good morning Mr. Chair, distinguished members of the
I am accompanied by my colleague, Carol Brigham, a director in the bank's
Financial Stability Department. We are here today on behalf of the bank to offer
our view of proposed changes to the Payment Clearing and Settlement Act found in
Division 5 of Bill C-15.
The Bank of Canada is responsible for designating and overseeing clearing and
settlement systems that pose systemic or payment-system risk. Our oversight of
these systems is to ensure that they operate in such a manner that the risk is
The changes to the PCSA relate to the implementation of CDIC's bail-in
regime, and we support these proposed measures. These changes align the actions
that may be taken by CDIC in managing the unlikely event of a bank failure and
the actions of financial market infrastructures in those circumstances.
Our view is that the changes will strengthen our financial system by helping
to implement CDIC's resolution regime in a manner that continues to protect the
safety and soundness of designated financial market infrastructures.
Thank you. We would be happy to answer any questions.
The Chair: Thank you. We will move to questions.
Senator Greene: I have three questions that I will ask all at once.
They are about the nature of the sunset legislation you are dealing with.
What is the maximum extension you are allowed to ask for? How often does the
Department of Finance ask for these extensions? Are you allowed to ask for a
second extension in the course of a sunset?
Mr. Campbell: Thank you for your questions. With respect to the sunset
provision in the act, there is no specific timeline in terms of a maximum that
could be deferred. It is a decision of Parliament to decide how long they want
to defer. In this case, the government is recommending an additional two years
to complete their review.
In the past, the date has been put forward for an amendment. Perhaps Mr. Weil
can answer that.
Jeremy Weil, Senior Economist, Financial Sector Policy Branch, Department
of Finance Canada: In recent memory, there have been three extensions: 1990,
2006 and 2007. Those have varied in length from one year to six months.
Mr. Campbell: We have had a few instances where there were extensions
to the time frame, depending on the circumstances and the length of time. In
this circumstance, given the practicality of so many amendments to the Bank Act
and related acts going through in previous years to complete the financial
crisis reform agenda, and also the timing of the fixed election date — these
make this issue one for the current government.
The period of time not being sufficient to do a review, the premise is to
give another two years to allow for the current amendments — including what we
are putting forward today, like bail-in and some of the other regimes — to be
completed, and then think about the shape of our financial institution statutes
for the future — that is, having a future vision after all these reforms are
done and how to continue to uphold the highest standards of Canada's financial
Senator Massicotte: I have many questions, but I will let others go
before me, if you don't mind.
The Chair: You can defer.
Senator Massicotte: I will. Thank you.
Senator Ringuette: I am always of the belief that if there is
legislation, it is because there was a cost to it.
My recollection of the federal credit unions act was that they were
financially strong enough to compete with the current federally chartered banks.
Now I see that these amendments may provide for a loan guarantee from the
Minister of Finance. That is quite a ways away from the act that passed through
Why, all of a sudden, is there this potential loan guarantee to credit unions
to become federally chartered credit unions?
Mr. Campbell: When the department has appeared before this committee
in the past, over previous years, as we were evolving the federal credit union
legislative framework, we have always indicated there were potential transition
issues for credit unions to face moving into the federal regime. In the past, we
have come forward with some legislative tweaks to facilitate the continuance of
certain provincial credit unions to the federal space. For example, we made
technical amendments for the Caisses populaires acadiennes in New Brunswick to
continue, which is now moving forward with a formal application. Pending
approval, we expect it, in the next few months, to be potentially the first
federal credit union.
I can say that they have not asked for a loan guarantee, specifically.
Basically, other credit unions across Canada have indicated that they face
potential procedural uncertainties about the continuance process — how long it
takes and the rules between the federal and provincial — which we are seeking to
address here with a couple of the amendments to facilitate that all the work
that goes into this by all parties — a credit union, the province and all the
regulators — that you don't get to the eleventh hour of approval and have a
The two amendments here provide some capacity for the minister to waive
certain requirements to facilitate the exit of a provincial regime into the
federal regime. That has been important to some credit unions that have said
they would not contemplate or think about moving federally unless there was more
certainty along the path of how that would move forward. Those two are
Senator Ringuette: So this is acting as an incentive, then?
Mr. Campbell: It's not an incentive; it is removing impediments.
Likewise, the loan guarantee — to use that, because you asked the question,
senator — is a short-term, temporary insurance value for some credit unions at
an appropriate price. It's just another liquidity tool that could be available
when a credit union moves into this vulnerable period of transitioning from a
provincial regime to a federal regime. Some provinces, such as the Western
provinces, have a different deposit insurance regime.
Before a credit union can move federally, the members have to agree, the
province has to agree, and then the federal regulators and minister have to
agree to receive them. Throughout that period, a member can decide to relinquish
their share in that institution and move their deposits elsewhere. It is a
member's free choice. In some Western provinces, there are different regimes in
deposit insurance that potentially could have an impact on the funding of that
This is a safety-net insurance vehicle that does not reflect on whether
credit unions are strong because we deem them to be strong. In order for them to
meet all the federal requirements before they get into the continuance, they
would have had to demonstrate they are strong, robust and will meet federal
This just allows the board and members to know that, through this uncertain
period, there is this safety-net provision for a price and that the tool is
available. Also, there could be a circumstance of general market disruption.
This provides a safety net for them to move forward.
Senator Ringuette: May I have another question or on second round?
The Chair: Go on a second round. I think everyone will want to get
involved in this.
What's the difference between a bail-in and bail-out?
Mr. Campbell: Many people ask this question. None of us at this table
were architects of that language. It really comes out of the G20 and the
Financial Stability Board with many years of work, post-financial crisis.
The concept in nature is that, post-financial crisis, most of, if not all of,
the measures put in place globally were designed, in the first case, to prevent
a financial crisis and an impact and to protect taxpayers. There were other
jurisdictions that actually had to use public resources to support financial
institutions. That would technically be termed a bail-out.
In the case of a bail-in, which basically means you're using money that
already exists inside the institution, the long- term creditors and investors
would have the value of their liability used to support capital. This is the
conversion feature. The premise is that, in a case of non-viability of a
financial institution, we're now putting the shareholders and creditors and
long-term investors ahead of the taxpayer.
Senator Tannas: I have a couple of quick ones. First of all, the
industry didn't ask for this extension. This is, as you've explained it, simply
because of the unique timing of the new government and so on. Is that right?
