Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue No. 40 - Evidence - May 9, 2018
OTTAWA, Wednesday, May 9, 2018
The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:33 p.m. to study the subject matter of those elements contained in Divisions 2, 4, 5, 6, 7, 12, 16 and 19 of Part 6 of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.
Senator Douglas Black (Chair) in the chair.
The Chair: Good afternoon, and welcome colleagues and members of the general public who are following today’s hearing either here in the room or via the Web.
My name is Doug Black. I’m a senator from Alberta and I chair this committee. We have a small number of senators because, as you understand, there’s a lot of activity in the chamber this afternoon, but the good news is we have quorum. So we’re starting. We want to get underway. So we’re going to introduce the senators who are here to you, starting with Senator Wallin.
Senator Wallin: Pamela Wallin from Saskatchewan.
Senator Moncion: Lucie Moncion, Ontario.
Senator Wetston: Howard Wetston, Ontario.
The Chair: Of course, we have the clerk, and we have our analysts, who do fabulous work for this committee.
Today, we continue our subject-matter examination of various divisions of Part 6 of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures, otherwise known as the budget implementation act 2018, No. 1.
Honourable senators, you will know that our committee must report our findings to the Senate no later than May 31, 2018.
Today, senators, in part one of our meeting, which I hope to complete before the bells for the deferred vote, scheduled for 5:30 p.m. today, we will hear from officials from the various departments responsible for the following divisions of the bill, all coordinated by the Department of Finance Canada: Division 2, Canada Deposit Insurance Corporation Act; Division 4, Securities Issued or Guaranteed by Foreign Governments; Division 5, Exchange Fund Account; Division 6, Banknotes; Division 7, Payment Clearing and Settlement; and Division 16, Financial Sector Legislative Renewal.
I should note that we are hearing from more officials tomorrow morning, regarding Division 12, Communications Security Establishment; and Division 19, Canada Pension Plan. So I would ask that any questions related to those divisions wait until tomorrow.
For today, we will have a busy and informative session and one that I hope, with some organization, will be as seamless as possible. I would remind you that we have a lot of ground to cover, so questions, of course, will be crisp.
We will start with Division 2 and, once completed, welcome the witnesses for the next division at the table in the order that I mentioned.
So, again, for Division 2, Canada Deposit Insurance Corporation Act, I am pleased to welcome, from Department of Finance Canada, Financial Sector Policy Branch, Yuki Bourdeau, Senior Advisor; and Justin Brown, Director, Financial Stability. John Rossi is the Policy and Research Advisor from Canada Deposit Insurance Corporation.
So please proceed with your opening remarks, and then we will move to questions.
Justin Brown, Director, Financial Stability, Financial Sector Policy Branch, Department of Finance Canada: Good afternoon.
Part 6 of Division 2 proposes amendments to the Canada Deposit Insurance Corporation Act to modernize and enhance the Canadian deposit insurance framework.
Deposit insurance is an important element of the financial safety net. It contributes to maintaining public confidence in the financial system by protecting depositors’ savings in the unlikely event that a deposit-taking institution fails. The proposed amendments modernize the scope of deposit insurance coverage to better reflect products currently offered in the market. For example, these amendments would remove travellers cheques as an eligible deposit as they are no longer issued by member institutions. They would eliminate the five-year term limit on GICs as longer-term products are now available, and they would extend coverage to foreign currency deposits, which are widely used by Canadians. These amendments would also improve the rules for trust deposit accounts by clarifying record-keeping requirements, which would facilitate more timely payouts in the event a bank fails.
This suite of amendments seeks to modernize and clarify the deposit insurance framework so that it can continue to meet its objectives of protecting depositors, promoting competition and supporting financial stability.
The Chair: Any other comments? Any questions?
Senator Wetston: This is not directly related to the amendment, but it might be related to your work, which is inflation and the CDIC insured limit, 125K.
Mr. Brown: It’s $100,000 per category.
Senator Wetston: Right, but it should be 125K with inflation. So why isn’t it 125K? Any thoughts?
Mr. Brown: The deposit insurance limit is something that was looked at as part of the deposit insurance review. When we looked at the data, an estimated 98 per cent of personal deposits and 92 per cent of corporate deposits are insured under the current limit. So any increase to the limit would disproportionally benefit corporate depositors and large, sophisticated personal investors. So it was considered to be not necessarily advancing the objectives of the deposit insurance review.
Senator Wetston: I have no idea why that makes sense to me. If they don’t have deposits up to that, it’s fine. I understand. It doesn’t affect them adversely because you’re insuring up to that amount. So, if somebody had $75,000 and lost 75, they still get the insurance. So I still don’t understand why you’re suggesting that this group should not get the benefit of a higher level of protection.
Mr. Brown: I could add, as a counter-example, that the CDIC could insure deposits to an unlimited amount, but what we have seen in international best practices and from our own analysis is that striking a balance between an adequate amount of coverage, that covers the large majority of individual depositors, while still leaving large, sophisticated investors open to potential losses, reduces the moral hazard in the financial system. So, if you have large amounts of money invested in a specific financial institution, you have an incentive to look at the practices of that financial institution to ensure that they’re sound. Otherwise, it’s simply a case of the government taking all of that responsibility, all of that risk, onto itself.
Senator Wetston: My note here is around foreign currency deposits. They’re not insured, I take it.
Mr. Brown: They are not currently, no.
Senator Wetston: Does that mean they might be insured?
Mr. Brown: The proposed amendments would include foreign currency deposits as eligible deposits, so, yes, they would be.
