:
I want to update the committee members. I gave you an indication that I was going to be speaking with the lawyer who is representing Madam Ouimet. We made several efforts to connect. We did so this morning.
We have a verbal understanding on where we will go. I asked him to send me something first. I said that if I thought it met the wishes of the committee, then I would respond to him so that we could have the confirmation items as per our understanding, and we're in the process of doing that. Okay?
An hon. member: That's fine.
The Chair: So thanks for giving me the flexibility that I needed to nail things down as per the committee's desires.
That's it.
Now we have before us several witnesses today. From the Office of the Auditor General of Canada, we have Mr. John Wiersema, deputy auditor general; Madam Nancy Cheng, assistant auditor general; and Mr. Richard Domingue, principal.
From the Department of Finance, we have Michael Horgan, the deputy minister; and Madam Diane Lafleur, director general, financial sector, policy branch. Welcome.
From the Canada Deposit Insurance Corporation, we have Michèle Bourque, president and CEO. Welcome.
And from the Office of the Superintendent of Financial Institutions, we have with us today Gary Walker, assistant superintendent, corporate services sector. Welcome to you as well.
Each of the four groups are going to be making a brief presentation. Some will be briefer than others, but since all of you are familiar with some of the procedures and conventions of committees, I won't belabour the point about hoping you'll stay within five to seven minutes. Then we'll go to questions. We'll go through all of the presentations first.
Mr. Wiersema.
:
Thank you for this opportunity to meet with your committee this afternoon to discuss the chapter, “Regulating and Supervising Large Banks” from our fall 2010 report.
As you indicated, joining me at the table are Nancy Cheng and Richard Domingue, who were responsible for this audit.
We conducted this audit following a period when the Canadian financial sector had to cope with significant pressures in domestic and international markets. Our audit objective was to determine whether the Department of Finance, the Office of the Superintendent of Financial Institutions Canada, and the Canada Deposit Insurance Corporation had appropriate processes in place to regulate and supervise Canada's large six banks.
The audit focused on the large banks because they are essential to providing stability to the Canadian financial system.
[Translation]
The audit examined four main areas: first, how the federal organizations share information; second, how they regulate the six largest banks; third, how they supervise these banks; and finally, how they request information from banks.
The audit found that, compared with many other countries, Canadian banks fared well during the recent global financial crisis. Canada's approach to regulating and supervising banks proved robust and effective. No Canadian banks failed.
[English]
The objective of regulating banks is to achieve a stable and efficient financial system. Around the world, regulations and best practices are rapidly evolving. The regulatory framework for banks needs to be kept up to date to reflect emerging domestic and international developments. We found that the federal organizations monitor emerging trends. For example, the Department of Finance Canada tracks domestic and international issues, and OSFI actively monitors and analyzes economic and market data. Information and emerging issues are regularly exchanged among the federal organizations. These exchanges were clearly a factor that helped Canada during the crisis.
We found that OSFI is implementing a requirement under the 2007 cabinet directive on streamlining regulation to incorporate effectiveness reviews into its rule-making process. However, while the Department of Finance performs some ad hoc reviews of the effectiveness of the bank regulations, significant parts of the regulatory framework are not subject to periodic reviews of their effectiveness. These reviews could support the review of the Bank Act, which takes place every five years, and help the government determine whether successive regulatory changes are working without unintended consequences.
[Translation]
The objective of supervising banks is to assess their safety and soundness and to intervene when necessary. We found that the Office of the Superintendent of Financial Institutions adequately supervises the six largest Canadian banks and that it is well regarded by the banks it supervises. We also found that the growing volume and complexity of its work is increasing the demand on its human resources. In this context, compensation practices and training need to be updated to ensure that it is in a better position to attract and retain qualified staff.
[English]
Reports and statistics from the regulated banks are required in order for the regulators and supervisors to perform their duties. Each large bank now submits a very large amount of statistics and information. Both the federal organizations and the banks have a common interest in collecting relevant data in a cost-effective manner. Therefore, information requests need to be periodically reviewed to determine if the data collected is relevant, accurate, and sufficient.
The Department of Finance and OSFI have agreed with our recommendations. We have reviewed the action plan, which I understand has been tabled with this committee today. OSFI's action plan, if successfully implemented, should address our recommendations. While the Department of Finance has considered our recommendation, it has decided, however, not to implement it. The committee may wish to discuss this further with the department.
[Translation]
Mr. Chair, this concludes my opening remarks.
We would be pleased to answer the committee's questions. Thank you.