Mr. Campbell: Senator, the department did not officially consult
widely with the industry. However, in our continuous discussion with all
industries that are covered under the acts, we sensed there was general
agreement that a deferral of the time frame made sense — particularly to allow
for the current reforms to move forward — as well as a bit of a breather, or a
time during which to reflect on what changes could be made in the future.
Senator Tannas: Again, there's no advantage to industry in this. I
just want that on the record.
Mr. Campbell: No. I see it as completely neutral.
Senator Tannas: Thank you. I have two other questions. To Senator
Ringuette's raising of the topic of the guarantee, I understand it really comes
as result of the fact many provinces have a 100 per cent guarantee on deposits
at credit unions; Alberta and British Columbia are two that I'm aware of.
That's not the way it will be in the federally regulated CDIC world, so there
naturally needs to be a bridge, because you're going to have people with
five-year GICs that are guaranteed one way, and now it will be the other way. Is
Mr. Campbell: To clarify, there are four provinces that have unlimited
deposit insurance. Of course, for a credit union there is a provision to allow
for term GICs to run off under the current regime. We really don't know whether
or not members will decide to move their deposits from the credit union that's
moving to someplace else. That's really the uncertainty that surrounds that
equation, given members are free to choose and do what they want.
Senator Tannas: It provides the tool that's needed to make the
transition happen and separate this guarantee issue so that it doesn't further
aggravate things; correct?
Mr. Campbell: Yes.
Senator Tannas: Is New Brunswick one of the 100 per cent guarantors?
Mr. Campbell: No, it is not.
Senator Tannas: Good. Then we're not designing this specifically for
the first entrant, which is great.
Mr. Campbell: No.
Senator Tannas: Would anything in here give you the power to also
provide liquidity or guarantees to credit union centrals? I think we'll probably
find that it will be the strongest credit unions that will think about going
federally, and that then puts pressure on the centrals in every province. Is
anything in here designed to help that potential situation?
Mr. Campbell: I can clearly say no. If anything, this is a
continuation of previous legislative amendments to clarify responsibility
between the provincial and federal regimes. Provinces are responsible for their
centrals in supporting them and the credit unions they serve. This is really
about one credit union that wishes to move federally, for whatever reason. It
pertains only to that credit union and does not contemplate centrals whatsoever.
Senator Tannas: Thank you. Chair, I have one last fast one. We talk
about certain federal procedural exemptions for these credit unions. Nothing in
that would include waiving the requirement that insurance not be sold in the
branches. Would that be a waiver that you would be prepared to give, or seek
approval to give?
Mr. Campbell: That authority to allow for transition in what we call
insurance networking is not reflected in either of these two amendments.
However, the Minister of Finance has existing authority, on a transition basis,
to grant that. It is part of the discussions with various credit unions that
they would emphatically meet the federal requirement. A discussion is under way
about giving them several years to come up to federal standards around insurance
Senator Tannas: But that power already exists?
Mr. Campbell: That power already exists. It is not referred to in
either of these two amendments.
The Chair: Senator Massicotte, do you want to continue to defer?
Senator Massicotte: Given I've been so patient, Mr. Chair, I'm sure
you'll be patient with me. I'm sure if people can respond with short answers, it
will give me a chance to ask more questions.
First, I want to talk about a bail-in or conversion of debt. Tell me the
story of the process exactly as it is going to occur. It starts with OSFI, from
what I understand, saying there's a problem. Tell me the exact steps which
occur, including the right of a creditor to sue you if they thought it was
damaged. Could you tell me that story?
Mr. Campbell: How about I give the short, general overview, because
that is a complicated sequence of events. Let me walk you through it.
In a highly remote scenario wherein one of our systemically important banks
enters the point of non-viability from the point of view of the Superintendent
of Financial Institutions — granted, there's a whole apparatus that leads to
that decision — in general terms, the superintendent would go to the CEO of the
CDIC and say, "This institution is non-viable.'' They would consult on which of
the tools would be appropriate to intervene with in that circumstance; as was
mentioned, bail-in has become a tool.
Together they would determine a recommendation and go to the Minister of
Finance as a safeguard. The Minister of Finance would then go to
Governor-in-Council to seek the authority for CDIC to use one of those tools, in
that circumstance, including the authority to conduct a conversion, or bail-in
scenario. CDIC would then be entrusted with all the powers that were referred to
and that already exist in the act and now are being amended, including the
Through myriad circumstances of a conversion, there are features included in
the CDIC Act that allow for redress. For these long-term debt holders or
creditors that are bailed in, there is a provision in the act, which my
colleagues could speak to if you want to go further, that allows for CDIC and a
third-party assessor to deem, once the dust clears, whether they would have been
better off in bankruptcy in terms of how it unfolds. There is a redress
mechanism for these long-term investors that will be clear.
Let me remind you that the bail-in feature does not apply to any legacy
assets. It will apply only to newly issued assets once this is in force. It will
be highly transparent, so all these long-term investors would know precisely the
contractual and legislative terms by which they would be buying the debt of
these banks. That's in general terms.
Senator Massicotte: I must admit I'm surprised this isn't already in
place. Governor Carney raised this issue five or six years ago, saying this is
the solution to capitalize the banks.
I know the banks have been issuing a lot of debt. Billions of dollars of this
type of hybrid debt have been raised. Everybody is doing this stuff, and no
legislation was in place to actually convert that debt into equity?
Mr. Campbell: Let me start, and then I'll turn it over to Judy
Cameron, if she would like to talk about non-viability contingent capital.
This really is the product of all the work that happened in the initial
conversations had at the Financial Stability Board and the G20. Many years of
work designed new standards and regimes for preventing a crisis. This is really
the tail end and is about what happens if an institution does fail.
Senator Massicotte: There is no current legislation? In spite of the
fact we have been talking about it for five years, this is it?
Mr. Campbell: This is it. And now that many countries are moving,
sequentially, to put this in place, the contingent capital, which I'll let Judy
or someone else speak to, is operating now with a conversion feature that is in
contract law. Everyone who has bought this non-viability contingent capital,
which exists now around the world, is under the terms of the contract.
This new type of long-term debt that would be subject to bail-in basically
has the legislative framework around it to make it more transparent and clearer
on how the rules are going to work.
Senator Massicotte: Let me go through the process. I think the
legislation is not only if you have problems even below the ratios; I understand
OSFI must ring the bell internally.
Let's say it occurs and the Minister of Finance says I'm going to use this
new tool called the bail-in or whatever. Is it all debt or only the specific
debt raised with investors knowing there was a conversion risk? The bank's
balance sheet as it exists today, can that be converted, or only those
specifically designated and raised in the public marketplace?