The Chair: A follow up to the questioning of Senator Wetston. The cap of $100,000 has been in place for how long?
John Rossi, Policy and Research Advisor, Canada Deposit Insurance Corporation: That has been in place since 2005. That was the last time that that was reviewed, and it was increased from $60,000 to $100,000.
The Chair: You don’t believe that it’s appropriate to lift that at this point? I’ve heard what you’ve said in testimony, but this puzzles me.
Mr. Brown: All I can do is repeat what we’ve seen in terms of looking at the data of current deposits, which is that the vast majority of deposits are currently insured.
I believe for the average individual or corporation almost $12,000 is the average amount that is insured, that is deposited. So most Canadians are well under that $100,000 limit.
Senator Wallin: So foreign currency deposits are not insured. Are deposits in foreign instruments insured?
Mr. Brown: Insurance only applies to deposits. So, very roughly speaking, cash or cash equivalents. Currently, foreign currency is not considered an eligible deposit. The proposed amendments would include foreign currency deposits for coverage.
Senator Wallin: Give me an example. I have an American currency account in Canada that was not, and now will be insured?
Mr. Brown: That’s exactly correct.
Senator Wallin: My second question was about the registered education plans. What happens there?
Mr. Brown: My colleague John has something to add to the foreign currency question.
Mr. Rossi: Currently our definition of deposit only applies to deposits that are payable in Canada, so any foreign currency amounts that a person would hold in a branch in the U.S. would not be covered under our framework, but under the U.S. framework.
However, anything held in Canada in a foreign currency would be covered under the proposed amendments.
Senator Wallin: That’s how you would have it unless there is a partnership with an American bank.
Mr. Rossi: Exactly.
Senator Wallin: On the registered education fund, what are we doing to it?
Yuki Bourdeau, Senior Advisor, Financial Sector Policy Branch, Department of Finance Canada: This is a streamlining amendment. There’s no change to the coverage. What we’re doing is trying to make it easier for depositors to understand the framework. Currently there is a bit of a patchwork where it comes to coverage for registered products. RRSPs, RRIFs and Tax-Free Savings Accounts have their own separate categories for up to $100,000. RDSPs and RESPs are currently covered either under trusts or the personal joint categories. We’re adding two more categories for RDSPs and RESPs so that it’s simple to understand. It’s easy to explain, if it’s a registered product it’s covered up to $100,000.
Senator Wetston: Going back to this issue that Senator Wallin was discussing with you — you’re going to cover RESPs and RDSPs but not RRSPs, RRIFs or Tax-Free Savings Accounts? Or you are?
Ms. Bourdeau: They’re currently covered. They currently have their own $100,000 coverage.
Senator Wetston: You’re adding them. Thank you for that.
One other quick question. The annual premiums, if these provisions are passed, will this result in annual premiums being increased as it applies to financial institutions to cover increased coverage proposal?
Mr. Brown: The rate of premiums are set by CDIC bylaws. This won’t have any effect on that. That’s a separate piece of statute.
However, CDIC premiums are based on the amount of insured deposits. Something like adding foreign currency would increase the amount of deposits that are insured, and that would increase the premiums in a corresponding way.
The Chair: Can you give us some indication as to the number, if any, of claims under the Canada Deposit Insurance Corporation Act?
Mr. Brown: If I understand the question, CDIC would pay out in the event that one of its member institutions fails. I believe the last failure of a CDIC member institution was in 1996, so it has been 22 years.
The Chair: Thank you very much.
Mr. Rossi: CDIC is not a claim-based operation. The depositors don’t have to make a claim to CDIC, the payment is automatic. We calculate that automatically and send the money to the depositor.
The Chair: That’s helpful as well.
Senator Moncion: In credit unions, you know that the insurance is much higher. It’s different in every province. Is there any reason? Can you explain the rationale to me, why you have never gone that way?
To give an example, in Ontario, all RRSPs are covered, so the coverage doesn’t end at $100,000. They’re all covered, they’re 100 per cent covered. They’ll cover chequing accounts for $100,000, joint accounts for $100,000 and so there are a lot of intricacies where there is coverage. Any reason why you have not gone that route?
Mr. Brown: There are financial institutions that are federally regulated in Canada and financial institutions regulated by the provinces. Different provinces set different rules around deposit insurance coverage. As you mentioned, some provinces have unlimited coverage, some have limits, such as the federal government. I don’t think we’re in a position to comment on why different provinces have set their limits in different areas.
I would clarify that the $100,000 limit for CDIC does apply to each individual category, as you mentioned. It’s not just per institution. It’s per category per institution. For example, you could put $100,000 in a joint account and $100,000 deposited in an RRSP in the same financial institution and each would be covered up to that $100,000.
Senator Moncion: It’s not per person?
Mr. Brown: It’s per category per financial institution. There tends to be a focus on the $100,000 limit. In reality there are options for Canadians to receive more coverage than that per individual financial institution. Looking at the numbers at the federal level, they have shown that the vast majority of Canadians are fully covered. All of their deposits are covered under the current framework and the $100,000 limit.
Senator Moncion: Do you have information on the size of the fund that is accumulated for the deposit insurance? What’s the average that you are looking to keep?
Mr. Rossi: Our current fund is sitting around $4 billion and is funded directly through the premiums that we charge our member institutions, so there is no taxpayer contribution to that. It’s directly from our members.
We’ve set a target of about 100 basis points on insured deposits and we’re halfway there right now.
Senator Moncion: You’re at 50 basis points.