:
Thank you, Mr. Chairman.
It's my pleasure to be here today. You have introduced my colleague, Madam Diane Lafleur, who is the general director of the financial sector policy branch in the Department of Finance.
[Translation]
I am pleased to be here to discuss the Office of the Auditor General's report regarding regulating and supervising large banks. I want to commend the office on the quality of the final report.
[English]
Overall, it clearly highlights the strengths of the Canadian approach to financial sector regulation and supervision, which contributed to the relative success of Canada's response to the financial crisis.
[Translation]
The Canadian financial sector regulatory approach involves five federal financial sector regulatory agencies with distinct and complementary mandates: the Department of Finance, the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation, the Bank of Canada, and the Financial Consumer Agency of Canada.
[English]
The Minister of Finance has overarching authority for legislation respecting the financial sector under federal jurisdiction and responsibility for the overall stability of the financial system. Each of the agencies has specific responsibilities and powers set out in their enabling legislation and in the four acts that govern federally regulated financial institutions: the Bank Act, the Trust and Loan Companies Act, the Cooperative Credit Associations Act, and the Insurance Companies Act.
As found in the Auditor General's report, there are well-established mechanisms to ensure collaboration among these agencies. In addition, information-sharing requirements and confidentiality provisions that are enshrined in legislation allow information to flow efficiently between the organizations.
The financial institutions supervisory committee, or FISC, under the chairmanship of the Superintendent of Financial Institutions, ensures collaboration on prudential issues. The senior advisory committee, or SAC, provides advice to the Minister of Finance on policy issues affecting the financial sector, and I chair this committee as the Deputy Minister of Finance.
These coordination mechanisms have provided for collaboration among Canadian regulators, which has allowed a responsive approach to monitoring and managing the broad range of financial sector policy issues as they evolve. We agree with the Auditor General that “This ongoing exchange of information contributed to Canada’s relative success in responding to the recent global financial turmoil....”
The Auditor General's report recommended that formal terms of reference be established for one of these committees, the senior advisory committee, and that these terms of reference include development of plans to perform effectiveness reviews of the regulatory and legislative framework to ensure that significant parts of the regulatory framework are periodically assessed.
As chair of the SAC, I have first-hand experience of the contribution this forum makes to ensuring that the minister is kept abreast of key developments in the financial sector and is provided with advice on ensuring that the legislative and regulatory framework is responsive to those developments.
[Translation]
As you know, we have recently been through very challenging times in terms of financial sector issues. We have gone through an unprecedented global financial crisis that identified a number of gaps and weaknesses in financial sector oversight in a number of countries. And we are now going through an unprecedented period of change as a result of international efforts to address those weaknesses in a coordinated way.
[English]
SAC has played a critical role throughout, meeting quarterly and more often as needed, particularly during the financial crisis, and harnessing the strong relationships between the Canadian financial sector regulatory agencies that were key to Canada's relative success. A key finding in the Auditor General's report was that Canada's information-sharing framework is effective and that its coordination mechanisms work well.
SAC was key in advising the minister on issues that arose during the crisis, often in ways that could not have been foreseen. SAC has also played a key role in developing Canada's response to the G-20 financial sector reform agenda, advising the minister on potential priorities for reform and on the impact of international proposals on the Canadian regulatory and supervisory approach. And SAC continues to play this role.
More recently SAC, for example, invited the Canada Mortgage and Housing Corporation to help form advice on ensuring the long-term sustainability of Canada's housing market. With the benefit of this advice, the government introduced adjustments to the rules for government-backed insured mortgages aimed at supporting the long-term sustainability of Canada's housing market.
We considered whether formal terms of reference for SAC would improve the functioning and effectiveness of the committee. As I've noted, SAC has proven to be a very effective forum for managing responses to financial sector developments and has been tested through an unprecedented period of crisis management and major reform. It has the flexibility to address issues as they evolve over time and the scope to provide advice to the minister on the full range of issues affecting the financial sector.
SAC's broad scope also allows the department to respond positively to the second part of the recommendation, to periodically assess the effectiveness of the regulatory and legislative framework.
It should be noted that the financial sector legislative and regulatory framework is already subject to regular review. The financial institution statutes have a built-in sunset date, which leads to a process for review of those statutes every five years. This five-year legislative review involves broad public consultations with stakeholders and in practice has resulted in both legislative and regulatory changes and changes to the enabling legislation for regulatory agencies. As noted in the Auditor General's report, “the legislated five-year review provision helps keep the regulatory framework current and provides banks with the flexibility they need to react to changing times”.