Mr. Campbell: The intention would be that the debt that's prescribed
in regulations, that debt that's longer than 400 days, typically those
securities will be prescribed in regulations, and all those securities that we
consult with the industry will be available to bail-in. However, under the
scenario it's not an all or nothing. There could be a decision to bail-in only
part of that stock. It's not a binary decision that if there's non-viability,
all of that debt that has now become eligible for bail-in necessarily gets
triggered. It's only a sufficient amount that's needed in the determination of
the authorities to recapitalize.
Senator Massicotte: You are saying any debt in extension of 400 days
could get converted, even if today that person invested that debenture, let's
say, not knowing that risk; therefore, it's not only that type of security being
issued, it's any form of debt on the balance sheet could be converted in excess
of 400 days.
Mr. Campbell: First, let me emphasize that no investor that currently
has any security with that bank would be subject to bail-in. It's only for newly
issued, certain classes of debt after the legislation comes into force.
Senator Massicotte: You just said certain classes. In other words,
only that class of debt which specifically deals with that conversion right. How
about the guy who buys a debenture six months from now and it's a two- or
three-year debenture, even if there is no provision; could he get converted into
Mr. Campbell: No. After the date of this coming into force, and only
after that date, any debt that's issued — and we've consulted with the banks and
they know this is coming; most of the investor class around the world know this
is coming at a certain point in time — under the legislation those new forms of
securities, largely the unsecured forms of long-term debt that are in a longer
duration that will be prescribed, will be eligible for bail-in. But any
securities or basically any funding the bank issues up until that date would not
be subject to bail-in.
Senator Massicotte: Let me go further, if I could. You say all
deposits excluded. Including the deposits in excess of the statutory limit? So
even if you have $2 billion or $3 billion of deposits and it's not insured, that
is still excluded from a conversion right?
Mr. Campbell: That is accurate. That's very correct.
Senator Massicotte: Let's go through the process.
This is a story for all of us, chair.
The Chair: I know, but don't turn it into a novel. Other senators want
to ask questions, maybe not in the same area.
Senator Massicotte: I appreciate that. It's a quick, short story.
So you're in this conversion stuff and now CDIC is in control. The
legislation says you have the right to kick the directors and officers out, and
the government agencies identify that it's without risk, yet you also give
yourself provision to instruct the directors to behave in a certain way, but
they remain on the hook personally as normal directors and officers under
Mr. Campbell: Let me answer first, and then I'm happy to turn it over
to Ms. Richer.
Generally speaking, CDIC, in this circumstance, would have all the tools they
need to basically run the institution through that transition period, however
long or short it is. They do have the power to remove directors and officers of
the entity, and they also have authority to direct those officers to behave in a
way they need to, to manage the bank. That does not relieve any of the existing
directors or officers from any liability or legalities that led to the
circumstance which they're in; it only is at the point in time that they're
moved from office. But all the legal provisions to hold them to account remain
Senator Massicotte: I have no problem with that. But if they execute
actions based on your direction, could they be legally held responsible for that
action, despite following your direction?
Mr. Campbell: That's a legal question.
Ms. Richer: I believe the intent of the proposed legislation is to
protect them if they follow our directions while we're in control.
The Chair: Does anybody else want to add to what has been said? Mr.
Thomas, Ms. Cameron?
Senator Massicotte: Can you do both, conversion of debt and liquidate
the bank, to maximize your interest?
Mr. Campbell: Yes. Under a scenario where CDIC or the authorities have
control of that institution, all those tools could potentially be available to
resolve that institution, which includes restructuring, liquidation; all those
tools are available now under this legislative framework. Again, back to the
point, these are entities that we deem to be systemic. That means the intent is
to keep them operating to protect customers and depositors. All those tools are
Senator Wallin: I have two questions. Lehman Brothers was almost 15
years ago, so it is about timing and triggers. Has the process taken that long
for us to think about the vulnerability of the Canadian financial institution
structure? Is this really the result, the first result?
Mr. Campbell: Thank you, senator. I would say this is near one of the
last results. If you would think since going back to 2008, and we're certainly
able to provide all the reforms that have been done internationally that have
flowed through to countries like Canada and all our supervisors, all the new
rules and regulations and capital requirements, all have been post-financial
crisis that have been focused primarily on preventing another crisis,
facilitating how jurisdictions can work together, particularly for cross-border
The G20 has been very transparent, the Financial Stability Board. Quite
frankly, all these agencies here, including the Bank of Canada, have now and
over the past few years done a lot of things through legislation and also
guidance to ensure Canada remains consistent with all of those directions.
We are in lockstep with others where bail-in, really, it's the trailing
piece, and it's been a complicated piece because it involves the scenario of
what happens if we don't do enough to prevent this from happening. We recognize
these are private financial institutions that build on confidence. There are
scenarios where despite all these efforts you could render a situation of
non-viability. This is really designed to say, when everything is completed,
let's at least mitigate or if not protect the taxpayer from that scenario.
Senator Wallin: And we couldn't do that domestically?
Mr. Campbell: We are doing it domestically. We could not do it without
a legislative regime to put that in place.
Senator Wallin: I understand that here, but you're saying it was the
result of the G20 had to do this and the G7 that. We're doing it today. Why
couldn't this have been done, I guess is the most simplistic way to put it.
Mr. Campbell: Let me go back and say this follows the spirit of the
Financial Stability Board's key attributes. It took them several years to decide
what are the key attributes and that various countries would have some
flexibility to introduce this standard to the respective regimes. Some countries
compared to Canada have had a lot more reforms to do than we have, but really
we've been waiting for consensus. That's the way international regimes operate
now, to make sure all countries are implementing these regimes in a consistent
way and that all our banks are treated similarly. Half of the international
investors who have been impacted who fund these institutions are international,
and this puts Canadian banks at a consistent position with other banks.
Senator Wallin: One point of clarification, because it seemed to go by
quickly, and I'm not sure what I'm asking here. You seem to be putting more
emphasis on in a crisis situation of defending and supporting institutional
backers, debt holders rather than depositors. You made some comment, and I need
Mr. Campbell: I'm happy to do so. This comes back to the concept and
premise that today you have shareholders that are responsible for the
institution; that is, whether an institution fails or even wobbles, the
shareholders will absorb losses and the value. As it stands now, if a bank were
deemed to be non-viable, there isn't a legal means through which to put
creditors and those long-term investors responsible for also absorbing losses;
it would go right to the taxpayer, simply put.