Mr. Rossi: Just over 50 basis points right now.
Senator Moncion: Any reason why you are not at 100 per cent? Because you have been collecting for 22 years now and you haven’t paid out of the fund for the last 22 years.
Mr. Rossi: We have tried to manage it in such a way as not to impose an undue burden on our membership. We’ve set a broad time frame to achieve our objective and we have currently a 2025 time frame for that objective and are building towards that.
Mr. Brown: I would add to John’s point that premiums charged on financial institutions, in whole or in part, get passed on to the depositors, to consumers. So there is an interest in building that gradually rather than imposing that in a short term.
Senator Moncion: I’m with a credit union, so I know how you build it. How much do you charge per $100,000 asset?
Mr. Rossi: We have a four-point scale and the vast majority fall into the first level which last year was at 6.5 basis points of insured deposits.
Senator Moncion: Six point five is much lower than credit unions.
Mr. Rossi: It scales up as the —
Senator Moncion: As the risk goes up. Thank you.
Senator Wetston: One follow up question, not directly represented by going back to my 125 if I can. Forgive me for this but, you’re aware of probate fees and the relationship between deposits and the fact that often families will have joint accounts not just because they trust one another, but because of the fact that they want to avoid probate. If you had that and you separate the accounts, you get both accounts insured up to $100,000. With probate fees looming on the horizon, in a joint account you would only get the $100,000 as well.
Have you ever given any thought to the fact that you have to consider that when families put joint accounts together and then are affected by tax one way and the failure to have an increase in deposit insurance the other way?
Mr. Brown: I would simply respond that I think deposit insurance is one factor that Canadians consider when they’re investing their money.
There are various different avenues that are available, for example, even just choosing between putting your money in a cash deposit versus some other investment, and it’s one of the factors that people consider.
If deposit insurance weighs heavily on their decision, there are ways of getting coverage by investing in different ways at a financial institution, but that has to be offset by other considerations such as fees for going through, for example, brokers or other things like that.
Senator Wetston: I wasn’t asking for investment advice, but thank you anyway.
The Chair: Thank you, witnesses. That was very helpful to us and I would invite witnesses for Division 4 to make themselves available.
We will now deal with Division 4, securities issued or guaranteed by foreign governments, and Division 5, Exchange Fund Account, with Mr. Marion and Mr. Gravelle, whom I am very happy to welcome, of course. It’s nice to see Mr. Marion. He was helpful to this committee when we were in New York this time last year, so welcome back. It’s nice to see you.
Can you please proceed with your opening remarks on both divisions, if that works for you, and then we will move to questions?
Toni Gravelle, Managing Director, Financial Markets Department, Bank of Canada: Good afternoon Mr. Chair and committee members.
I am the Managing Director of the Financial Markets Department at the Bank of Canada.
Thank you for your invitation to discuss proposed legislative changes to Bill C-74, to the Bank of Canada Act and the Currency Act.
Under section 18(d) of the Bank of Canada Act, the Bank of Canada has the authority to buy or sell securities issued or guaranteed by the government of a country in the European Union. The Bank of Canada is proposing amendments to the act in anticipation of the United Kingdom’s exit from the European Union.
These amendments would ensure the Bank of Canada can continue to buy and sell securities issued and guaranteed by the United Kingdom.
Nick Marion, Director, Reserves Management, Financial Sector Policy Branch, Department of Finance Canada: For Division 5 proposed amendments, the Exchange Fund Account represents the largest component of Canada’s official international reserves. In 2011, the government announced that the exchange fund account would be part of the government’s prudential liquidity plan if, for instance, markets were severely disrupted or inaccessible for domestic funding purposes.
The proposed technical amendments in Division 5 of Part 6 would clarify this objective by stipulating that the Exchange Fund Account may provide a source of liquidity for the Government of Canada. The amendments would also clarify that funds in the Exchange Fund Account can be transferred to the Consolidated Revenue Fund.
The Chair: Thank you very much.
Senators, any questions?
Senator Moncion: How much is in the Exchange Fund Account right now?
Mr. Marion: Within the Exchange Fund Account, there is approximately $81 billion as of the end of fiscal year March 31.
Senator Moncion: How much of that money would the government want to use? I understand it’s in case of an emergency. How much does he have to keep in the fund and how much does he have to work with?
Mr. Marion: Thank you for the question. Within the Exchange Fund Account there are, broadly, two tiers of assets. In the first tier, the largest component is the liquid reserves. In terms of liquid reserves, as of the end of fiscal year March 31 there was approximately $73 billion, and the other components are Special Drawing Rights, which is a currency issued by the IMF and so the balance is in SDRs, these Special Drawing Rates.
Now, from a prudential liquidity perspective, all of the funds would be available if the government needed it because the domestic funding markets were inaccessible. The reality is only a portion would likely be needed and one needs to be creative as well in terms of thinking that domestic funding markets are inoperable and inaccessible for a long period of time.
Senator Wetston: Why do you need this amendment? I thought you could have done that anyway. I’m not thinking of lender of last resort issues, obviously, and I’m not necessarily thinking along that line, post-financial crisis, but I’m still not absolutely sure.
My concern is that — and I wouldn’t suggest this would be the case — it could be used for the wrong purposes and if that is the case, not having this amendment would preclude that from occurring; having this amendment might allow that to occur. I think you know what I’m getting at.