The next five-year review must be completed by April 2012. In keeping with that, the Minister of Finance issued a call for consultation for the 2012 legislative review in September of 2010. Conducting a five-year review of the statutes that govern our federally regulated financial institutions ensures that Canada remains a global leader in financial services and sets us apart from almost every other country in the world.
There are also regular international assessments and, as a result of recent G-20 commitments, periodic peer reviews of specific issues. Canada participates in the International Monetary Fund and World Bank financial sector assessment program, FSAP, which assesses Canadian adherence to international principles for financial sector regulation and supervision every five years. Canada has also been a major proponent of enhancing the Financial Stability Board's peer review process, which reviews findings from the financial sector assessment program as well as lessons learned from the financial crisis. We in Canada have volunteered to be an early candidate for peer review, beginning this year.
SAC plays an ongoing proactive role in ensuring the effectiveness of the legislative and regulatory framework, in discussing emerging risks and issues, identifying priorities, analyzing impacts, and discussing options for legislative and regulatory change. SAC discussed the new and strengthened legislation and regulation developed during the financial crisis and in response to the G-20 financial sector reform effort.
SAC has also been the forum for discussion of legislative and regulatory initiatives in response to stakeholders' interests, such as a legislative framework for federal cooperative banks, consumer protection enhancements, and a credit and debit card code of conduct.
[Translation]
In summary, the pace of change in the financial sector requires regular proactive risk-based assessment of the effectiveness of the legislative and regulatory framework. The current flexibility of SAC has allowed us to carry out such reviews in a timely way and make sound recommendations to the Minister of Finance on the need for new or more effective legislation and regulation in key areas of priority.
[English]
Thank you, Mr. Chairman.
:
Thank you. Mr. Chair and honourable committee members, good afternoon.
[English]
Mr. Chair, honourable members, good afternoon. Thank you for the opportunity to appear before you.
Since the Canada Deposit Insurance Corporation is not often called to this committee, I would like to begin my remarks by providing you with a brief snapshot of the work of the Canada Deposit Insurance Corporation, the CDIC. I will then comment on the role of CDIC as part of the Auditor General's fall 2010 report on the regulation and supervision of large banks. I will keep these opening remarks short and would direct you to additional information in our written submission.
CDIC is an independent crown corporation that is fully accountable to Parliament through the Minister of Finance. CDIC currently has 84 member institutions consisting of banks, trust and loan companies, and one retail association. The corporation is funded by premiums paid by these members and does not receive any parliamentary appropriations.
CDIC insures eligible deposits at each of our member institutions up to a maximum of $100,000 per depositor in each of seven categories of deposits. These include eligible funds held in basic accounts, joint and trust accounts, along with registered retirement savings plans, registered retirement income funds, and tax-free savings accounts. As of April 2010, we insured over $600 billion in deposits.
[Translation]
In addition to the provision of deposit insurance, CDIC contributes to the stability of the financial system in Canada. In order to achieve this part of our mandate, we work closely with all of the federal financial safety net agencies. The report of the Auditor General attests to this very effective working relationship with my fellow panelists from the Department of Finance and OSFI, along with the Bank of Canada and the Financial Consumer Agency of Canada.
I can add, from an international perspective, that the Canadian model of financial safety net agencies working together is the envy of many deposit insurers around the world.
CDIC was pleased to participate in this review by the Auditor General of the federal agencies responsible for the regulation and supervision of large banking institutions.
[English]
In speaking to the three recommendations in the fall 2010 report, CDIC factors indirectly into the first and third recommendations. Recommendation number one relates to the work of the senior advisory committee, or SAC, chaired by the Department of Finance. From a CDIC perspective, this committee and its numerous working groups provide invaluable and effective exchanges on a number of topics of importance in the financial sector. Coordination bodies such as SAC, the FISC, or the financial institutions supervisory committee, chaired by the superintendent and the CDIC board of directors, have proven vital during the financial crisis to stay ahead of emerging issues and to coordinate actions.
The third recommendation in the report addresses data and information requests to financial institutions. Given the compact size of CDIC, there is no duplication with regard to information requests of our members. We rely primarily on data collected by OSFI and through the umbrella of the financial information committee to carry out much of our risk assessment work. CDIC's specific data collection activities are associated with statutory and bylaw provisions, in particular those involving the collection of premiums from our member institutions.
This concludes my opening remarks. I would of course be pleased to answer any questions.