So this regime is designed to ensure the shareholder is the first to absorb
losses, and then those creditors and long- term investors who should have an
aligned incentive to help manage that bank and know what they're investing in,
before you would contemplate going to the taxpayer for support. It's that
sequence of who absorbs losses.
Senator Wallin: I heard it the other way. Thank you for the
Senator Enverga: There are so many questions but so little time. A lot
of the questions have been asked, but my question is about the Special Import
Measures Act. Clauses 192 through 200 of Bill C-15 amend section 38, section 35
and others of that act.
My question is more related to our committee: Why do the proposed amendments
apply only to the North American Free Trade Agreement? Why not other countries
or internal trade?
Michèle Govier, Chief, Trade Rules, International Trade and Finance,
Department of Finance Canada: It applies to all countries. We're required
under NAFTA to specify that it applies to the NAFTA countries, as well.
Senator Enverga: That's good. How would it apply to our internal
Ms. Govier: It does not apply to internal trade. It only applies to
imports coming from other countries.
Senator Enverga: In what proportion of cases has the CBSA determined a
margin of dumping or amount of subsidy to be insignificant? How would you
quantify those things?
Ms. Govier: It is not common. We looked into it. Going back to 2004,
there have only been three cases where, at the preliminary phase, they
determined that there was an insignificant margin of dumping or amount of
Senator Enverga: With regards to CDIC, you say we'll be allowing CDIC
to convert certain debt of the bank into common shares. Can you cite examples?
Can you put it in layman's language how you're planning to do this?
Mr. Campbell: In terms of the process?
Senator Enverga: That's right, the process and how would you — the
past and the present that you're trying to do?
Mr. Campbell: In layman's terms, a bank will issue debt securities in
the market to fund itself. These debt securities have a value and a term.
There's a various amount, and they're largely purchased by institutional
investors, which are large investors. Very few individuals would have direct
exposure to these securities, unlike a common share where they might.
In the circumstance of non-viability, if there's $10 billion of those debt
securities, and that's the amount that's needed to recapitalize the institution
to keep it operating, then basically $10 billion worth of those debt securities
will be converted into common shares. Those holders of those securities would be
redeemed a common share at a certain multiple to be determined in regulations.
That's the process to be followed.
Really, it's a straight conversion where the value is used to recapitalize
the bank, because, effectively, that liability to those debt security holders no
longer exists, but they're being swapped out for a common share. In the future,
if that common share rises, those investors will get the value of that common
share. That's really the process.
Senator Massicotte: It's simple.
Senator Enverga: It will follow the same book value, not the market
Mr. Campbell: Actually, at that juncture, it will not be a question of
book or market value; it will be straight conversion into number of common
shares. In order for it to work, the actual amount outstanding — the liability
the bank has to that investor — will have to decrease by the amount being bailed
in. In that case, it would be the book value, because it's a debt security that
has a principal and a coupon. Not to get too complicated, but it would basically
be the book value to that investor.
The Chair: The share would be converted at the going rate; in other
words, what's on the market?
Mr. Campbell: The conversion process will be determined under
regulations. There will be more consultation with the industry about how that
conversion process will work. The industry, which we understand is supportive of
the legislation, is also supportive of that period of time to consult prior to
putting this process in regulation — not only how the multiple would work or
that conversion process, but also the technicalities around that, which are
better suited in regulation. Those are still to be determined and consulted on.
The Chair: So the pricing hasn't been agreed on?
Mr. Campbell: The conversion pricing or the multiple of common shares
that a holder of a debt security would receive — that process will be set out in
regulations, following consultation with the affected industry.
Senator Enverga: Are opportunity costs considered as part of the deal?
Mr. Campbell: This will be a straight process — the balance sheet of
the institution at that time. At the end of the day, it will depend on the
circumstance. This is really all hypothetical, but it has to work for planning
purposes. It really depends on the value of the institution at that juncture of
what the value of those common shares would be at that time.
The Chair: We're finishing the first round with Senator Day. It's
appropriate. He was Chair of the Finance Committee for 10 years.
Senator Day: I see lots of familiar faces here from previous times
through this. That may inform one or two of my questions in terms of the
evolution of what we're seeing before us.
Just to close out the discussion with Mr. Campbell on recapitalization and
bail-ins, can I understand that determining what debt will be subject to
conversion to equity will be in the regulations?
Mr. Campbell: That is correct. Given the technical nature of what
constitutes a long-term debt security and the potential for that to be amended
over time, and also for, might I say, a very innovative industry to continue to
change the nature of those securities, it's more appropriate for that to be set
out in regulation, to allow it to be adjusted over time.
But, yes, what is "bail-in-able'' will be prescribed clearly in regulations.
Senator Day: Thank you. A couple of short questions. It seemed strange
to me that, under Division 6, you had to put in federal legislation which
representative of the Canada Deposit Insurance Corporation was going to be the
representative on the Financial Institutions Supervisory Committee. Why would
you have to put that in legislation to change it from the chair to the CEO?
Ms. Cameron: It's because the Financial Institutions Supervisory
Committee is actually a committee that is mandated by statute. In the OSFI Act,
there is a provision that states there must be this committee, that the chair of
the committee is the superintendent and the members of the committee are — and
then it lists them.
Senator Day: It lists them all as office-holders of various
Ms. Cameron: So the Governor of the Bank of Canada, et cetera.
Senator Day: Thank you. Another "why'' question is with respect to the
extension that you've been asking for — the financial institution sunset
provision extension of two years. I think it was Mr. Weil, who has disappeared
on me now. That's okay, Mr. Robinson. You stay there. It's not a complicated
Mr. Weil, I believe, indicated a number of times that this five years had
been extended. Should we be looking at a permanent extension? Is five years not
enough with the way things are happening now and the rapidity of change? Should
we be thinking in terms of making a recommendation that the five years be
Mr. Campbell: That is a policy decision of the government, of course.
Senator Day: I understand.
Mr. Campbell: Parliament can express its will on that question.
The premise of moving to a five-year review really is to ensure that in those
periods where the legislation is not being amended or not being tweaked, if you
will, Parliament has an opportunity to come back and opine on it, given how
important the suite of financial sector legislation is.