Mr. Marion: Thank you for the question, senator. I will draw your attention to two specific points related to that question. The first is that within the Currency Act, it’s expressly stated that funds can be advanced — and I use the term “advanced” — from the Consolidated Revenue Fund to the Exchange Fund Account. Some would suggest that in the term “advance” there is a concept of being able to pay those funds back, but it’s not expressly stated.
Within the Currency Act there is also a provision right now that allows for net returns generated through investment activities to flow from the Exchange Fund Account to the Consolidated Revenue Fund.
So there were already mechanisms for the two-way transfer and at least from our perspective, the presumption is that one could do it but as good stewards we want to make sure it’s clarified, which is why this would be construed as a technical amendment.
Senator Wetston: And you want to do it in a way to avoid any transfer of funds for purposes which may not be entirely related to the issue that you’re attempting to address. How does this preclude that from occurring?
Mr. Marion: The funds available within the Exchange Fund Account were deemed to be eligible for the government’s prudential liquidity plan back in 2011. It was well laid out in Budget 2011 and since then has been reasserted in every subsequent budget, as well as in the annual report on the management of the Official International Reserves. So there is certainly that commitment that has been made in the past and a recognition that the funds would be available for that purpose. So there is that stated commitment.
I would like to add as well that the way that the fund is managed is through an asset liability match framework. So for every asset in a particular foreign currency, there is a matching liability and that’s for a risk management perspective in the way that it neutralizes currency fluctuation risks as well as interest rate risks, in part because we match duration.
If one were to remove those assets from the EFA to the Consolidated Revenue Fund, you would have a mismatch there and you raise other risks. It’s always better, at least from my perspective, for the government to raise funding for domestic purposes through domestic funding channels.
Senator Wetston: On this issue of the previous amendment, I guess, Mr. Gravelle, on the holdings and the U.K. withdrawing from Brexit, without the proposed change, what would happen to the government’s holdings of securities?
Mr. Gravelle: Currently, the bank doesn’t hold any other securities other than in Canadian dollars. So we just hold Canadian dollar securities, mostly Government of Canada bonds and T-bills. This is a precautionary measure.
If, in the future, we had to hold or purchase other types of securities and, in particular there is a possibility where, in terms of prudential liquidity plan, the government needs Canadian dollars, we could do a repo with the EFA, the account itself, and receive, for example, United Kingdom securities in return for Canadian dollars. So we’re being, in some sense, prepared for any shock in the future. That would allow us to more efficiently lend money to the government in that sort of very systemic event, but, right now, we don’t hold any.
Mr. Marion: The assets within the Exchange Fund Account are held in the name of the Minister of Finance, and the Bank of Canada manages those as fiscal agent to the government.
Senator Wetston: Do we have Canadian securities guaranteed by the U.K. at present?
Mr. Gravelle: Canadian dollar securities, you mean?
Senator Wetston: Yes.
Mr. Gravelle: We don’t hold any. There might be some in the market, but not held by the bank.
Mr. Marion: Would you refer to Maple-Bond-type instruments?
Senator Wetston: No, not really because I don’t look at it that way, but maybe comment on it. I wasn’t thinking of Maple Bonds, but I’m glad you asked the question.
Mr. Marion: We do hold U.K. securities that are guaranteed by the government, and we do have that as part of our portfolio.
Senator Wetston: I was thinking of the other way, but that’s okay. The list of countries whose securities the Bank of Canada can buy and sell is limited to?
Mr. Gravelle: It’s U.S., Japan and the EU right now, as well as Canada.
Senator Wetston: Thinking of others, are you?
Mr. Gravelle: No, not at all.
Senator Wetston: Why?
Mr. Gravelle: We think that’s a more than generous set of availabilities in terms of securities holdings. Our balance sheets can be fulfilled. Any balance sheet growth that we manage currently, because our liabilities are growing, is more than sufficiently able to be fulfilled with Canadian dollar securities. Actually, Government of Canada securities are sufficient because, for Government of Canada securities, there is $560 billion outstanding, and we only need, right now, roughly $80 billion to fulfill our balance sheet of holdings, in terms of assets.
Senator Wallin: These seem pretty straightforward. It is kind of like just-to-be-safe amendments. But, just for interest’s sake, what on earth kind of crisis would have to occur to trigger this? I think you said, Nick, that domestic funding markets would not be accessible, and that’s what would happen. What does that mean? Every bank would have to fail?
Mr. Gravelle: One example that’s kind of close and probably what drove the prudential liquidity plan is 9/11.
Senator Wallin: Okay. Because of the technical shutdown?
Mr. Gravelle: There are clearing banks and systemically important institutions that do the backroom clearing aspects of the markets that were shut down in New York, and it caused a global shutdown of various capital markets. It was for only a day or two, so it was kind of short term. But that was one of the things we were thinking of.
Senator Wallin: Fortunately, the computers in Bermuda worked.
Mr. Gravelle: Exactly. Those are the kinds of events we’re thinking of. Another one would be a cyber event, for example.
The Chair: Thank you very much, gentlemen. Thank you very much for your presentation. Very helpful. We’re going to move on to Division 6, Banknotes.
I’m pleased to welcome, from the Department of Finance Canada, Financial Sector Policy Branch, Marie-Josée Lambert, Director, Crown Corporation and Currency; and, from the Bank of Canada, Richard Wall, Managing Director, Currency Department.
Please proceed with your statement, and then we’ll move to questions.
Marie-Josée Lambert, Director, Crown Corporation and Currency, Finance Sector Policy Branch, Department of Finance Canada: Thank you, Mr. Chair.
Canadians need secure bank notes that they can use with confidence and pride.