It just happens to be in this circumstance in the past few years there has
been a lot of change under the legislation itself or through the guidance of
what our institutions are doing. It's not clear that would be the case going
When the government contemplated the need for an extension, and even when we
did soft consultations with the industry, it made sense that if you extend it,
why not extend it two years to allow time for these reforms to pass and to
consult? Given the amount of time it takes to think through all of these
potential changes, given the industry between banks, insurance, trust and loan,
sometimes there are competing issues, and it takes time to work through what
would be potential legislative changes. It only made sense if we are going to
extend it just to extend it for two years.
Going forward, it will be a decision of whether or not it will be five years
thereafter. It is really a question for Parliament to decide.
The Chair: In two years we will be able to review this and see how it
all worked; is that what you are saying?
Mr. Campbell: Correct.
Senator Day: The discussion we have had with respect to provincial
credit unions continuing federally, we've seen that legislation in the past. We
have seen it in budget implementation acts in the past. Are these new
initiatives as a result of experience that it hasn't been working well and you
needed these additional incentives or reductions of impediments? Why are we
seeing more changes?
Mr. Campbell: That's a good question. This would be the third time
that we are moving forward to make minor amendments to the legislative
framework. The first two that I referred to that involved some exemptions are
the product of having the first entrant coming forward as an official applicant,
as well as other provincial credit unions that are merely exploring the prospect
of moving federally.
Again, the premise is that we are not incenting or dis-incenting, that really
it is a decision for the credit unions themselves to decide whether growing
across provincial boundaries is part of their business plan. We are removing
ultimately the impediment that some credit unions face from doing business
In terms of the loan guarantee, to come back to what a senator mentioned
earlier, this is always contemplated as we discuss unique scenarios of various
credit unions that come from different provinces under different circumstances.
Some of the credit unions vary in size and, therefore, their circumstances
are different. The government had committed to return, and through the
discussions with the industry, to think about transition measures, which would
be that the framework is now in place, and OSFI is now in place to receive
applicants. What is the path? What certainty through this transition period?
What are the things we need to do to give boards of directors and members
confidence that they should proceed with the business plan to move federally?
The loan guarantee is only a guarantee. It may never be tapped. It is an
insurance value, and it will come with a price, like every other instrument.
There is no subsidy involved. It is ensuring that they are able to remain
financially stable through this short transition period.
Senator Day: We wouldn't want to leave the impression for those
watching this and those who are here that this whole scheme is an attempt by the
federal government to raid provincial credit unions. What triggered all this
transition in the first place?
Mr. Campbell: That is a very good question, senator. This whole
exercise federally to develop a federal credit union framework, I feel
comfortable saying, is in response to requests from the industry and the credit
union sector, which for many years have asked for a federal framework as an
option for them to consider growing regionally or nationally.
There are different circumstances that would lead a particular credit union
to say that they might want a federal framework in which to grow, which would
mean going across provincial boundaries. We would characterize this as being
responsive to those demands.
It's also quite consistent with existing federal objectives to promote
competition in Canada, or at least not prevent it. This would be a feature that
if credit unions want to compete with banks or other credit unions in another
part of Canada, they shouldn't be prevented from doing so.
Again, the keys to moving forward are pretty clear. The members themselves
need to decide. They will continue to be guided by their members and their
boards. The provinces have to agree to an exit, and our supervisors have to
agree to receive them. There are a lot of hoops there. Everyone needs to be on
board that moving federally is in the best interest of that credit union and its
The Chair: I concur. We have had credit unions at this committee for
15 years, at least, requesting to be involved in the banking business, if they
so choose. It is a long, slow process, it seems.
Senator Ringuette: I would like you to clarify, in regard to the
bail-in conversion process, and you say it applies to major Canadian banks that
will be identified by OSFI and already have been identified. We all know that
since 2008, major Canadian banks have been acquiring subsidiaries and affiliates
outside Canadian borders. Would this bail-in process apply to those subsidiary
or affiliates outside Canada?
Mr. Campbell: In totality, it applies to the consolidated group. I
will allow OSFI to talk about it in more specific terms.
If you look at the internationalization of our Canadian banking sector that
does business abroad, either through branches or subsidiaries, also lending
abroad, following, in many cases, Canadian companies abroad to do business and
facilitating global trade and investment that benefits Canada, clearly when a
bank is at the point of non-viability, it's really from the point of view of
looking at the bank and the entity in its entirety, wherever its assets may be,
to make the determination of non-viability.
Judy, is there anything to add?
Ms. Cameron: I concur with what Glenn says. This is intended to happen
at the consolidated entity level, and the debt is generally issued at the
consolidated entity level.
Senator Ringuette: It would include whatever kind of activity in
shares and debentures that are happening outside of Canada?
Mr. Campbell: A bank operates daily in many locations, and it has the
capital to support that, whether it's domestically or abroad. A non-viability
determination would include whether or not the bank, wherever it may reside in
the world, has enough capital to support its operations.
The point of view is what's being bailed-in is that for the Canadian banks
the only issue is securities through the parent in Canada, by and large; that is
the debt that would be bailed in under that scenario. So it would be tradeable
debt through various securities that are covered by this regime.
Senator Ringuette: But if this bail-in concept is an international
initiative, for instance, if RBC has an operation in Venezuela, I suspect that
this bail-in process is not in place in Venezuela. Therefore, Canadian
legislation would have to apply even to their operation in Venezuela.
Mr. Campbell: Let me simplify.
Senator Ringuette: Yes, please.
Mr. Campbell: Any affiliate of the parent bank, no matter where they
are in Canada or abroad, is the responsibility of the parent. Whether it is a
subsidiary or branch and regardless of how it is treated, it is governed by the
regulations of whatever country they are in. However, if that entity fails,
generally speaking, it has to be absorbed by the parent. It's only if the
parent, for some reason, in a highly remote scenario, were the one deemed
non-viable, that tools like bail-in come into play.
If something happens with one of the foreign operations, it's the
responsibility of the entity, the bank or those local regimes to absorb those
losses, close it down and do what it can.
Senator Ringuette: All of this will be supervised, and is currently
supervised, from the parent to the children, to paraphrase, by OSFI?
Mr. Campbell: Generally speaking, yes.
Senator Ringuette: Does OSFI have the authority to research Canadian
banks' affiliates outside of Canada to ensure that they comply with Canadian
Ms. Cameron: OSFI applies the Bank Act, but it supervises on a
consolidated basis. The Bank Act applies to entities incorporated in Canada, but
most of our supervision focuses on the risks taken by the institutions and risk
management practices, and that is not set out in legislation. We expect our
institutions to comply with our standards and to push those expectations down to
all of their affiliates. That's our supervisory approach.