The government proposes to initiate the process to remove legal tender status of banknote denominations no longer issued by the Bank of Canada, that is the $1,000, the $500, the $25, the $2 and the $1. Removing the legal tender status of older bank notices, such as those with less sophisticated security features and denominations no longer issued by the Bank of Canada, would contribute to the reduction of illicit transactions and increase the security of Canadian banknotes in circulation. Mr. Wall will provide further information.
Richard Wall, Managing Director, Currency Department, Bank of Canada: Thank you for the invitation to discuss the proposed legislative changes to the Bank of Canada Act and the Currency Act. These changes will allow the government to remove legal tender status from Canadian banknotes and the Bank of Canada to more effectively manage the quality of notes in circulation.
Notes issued by the Bank of Canada, together with coins issued by the Royal Canadian Mint, are what is known as legal tender, which means the money approved in a country for paying debts. Removing legal tender status means that some banknotes can no longer be used for payment of debt.
In short, it will be more difficult to make purchases using bank notes without legal tender status: businesses will refuse them, because they will not be able to use them to pay their debts. These notes will not lose their value, however. The Bank of Canada will continue to honour them.
The Bank of Canada supports this initiative because having the power to remove legal tender status from banknotes means that we can do a better job of keeping notes that are in circulation more secure. Newer banknotes have better security features that make them difficult to counterfeit and are in better condition overall. Keeping notes current means that they work more efficiently for all of us. To date, every note issued by the Bank of Canada since 1935 remain legal tender, despite the fact that the security features on these older notes are either non-existent or easily simulated. Withdrawing older notes from circulation will contribute to the public’s confidence in using banknotes and the systems in place to efficiently process them.
As stated in Budget 2018, if the power to remove legal tender is granted by Parliament, the government’s intention is to remove this status from the $1, the $2, the $25, the $500 and $1,000 banknotes. Legislative changes are required to both acts because the powers for issuance of banknotes reside in the Bank of Canada Act, but the specifics of banknotes are in the Currency Act.
Many central banks have the power to remove legal tender status from their old notes. At the Bank of England, for instance, the removal of legal tender is often part of the issuing strategy: when a new note is put into circulation, the old series and the new series are in circulation at the same time for a predetermined period of time. After that, people have to go through the central bank to be reimbursed for their old notes. For example, the Bank of England issued a new 10 pound note in September 2017, and in November, it announced that the old bills would cease to be legal tender four months later.
In Canada, however, bills whose legal tender status has been removed are no longer in circulation. Those are the $25 and $500 bills, which were among the first notes issued by the Bank of Canada in 1935; the $1 and $2 bills, which were no longer issued as of 1989 and 1996 respectively; and the $1,000 bill, which has not been issued as of the year 2000. This decision should not have a major impact on most Canadians. These bills have not been produced for decades and are rarely used in transactions.
If the government is granted this power, the bank will provide clear information to Canadians on how to redeem the affected notes. This will involve a period during which the notes can be redeemed through financial institutions, as Canadians can do today. After this period, the notes can be redeemed directly with the Bank of Canada.
I am happy to answer any questions that you may have.
The Chair: I note the light reflecting the bells is flashing. What does that mean?
Senator Ringuette: It is a one-hour bell.
The Chair: Very well. On we go.
Senator Tannas: You mentioned that the Bank of England has had this power for a while and I happened to have an experience where my grandmother gave me a bunch of money and I tried to spend it and it had been recalled. I couldn’t take it to a bank in England. I had to take it to the Bank of England to exchange it, which was a taxi ride in London. We won’t have those problems here, right? You can always take your $1,000 bill to your local Royal Bank and they will take it from you? Is that the plan?
Mr. Wall: There will be a period of time where the notes can be exchanged at financial institutions but just like what occurs today, with a $1,000 note dating from 1935 — and there are some — banks have difficulty authenticating whether that is a real note. So there is a process where a bank will take a note on collection and send it to the Bank of Canada and that process is in place. They won’t give credit right away because they can’t trust the note.
Senator Tannas: That is okay, but some little old lady in Wetaskiwin doesn’t have to drive to Ottawa to get her money.
Mr. Wall: No, there will be a number of ways they can do that, as they have today.
We have a number of ways in which Canadians can correspond with the Bank of Canada.
Senator Wallin: I’m not that worried because my sheet is one dollar bills. I don’t have any thousands lying around.
On this question — it’s kind of irrelevant to this and it’s very straightforward — at what point do you decide that the toonie, which makes my purse incredibly heavy, is a better idea than that nice bill we had? Who decides?
Mr. Wall: That ends up being a discussion between the Minister of Finance, the Royal Canadian Mint and the Bank of Canada.
Senator Wallin: Somebody proposes and says it’s time to do this.
Mr. Wall: The last time that discussion was had was in 1992 or 1994.
Senator Wallin: That’s when the $2 bill bit the dust?
Mr. Wall: Yes.
Senator Ringuette: I don’t have $1,000 bills either but I appreciate that Canadians with these old bills are able to go to their local facility and transact that way. I’m supposing that local facility will require a commission, though, for the work and who is going to pay for that?
Mr. Wall: If you’re a customer of the bank, that service is generally provided. As it rolls out, I expect it will happen less and less often. If in fact there is an instance where there is a fee attached by a financial institution — I’m not saying there will be — there are other mechanisms where a person can correspond directly with the Bank of Canada and we will reimburse them for whatever value they have.
Senator Ringuette: Okay, sounds fair. Thank you.
Senator Wetston: How much money are we talking about?
Mr. Wall: If you’re looking at the $1, $2 and $1,000 bills, it’s approximately $1 billion in value out of the $83 billion in value that’s in circulation.
The $1,000 note has not been issued since 2000. There were approximately 3.3 million at that time. There still remains about 700,000 in circulation. Of the $1 bills, I think there are 250 million in circulation still and the $2 bills, approximately 104 million.
Senator Wetston: We tussle with these big numbers like it does not mean a lot, but it is a lot of money, $1 billion. What do you do with it when you get it?
Mr. Wall: Since it’s coming out of circulation, we give credit to the depositor and then destroy the notes.
Senator Wetston: I always have a bit of a suspicious mind with this kind of stuff. It is probably my experience, but not personal. Are there money laundering opportunities associated with these bills that come out of circulation, used by organized crime to facilitate transactions that you may not be aware of and might be a useful tool to achieve that?
Mr. Wall: It’s a good question, and I appreciate it. With respect to removing legal tender status, probably not. But with the reimbursement of notes coming out of circulation, there is always that opportunity. We’ve looked at our mutilated note operation where we take notes that are generally damaged and give credit back to them. We built around that process a fairly rigorous validation process to make sure that the likelihood of money laundering or other illicit activities are not supported by our operations.
Senator Wetston: I suspect you’re on top of that. It’s one thing to be able to try to find a way to manage the money laundering aspects of this. It’s a whole other issue to address the counterfeiting aspects of this. So how much of the $1 billion that you think will be coming in would be counterfeit money?
Mr. Wall: Likely very little of it. The ones and twos were never highly counterfeited notes.
The $1,000 bill, because of its value, tends to be highly inspected by any receiver of it, so generally it has not been highly counterfeited. I expect a very low, a minuscule amount would be counterfeit but even then, we inspect every note that comes in through our processes at the Bank of Canada to make sure that we only credit real notes.
Senator Wetston: This is my last question, I promise. Do you use automated means to inspect these notes or do you have humans, believe it or not, doing it?
Mr. Wall: For most notes that come in — we process approximately 450 million notes annually — those are all done through automated processes. Unfortunately, for some of the notes, like the very old 1935 series notes, we don’t have machines that can read those notes so they are submitted to a manual process.
Senator Wetston: That’s a good thing. I don’t want robots or machines running our lives completely.
Senator Unger: There is a well-known court case in British Columbia between a family whose last name is Samaroo and the CRA. The Samaroos had many thousands of dollars saved in cash and they were worried that the bank would no longer accept the old $50 and $100 bills so they moved the cash from their safety deposit and put it into their bank account. This move caught the eye of the CRA who accused the Samaroos of tax evasion and took them to court. The process began in 2006 and is still in the courts today.
It’s tragic because it’s predicated on a misunderstanding with them that the bills would be worthless. What needs to be done to ensure that Canadians understand that while the bills will no longer be legal tender, they will not be worthless and will be redeemed at the Bank of Canada?
Mr. Wall: Thank you for the question. It is a good one. We intend to reinforce our public messaging around this to make sure people understand that the notes, regardless of the time that we happen to be in, always have their face value and will always be honoured by the Bank of Canada. And the processes in place to have those notes redeemed will be well publicized to Canadians.
Senator Moncion: That was my question. What kind of publicity will you have around the fact that you are pulling these bills? There are a lot of people who do not have a lot of trust in keeping money at home or leaving them in a financial institution, so they would put the money in safety deposit boxes.
Mr. Wall: We expect we will launch a public campaign around this and make sure that we reach out to our regional offices throughout the country to get the message out to as many people as we can.
Senator Moncion: Thank you.
The Chair: Thank you both very much. Very well done.
I would ask now that the speakers in respect to Division 7, payment clearing and settlement present themselves.
I am pleased to welcome back Yuki Bourdeau, Senior Advisor, Financial Sector Policy Branch, Department of Finance Canada; Mr. Justin Brown, Director, Financial Stability, Financial Sector Policy Branch, Department of Finance Canada and from the Bank of Canada; and Nikil Chande, Director, Financial Stability Department, Bank of Canada.
Please proceed with your opening remarks and then we will move to questions.
Mr. Brown: Division 7 of Part 6 proposes to amend the Payment Clearing and Settlement Act to implement a Financial Market Infrastructure resolution framework so that the appropriate tool kit is in place in the unlikely event that a systemically important FMI fails.
FMIs are hubs for financial transactions and facilitate the clearing, settlement and according of payments. Certain FMIs are designated and overseen by the Bank of Canada if they are considered to pose systemic or payment risks. It is important that these designated FMIs continue operating even in times of stress. Therefore, these amendments would introduce a resolution framework to support the development of feasible, credible resolution plans for the designated FMIs, and to provide a legal basis for federal authorities to intervene if a designated FMI is unable to recover from a stress event.
The proposed changes would help preserve financial stability, maintain the critical functions of the FMIs and minimize public exposure to losses during a financial crisis. Thank you.
The Chair: Anything else, Mr. Chande? Thank you very much.
Senator Moncion: I understand that the Bank of Canada would be doing the work if there is a financial institution that has liquidity problems, or you find problems in the loans or what not?
Mr. Brown: Just for clarity, there are different types of financial institutions. Many of these similar powers related to banks are provided to the Office of the Superintendent of Financial Institutions Canada on the day-to-day side of it, for daily operations. The bank has comparable oversight powers for these FMIs under the Payment and Settlement Clearing Act. What we’re talking about is the resolution side.