The Chair: Senator Ringuette, can you come back to this?
Senator Ringuette: I have just one more small question. What you have
just said is that you don't have the authority with regard to the affiliates
outside of Canada. All you can do is make recommendations to the Canadian
chartered banks with regard to their offspring offshore.
Ms. Cameron: We can impose expectations on the consolidated bank. It's
like a parent and their children. Up until the child is 18, you tell the parent
to make sure their kid does this, and make sure they are home at 10 o'clock, and
For our prudential supervision, yes, we can impose our expectations on the
consolidated entity because we have a lot of formal tools that apply to the main
bank, which is subject to the Bank Act.
The Chair: We have 16 minutes left, so conduct yourselves accordingly.
Senator Tannas: With regard to the future securities that banks will
issue that would fall into the conversion, can they contract out? Can they start
developing their own structure to say, "We have guaranteed these guys won't get
converted unless those guys have been completely converted, and these other guys
before those?'' Have you anticipated that by layering or structuring, they would
be able to contract out, or does it just not matter because no one can contract
out because you will convert everyone in this slice evenly?
Mr. Campbell: That's an interesting question. Let me go back to the
principles that the institution that is issuing would not have that flexibility.
Senator Tannas: You will decide all debt?
Mr. Campbell: It will be the debt prescribed in the regulations. Part
of the need for flexibility in the regulations to adjust this over time is to
account for the industry itself engaging in new instruments that we may not
support. This allows us the tool to continue to modify that definition.
Clearly, the premise here is the amount and type of debt. The superintendent
will issue the minimum amount of debt that is "bail-in-able'' that an
institution will have to have at any time.
Think about it. We will make sure what the requirement is and that the
investors know what can potentially happen, and the superintendent will ensure
that the banks issue a significant amount of this debt to meet the level that
supports the bank under that very remote scenario.
Senator Tannas: So, you may tolerate what I just described as long as
you are satisfied that you have enough in the catchment that can be converted?
Mr. Campbell: I would say so, yes.
The Chair: The bank is no longer in charge at this point, is it?
Mr. Campbell: The conversion process would be statutory. I think the
senator was asking how they can issue different type of instruments that would
change the hierarchy of claims.
Senator Tannas: I also want to say thank you. We don't get enough
opportunity, as legislators on behalf of Canadians, to thank you for the work
that you people do. You kept us largely out of the ditch in the last financial
crisis, and you are to be commended. Thank you.
Senator Massicotte: Are three- or five-year term deposits excluded, or
are they considered debt in your mind?
Mr. Campbell: All deposits, including term deposits, whether insured
or not, are not subject to bail-in.
Senator Massicotte: They are treated like depositors?
Mr. Campbell: Yes.
Senator Massicotte: You said you convert debt at book value, and you
say it is all in the regulations, but I am anxious to see how you deal with the
issue in the regulation. Let's say you have a $3 million deficit at a bank, the
stock is at a certain price, and you confidentially decide to subsidize the bank
with the problem. You seek the approval of the Minister of Finance and make an
announcement. But let's be frank: The stock price would go way down when that
came out. The conversion price is a morally difficult concept to come to.
Let me talk about the idea of Goldman Sachs or Lehman Brothers coming to
Canada, and you deem it to be significantly important to define your
competition. You have the right, I presume, to make it one of the six
institutions that you think is sensitive to our economy. Is that accurate?
Mr. Campbell: Yes. Any federally regulated financial institution
operating in Canada would be subject to the superintendent's determination as to
whether or not it's systemic.
Senator Massicotte: Therefore, your definition of systemic is based on
the impact on our economic system.
I appreciate that prudential is always on a consolidated basis. Let us say
you have a bank that has problems and CDIC says that, with the permission of the
Minister of Finance, it will take control of the entity. I know that the
overview is consolidated, but when you are managing debt or an entity that has
affiliates, you may decide in our country's interest to let the subsidiaries go.
I know you say you automatically consider it systemic, but you will manage
based on the interests of the legal entities, not the accounting consolidated
approach. It's not as simple as it will always be there. You may decide to
forget about the Bahamian subsidiary and let it die. Am I correct?
Mr. Campbell: This is for the flip side of the conversation we had
earlier, and that is the affiliates of a foreign entity operating in Canada. It
depends on whether they are licensed here as a rep office, a branch or a
subsidiary and to what extent they take deposits or not, the type of business
they are in and their size. Clearly, those entities would be regulated in
Canada, and if they get into trouble, tools exist to manage it.
Senator Massicotte: My point is that, contrary to the impression you
are giving, there is no international agreement that the country where the head
office is located is responsible to ensure the prudential nature of all its
subsidiaries in whichever country. Am I correct in saying there is no such
Mr. Campbell: I would say the premise on the Financial Stability Board
is that every participant in the G20 is prudentially managing their institutions
from the point of view that they are responsible for their whole entity, whether
or not there are issues that come into play when things happens. The sentiment
is that they would be responsible.
Ms. Cameron: It is one of the Basel Committee core principles that a
regime subject to Basel rules conduct effective consolidated supervision. All of
the jurisdictions that have signed on to the Basel Accord are expected to do
Senator Massicotte: Some American bank in the past two weeks made it
very clear, relative to an operation in Asia, that they expect this entity to
stand alone because they would not be there if it goes under. It was a large
investment bank in the United States. I appreciate the prudential view, because
that is the right approach.
First, to your delay on the sunset, I can appreciate why all of you want to
delay it. This is a lot of clumsy work. It's strategic in nature, but I don't
buy the fact that in amending this legislation, you should delay. I can
appreciate why you want to delay — everyone wants to delay — but this is not
significant. This is a low-probability event, and it is not significant relative
to your whole system.
Let me talk about the imports. You are now providing legislation to say that
even if the preliminary analysis shows the impact is insignificant, you will
continue with your study. Why is that the case? If you conclude it is
insignificant, why would you spend taxpayer money completing your study?
Ms. Govier: The main reason is that at the preliminary phase, it is
quite cursory information available at that time. It might give an indication
that there is an insignificant margin of dumping, but a more fulsome analysis
could bring up information that helps to verify that is the case, or whether
there are higher margins of dumping.
Senator Enverga: This will be a simple question about Division 5 of
Part 4, financial institutions formally designated as domestic systemically
important banks. You mentioned a few banks, such as BMO and CIBC.
There is another bank there that I think was missed. I don't know if it is a
bank, but it has assets of $251 billion, and according to Bloomberg it is the
strongest bank in Canada and has the highest capital ratio in credit rating. I
am talking about Desjardins bank. Is there a way that we can change this, or is
it part of a bank?