If one of the FMIs fails — on the bank side, a similar tool kit has been given to the Canada Deposit Insurance Corporation in recent years. What we’re doing here is the legislation proposes providing a similar tool kit for the Bank of Canada for these FMIs.
Senator Moncion: You would be two entities looking into the problem of one FMI that is having problems.
Mr. Brown: They would be distinct entities. There are banks, which are overseen on a regular basis by OSFI, and if they fail or are about to fail then the CDIC could step in. These are financial market infrastructures, and in this case there are two major payment systems in Canada, and two central clearing parties. They’re different institutions. Banks tend to be participants in the FMIs but are not the same institution. For FMIs, the Bank of Canada would be the resolution authority.
To add onto the coordination point, there are committees, federally, to coordinate between the different financial sector regulators. Coordination between the Bank of Canada and relevant provincial regulators is an important factor.
Senator Moncion: Thank you.
Senator Wetston: In my previous role in securities regulation, we spent a lot of time on this issue. Trying to identify what the appropriate resolution regimes would be in Canada, and I think we were following — and I’m asking you this question — whether or not we were following the international standards, the PFMI, as well as standards were developed through that, by IOSCO, FSB, et cetera. Could you share with the committee whether or not these standards have been developed in light of those, and whether or not they are comparable to those international standards that were developed post-financial crisis.
Mr. Brown: I would say currently, under the PCSA, the Bank of Canada applies international best practices related to PFMI, and the CPMI and IOSCO standards. There is a tool kit available already in legislation being applied by the Bank of Canada. In looking at this FMI resolution framework, so if an FMI is failing, we look at the key attributes that stem from the financial stability board. The financial stability board is the key international body that has been discussing and setting best practice standards since the financial crisis occurred. We’ve looked at the standards that have come out of that body, seen how they would best apply in the Canadian context, and that has been reflected in the proposed legislation.
Nikil Chande, Director, Financial Stability Department, Bank of Canada: Just as we oversee jointly with provincial securities regulators, like the Ontario Securities Commission, we develop the standards specifically to resolution for financial market infrastructures, through the financial stability board. We did that with the help of provincial securities regulators. We had the Ontario Securities Commission participating on the financial stability board work with the Bank of Canada collectively to help develop international principles that would guide the resolution regimes that are built for these financial market infrastructures. The regime that we’re proposing in Canada aligns very well with those international principles.
Senator Wetston: For clarification purposes, there are federal and provincial jurisdictions, and we have a lot of regulators as you know, but the CDS is jointly overseen by the AMF in Quebec, the OSC and the Bank of Canada because of jurisdictional responsibilities. If you took that forward and found a financial institution that was in trouble, required the application of a resolution regime, but was provincially regulated as opposed to federally — because when I think of the federal regulatory environment I think about insurance companies, banks, et cetera. And when I think about provincial, I also think about insurance companies, but not banks, financial institutions.
The last part of this question is that the large banks, as you know, are integrated. On the one side they are in financial services and on the other side they are in banking, but they are regulated by federal and provincial entities. In that environment, how would you respond to a circumstance like that?
Mr. Brown: It’s an important question that we have been discussing with the provincial regulators over the past several months. The Bank of Canada has an existing relationship with the relevant provincial regulators. In our view it works quite well.
Just for context, the Bank of Canada currently has oversight responsibility for the four designated FMIs that would be within the scope of the proposed amendments. The Bank of Canada looks at it from a system-wide perspective and a financial stability perspective, whereas for the two central counter parties, one of which you mentioned, the provincial authorities look at it from a market conduct perspective. That dual responsibility already exists under the current framework.
The Bank of Canada currently has a memorandum of understanding with relevant provincial authorities to help share information, and establish how consultation and coordinating will work.
The intent, if and when these amendments have legislative passage, is to have an MOU that touches upon the resolution side, and the bank and provincial authorities have been discussing that MOU over the past several months.
Senator Wetston: I take it you’re doing that through the heads of agencies meetings?
Mr. Brown: Part of it, and there is a separate working group that has been set up.
Senator Wallin: My question is one of context. It’s budget time, so we just put this stuff in, or is there something specific that triggered it? Why this now?
Mr. Brown: I would say this would fill an important gap in our financial stability framework.
Over the past few years, the government has proposed changes to give financial sector regulators powers with respect to the banking side. We do not have resolution powers on the financial market infrastructure side. These amendments are being proposed to the extent that we would hope they are never used, but if there ever was a financial crisis or an incident that potentially caused the failure of a financial market infrastructure, these powers would be important to maintaining financial stability.
Mr. Chande: I wanted to add that Canada doing this fits well with international commitments. The G20 has committed to put in place resolution regimes for systemically important financial institutions. This is part of filling that international commitment.
Other countries are doing the same thing. The Bank of England, the U.S., Australia and the European Union are all moving forward with regimes like this for financial market infrastructures.
Senator Wallin: These clearing houses or whatever we will refer to them as, if they fail, we still don’t call it a bankruptcy, and no one gets their money back. Is that correct?
Mr. Brown: The intent with this regime, because these clearing houses provide critical services for the financial sector, their failure would cause repercussions throughout the financial sector and, potentially, the broader economy. The goal is to give the Bank of Canada the powers to step in to maintain those critical functions, address the underlying issues, maintain confidence in the financial sector, maintain financial stability, and then eventually exit from the situation once things are clear.
Senator Wallin: This is just my naïve reading of it here, but non-viability does not constitute a bankruptcy, and no creditor has a remedy. What are you going to do when you step in?