Ms. Cameron: Desjardins is not a federally regulated institution. It's
a bunch of cooperative organizations regulated by the Province of Quebec.
Mr. Campbell: The Province of Quebec and its regulators have
themselves deemed Desjardins to be systemically important for the province, and
therefore the Autorité des marchés financiers is approaching regulating
Desjardins with that in mind. They have given a similar designation to
Desjardins inside its own regulatory ambit.
Senator Enverga: Would you require them to maintain a minimum
capacity? Will it be part of the system-wide policy?
Mr. Campbell: We are working with other provincial regulators,
including the Province of Quebec. I will not speak for them, but I know the
intent would be that Desjardins is regulated to the same standards as others. It
is really up to the provincial parties to ensure that they are appropriately
Senator Enverga: You don't think they are important to the whole
federal policy system?
Mr. Campbell: The banking operations or credit union operations that
Desjardins does are not federally regulated.
Senator Day: I have two questions. They are both probably quite
obvious, but I don't know my way around the Bank Act clearly enough.
First, why, in this legislation, do you feel it necessary to add 39.01(1),
which exempts the credit union continuing as a federal credit union resulting
from the continuance from any of the requirements of Part VI of the Bank Act
related to voting? Voting seems to me to be pretty fundamental, and I wonder why
they could be exempt for three years.
My second question relates to the issue of systemically important banks. That
terminology and the obligations that flow with that designation have been around
for a number of years, since the economic crisis period in 2013. I have
indication that those banks designated had higher capital requirements and
greater supervisory intensity; then, last year, there were additional
requirements for banks under that designation of systemically important to
Canada, and they had to prepare a lot more documentation to help get them out of
trouble if there was any difficulty.
Now this legislation comes along which says OSFI can formally designate them.
Is this just the name and the law catching up with what already has been going
Mr. Campbell: I will answer both of those questions, and others can
To take your latter question, yes, this is effectively just enshrining in
legislation the authority of the superintendent to designate these institutions
as systemically important, and then bring all that is needed in order to
regulate them as such, given their importance to the Canadian economy in that
Regarding your first question, under those two exemptions, in particular the
one that pertains to voting, once a credit union is in the federal domain, we
recognize there are various provincial regimes across Canada that have rules
that pertain to voting. Some provincial regimes are arguably more advanced than
ours and allow for electronic voting or for when they communicate with members.
This basically recognizes, after talking to some credit unions, that they would
be seeking some relief to continue the way that they have been voting with their
members for a period of a few years. This allows the minister to say he thinks
the provincial rule substantially complies with the intent of the federal rule,
but recognizes they may be conflicting, and so for a period of time he will
allow the credit union to continue to operate under that voting regime for three
Senator Day: Thank you.
The Chair: Thank you, witnesses. Thank you for a great hour and a
half. I appreciate it very much.
For the second portion of our meeting in which we're pre-studying Part 4 of
Bill C-15, I'm pleased to welcome, from the Canadian Bankers Association, Darren
Hannah, Vice President, Finance, Risk and Prudential Policy. Thank you for being
with us today. Please go ahead with your opening remarks, and then we'll get to
Darren Hannah, Vice President, Finance, Risk and Prudential Policy,
Canadian Bankers Association: I'd like to thank the committee for inviting
the Canadian Bankers Association to discuss Part 4, specifically Divisions 3 and
5, of Bill C- 15, the 2016 budget implementation act.
The CBA represents 59 domestic banks, foreign bank subsidiaries, and foreign
bank branches operating in Canada and their 280,000 employees across Canada.
Strong, sound banks help families buy a home and save for retirement, help
small businesses grow and thrive, and help drive the economy. Over half of all
business lending in Canada is provided by banks. In fact, as of December 2014,
total authorized lending surpassed $990 billion, up 5.5 per cent over the
previous year and up 40 per cent since 2009.
Canada's banks are prudent lenders and continually work to make credit
available to credit-worthy Canadians and businesses in Canada. This prudent
approach is a key reason why Canadian banks avoided the financial difficulties
that plagued banks in other countries. Maintaining these sound, fundamental
principles of prudent lending is important to Canada's banking system and is in
the best interests of Canadians.
During the financial crisis, there was significant turmoil in the global
financial system. A number of banks in other countries became insolvent and
either failed or received taxpayer-funded bailouts. In Canada, this was not the
case. No bank was in danger of failing and no government bailouts were required
during the financial crisis. Canada's banks were well-capitalized, well-managed
and well-regulated going into the global financial crisis, and they remain so to
As you know, the global financial crisis led to a series of significant
regulatory changes to international banking rules. These efforts and regulatory
reforms were designed with the objective of reducing risk in the global banking
system and preventing another financial crisis.
While these rules are set internationally, it is up to domestic regulators to
put them in place and to enforce them. For example, as the committee is well
aware, Basel III sets out new rules to enhance bank capital and liquidity
requirements. These changes have increased the level of capital and liquidity
that banks must hold, and they further reduce the remote chance that a bank in
Canada may become distressed.
A key element of the global financial reform agenda is the bank
recapitalization framework, otherwise known as a bail-in regime. The idea was
originally proposed by the Financial Stability Board, which was established in
2009 to monitor and make recommendations about the global financial system. In
2011, the Financial Stability Board published a report entitled Key
Attributes of Effective Resolution Regimes for Financial Institutions. It
provided a high- level framework for a bank resolution regime to protect
taxpayers. This was officially endorsed by the G20 in November 2011 as part of
its broader financial-sector reform agenda.
Although the Canadian financial system remained strong throughout the
financial crisis, the federal government began exploring potential options to
institute a bail-in regime for domestic systemically important banks in Canada.
The CBA and its members have been part of these consultations from the
beginning, and we support efforts to enhance the financial system by introducing
a bank recapitalization regime.
In short, a bail-in regime provides a framework to allow the conversion of
certain long-term debt obligations into capital in the unlikely event that a
bank depletes its capital and is in danger of failing. It provides a strategy to
ensure that losses are borne by shareholders and creditors, and protects
taxpayers in the event of a bank failure.
Regarding the bail-in regime, we would like to make one point very clear: It
will not capture deposits as part of its resolution framework. Instead, the
bail-in regime will use long-term debt instruments that could be converted into
common equity in order to recapitalize the bank so that it can remain in
This, in effect, means that the bail-in framework is actually an added level
of protection for depositors, as it provides a road map for the bank to return
to solvency. Furthermore, Canadian bank deposits are already insured up to
$100,000 by the Canada Deposit Insurance Corporation in the unlikely event that
a bank fails, so bank customers can be assured that their deposits are safe.
The bail-in regime proposed in Bill C-15 ensures Canada remains consistent
with international standards endorsed by the G20 and provides the government
with another tool in its bank-resolution tool kit, despite the demonstrated
strength and stability of Canadian banks. We are supportive of the framework,
and we look forward to working with the government as it further develops
regulations to complete the bail-in regime.
Division 3 of Part 4 amends the sunset provisions of the statutes governing
federal financial institutions by extending by two years — to March 2019 — the
sunset date beyond the normal five-year cycle. This will provide the government
with additional time to undertake a review of the statutory framework for
financial institutions in Canada.
As committee members know, the Bank Act and related statutes are important
and complex pieces of legislation. It is our understanding that the government
has yet to determine the nature and focus of this next review, so we look
forward to working with the government and parliamentarians once the review
The CBA and its member banks are committed to continuing to contribute to
effective public policies that support a sound, successful banking system for
the benefit of Canadians and Canada's economy.
Thank you again for the opportunity to present our views, and I look forward
to your questions.
The Chair: Senators, as you know, we have about 22 minutes left, so
govern yourselves accordingly.
Senator Massicotte: Quick questions, quick answers. Let's say one of
your members — TD, RBC, which are all in the United States — or even those in
the United States — your members issue a lot of debt in the U.S. and other
marketplaces outside of Canada. I gather that even if a U.S. citizen owns a
debt, it's still subject to the bail-in conditions? Because Canadian legislation
will dominate. Is that accurate?
Mr. Hannah: Typically, when debt is issued, it's issued at the group
level, so it's issued at the parent level.
Senator Massicotte: We mentioned many banks. Let's say TD, RBC or any
other bank has a solvency problem with a U.S. entity. Canadian banks take a lot
of time and pain to make sure they segregate the banks. But let's say there's a
problem with the American subsidiary — and it is a subsidiary; it's not the
parent company in the U.S., most often.
Therefore, let's say OSFI and CSE say there's a problem, given the
consolidated approach, given the inclusion of the U.S. subsidiary causes a
problem with the consolidated approach, they may come to a decision to convert
some debt to equity. Yet, the alternate solution is to ask, "Why don't we regard
this as a separate entity, which it is in law, and allow the U.S. authorities to
deal with it?'' How do you deal with that issue, and how do your members feel
about that "looseness'' where you may see conversion of debt whereas it's
allocated to a third country?
Mr. Hannah: Senator, at that point in time what you're starting to
think about there is that it's less about the bail-in framework and more into
something else that was alluded to before, and that's the resolution planning
and recovery process. Each of the domestic systemically important banks has to
work with the regulator, primarily CDIC, to identify a resolution and recovery
plan: What would you do under the following circumstances? How would you go from
a point of financial weakness, and what steps would you take to come to a point
of financial strength? That includes looking at the different situations that
you might have amongst some of your affiliates and how you deal with that.
The Chair: You could sell them.
Mr. Hannah: Correct.
Senator Massicotte: Let's say they convert debt to equity in Canada,
and I'm part of the debt holder. I get converted equity. But I think legislation
also says that if liquidation would have been better, I can sue for damages,
right? I think that's what the proposal is.
Mr. Hannah: It's usually not made worse off.
Senator Massicotte: Exactly. But if that bank had liquidated, the U.S.
problem was not my problem; I would have been whole. So then I presume you've
got the recourse mechanism. But the recourse mechanism, as you well know, is
very one-sided. The government can develop a tribunal. You have no right to sue.
They decide. You take what it's at. Certain debt holders won't be very happy
with that. Is that satisfactory to you, that process?
Mr. Hannah: I come back to the disclosure that goes along with this.
It applies to new debt. The new debt holders will understand going in and will
be clearly informed what the terms are that they're buying into. They will be
informed about the fact that the bail-in regime is there and that this is a
potential risk. The risks are disclosed up front. Will they be happy about it?
No, but they will have known that it was going to happen.
Senator Massicotte: But members have no difficulty with that recourse
mechanism per se?
Mr. Hannah: Not directly, no.
Senator Massicotte: You obviously reviewed the amendments to the whole
purpose of federal credit unions, if you wish. Do your members have any dispute
with those amendments? Are you all okay with it? Is it unfair competition? Can
you make a comment on that?
Mr. Hannah: We've generally been supportive of a federal credit union
option. We recognize that there will need to be transitional measures,
absolutely. We recognize, though, and are very supportive of the fact that
transitional measures have to have a termination date. Moving from one regime to
another is not a simple matter, understood, so there needs to be allowance for
that, but at some point in time everybody has to be moved to the same set of
Senator Massicotte: Why the roughly poor success? We've been talking
about this issue for five years at this committee, where some credit unions have
expressed a desire to be federal, and yet nothing has occurred. We're about to
have maybe one little birth.
Mr. Hannah: I'm the wrong person to ask that one, senator. That's
something you would have to ask people on the credit union side.
Senator Enverga: Thank you for the presentation. I know our banking
has a solid foundation, and I know it's evolving in certain ways. You also
mentioned that you're supportive of the framework that the government has
Are there any other missing pieces to make sure the bank is strengthened
further? Can you think of any other legislation that perhaps government has to
make on this part?
Mr. Hannah: I'll come back to something one of the prior presenters
said. This is actually near the end of the process of reform rather than the
beginning. We've already gone through a substantial process of putting enhanced
capital requirements, enhanced liquidity requirements and a resolution planning
process. This is near the — I shall call it the ultimate step and the final
step, more towards the final step, of building out that robust framework. I
think we've done a lot up until this stage.
Senator Enverga: I know there are limitations to foreign ownership in
our banking system. Is that one of the things that you would like to change?
Mr. Hannah: The ownership rules are a completely different issue. They
really don't apply in the case of bail-in. That's a different question. It's not
something we've really looked at.
The Chair: Any other questions?
Mr. Hannah, we seem to be a bunch of happy senators today and seem to be
satisfied with all the other witnesses that we had here today. But I think your
testimony has given us comfort that the bankers are also in agreement with the
legislation and don't see any roadblocks or problems. We appreciate that very
much. That's one less problem that we have to deal with.
Our next meeting is Wednesday, June 1. With that, the meeting is adjourned.