Mr. Brown: That’s technical language just to make sure that the potential failure of the FMI doesn’t trigger certain provisions under different bankruptcy acts. When we think of what the Bank of Canada would do when they step in, it depends on the scenario. The powers and tools proposed are similar to those that have been given to CDIC on the banking side, if you are familiar with those, but at a high level, the Bank of Canada will be working with the provinces to develop resolution plans. They would have the ability to take control of an FMI through vesting or a receivership order, things like that.
Mr. Chande: It is an objective to avoid traditional bankruptcy of these types of institutions because of the crucial role they play in the financial system. In stepping in, the Bank of Canada’s job would be to make sure they can continue to provide those critical services, avoid a shut down that might otherwise occur through a more traditional bankruptcy route, which would be one of the available options if one of these entities became insolvent. We don’t want that.
Senator Wallin: We don’t want everything out of their hands.
Mr. Chande: That’s right.
Senator Ringuette: What I found was very interesting in the regime that you are creating. Let me read the following, and hopefully you can clarify:
. . . subsection 11.07(1) provides that despite section 8(3) of the PSCA, the declaration —
— the declaration from the Bank of Canada —
— shall have the effect of a stay for the purposes set out in subparagraphs (a) to (f).
Then it says:
(a) no person or entity shall terminate or amend any contract with the clearing house —
— that has the declaration —
— or the central counter-party or claim an accelerated payment, or forfeiture of the term, under such a contract by reason only of the making of a declaration of non-viability;
Then it says:
(b) no action or other civil proceeding before a judicial or quasi-judicial body and no arbitration may be commenced or continued against the clearing house or in request of its assets other than a proceeding under the Winding-up and Restructuring Act commenced by the Bank or the Attorney General of Canada. . .
That is very restrictive in regard to the clientele of that clearing house. You’re dealing with a certain clearing house. The Bank of Canada provides an order, and because that order has been put in place by the Bank of Canada, you as the client cannot change whatever in your dealings with that clearing house. In addition to that, you cannot have access to civil and judicial process.
This is really stiff, in my opinion, that such power and such limitation would be allocated to the customer of that entity, the clearing house.
Mr. Chande: I think that’s a fair question to ask and a good one. Let’s keep in mind that if we’re in a situation where the Bank of Canada has made an order declaring resolution, it means that the entity we’re talking about is essentially at the point of failing and no longer able to provide those critical services to the financial system, something we hope will never happen. These are highly regulated entities to avoid exactly that.
If we ever did end up in that desperate situation, an order is made by the Bank of Canada which puts the entity into resolution, and then you’re right, these restrictions are in place for the time period in which the entity is in resolution. They are temporarily in place for that period. That’s to make sure that, as the central bank that has now stepped in to operate this entity, we can continue to operate it properly.
Many of the services that are provided to financial market infrastructures by others are crucial services without which they cannot continue to operate. We cannot have a situation where in a crisis situation we have stepped in temporarily to continue these critical services, but yet also have members fleeing the service, and service providers not being willing to continue to provide those services during that emergency period.
Senator Ringuette: As you mentioned earlier, Mr. Brown, there are two sets of clearing depending on what you want to clear. If one is not functioning right, why not allow the clients of that one to merge with the other one that is functioning right?
Mr. Chande: In this case, they are not substitutes for each other. There are two central counterparty clearing houses in Canada, but they clear different markets. One is clearing derivatives on the Montréal Exchange, and another is clearing equity transactions on the Toronto Stock Exchange, and fixed income transactions.
That’s part of the reason they have this systemic importance, the reason why we cannot have them not operating. They are providing crucial services. There are no substitutes that can be easily accessed, and the financial market operations and, ultimately, our financial system operations are dependent on those services being provided. We really have nowhere else to go. We can’t have a situation where one of these entities would not be operating.
Senator Ringuette: That would be for the derivatives. What about the others?
Mr. Chande: In the case of the derivatives central counterparty, there is only one in Canada. If it’s not operating, then the derivatives market on the Montréal Exchange doesn’t operate. In the case of the central counter party that clears the equity transactions on the Toronto Stock Exchange, if that is not operating, then the Toronto Stock Exchange market is disrupted. They really don’t have substitutes that can be drawn upon.
Senator Ringuette: If I may, it’s not within this bill, but it begs to be asked: If we had one national-security-regulating entity, would we face that same kind of situation?
Mr. Chande: I think we would, yes. The market structure of the clearing industry is driven largely by the market forces. There are a lot of economies of scale of having all the activity centrally cleared in one spot — all the liquidity for the same products in one spot.
I don’t think it’s really the structure of our regulatory framework that’s driving how these are set up in Canada.
Senator Ringuette: Thank you.
The Chair: Thank you very much. That was a good line of questioning, Senator Ringuette.
Thank you. We appreciated that. We’re going to see what my colleagues think. We’re obviously losing members. The vote is at 5:09, and I’m told that the Division 16 presentation will take about 10 minutes. We’re likely a bit tight. Do you want to come back after, or do you want to do this another day?
Senator Ringuette: We should come back after. If the witnesses want to —
The Chair: Senator Wetston, come back or tomorrow? Senator Tannas, what do you feel?
Senator Tannas: We have a 5:30 vote, too, so we will not get back here until quarter to six, so we should maybe hold it over for tomorrow.
The Chair: Can we do that another day?
I’m sorry we can’t advance at this moment, but I think that is likely the right decision. A number of us also have committees after six o’clock.
Thank you all very much.
(The committee adjourned.)