[Translation]
This concludes my opening remarks. I would be pleased to answer any questions. Thank you for your attention.
:
Thank you for inviting me to appear today to speak about the Auditor General's report.
I believe that copies of my remarks have been distributed by the clerk, so to respect the members' time, I will only cover the key points now, but trust they will become part of the public record.
In brief, I'd like to thank the Office of the Auditor General for their work. We are glad the report confirms that the large Canadian banks are well supervised. We are implementing the recommendations contained in the report. OSFI had identified similar issues to those identified in the Auditor General's report through our own auditing and risk management processes. We believe we have processes in place to effectively mitigate potential risks identified.
To give a bit of context, it may be helpful to give you a brief overview of OSFI and its mandate. OSFI is responsible for prudential oversight of about 450 financial institutions in Canada and approximately 1,400 private pension plans. Currently we have approximately 570 employees working in offices in Ottawa, Toronto, Vancouver, and Montreal. OSFI is tasked with overseeing the solvency of federally regulated financial institutions in the interest of depositors, policy holders, and members of federal private pension plans.
The Auditor General's report mentioned that OSFI is fulfilling its mandate and that we should update our human resource planning to be better able to attract and attain qualified staff. We are addressing this recommendation by ensuring that our training programs and resource planning support business plan objectives and emerging risks, and by updating our compensation structure.
Training is very important to OSFI. Annual training plans are developed and prioritized as part of our annual HR planning and business plan process. The executive committee of OSFI monitors progress and provides direction on training priorities through quarterly updates. Individual divisions and units have access to training budgets for specialized training.
We also have plans to update our compensation structures to ensure that our salaries are competitive with those in the financial services industry, the market from which we source the majority of our talent. This would provide OSFI with greater ability to hire and retain the skills and experience that we need.
To respond to the Auditor General's recommendation on data collection from banks, OSFI, along with other members of the financial information committee and in partnership with the industry association, plans to use the annual housekeeping exercise to more thoroughly confirm the relevance and the continued usefulness of the data being collected.
As Mr. Wiersema suggested in his remarks, our action plan, once implemented, should adequately address the recommendation contained in the Auditor General's report. We believe that our plan will allow OSFI to remain a world-class regulator and supervisor so that we can continue to protect the interests of Canada's depositors, policy holders, and private pension plan members.
Thank you for your time. I look forward to any questions you may have about OSFI.
:
Could you explain them a little, because it almost seems as if nothing happened in Canada and the federal government had no need to provide support to the banks.
My next question goes to the superintendent of financial institutions, or anyone else who would like to answer.
The federal government put measures in place. At the same time, I recall that, because of the risk, financial institutions said that times were hard and they had to increase some interest rates. I recall what happened to home equity lines of credit. Beforehand, the rates were at prime, and then, all of a sudden, they went up to prime plus one per cent because of the crisis.
The federal government was there to support financial institutions. Some people feel that the crisis is over. So how is it that financial institutions are still charging their customers the same interest rates? The federal government was there to help them, but, at the same time, they imposed a surcharge, not on businesses, but on homeowners with home equity lines of credit, that is, a line of credit based on the mortgage on their homes.
Thank you all very much for your attendance today.
I'll begin by commenting on Mr. Horgan's comments about how good a report it was. I agree. It was a good report. I'm surprised, collectively, that we chose to do this. We have a short period of time. There are lots of problems out there. When something goes well, the government has all the techniques and departments and vehicles to let the world know how wonderful the AG's report was. Our job is to deal with things that are problematic, so I'm really surprised that, collectively, we all made that decision, but I'm not sure it was the best use of our time.
Having said that, it is a pretty good report, and most Canadians, by and large--I'm not even going to get into tax benefits or any of that. I'm going to stay on this report, and in the context of this report, it was a good report, and I think Canadians are pleased about how strong the banking system is as a system. The government takes a lot of credit for that, but the truth is we have to also give a fair bit of that credit to the previous government, which maintained it too. Fair is fair. Give everyone his due.
However, there are a couple of things we can talk about here. I don't have anything to go on about at great length. I may run out of questions before I run out of time, which is very unusual for me. That is because I don't know what to do with a good report. I'm used to reaching for my weapons, but in this case, we'll deal with what we have.
I have one simple question first. Madame Bourque, I was just curious, on page 3 you mentioned that your colleague Michael Horgan will be speaking to this particular recommendation, and then later on you say, “The written remarks of my colleague Gary Walker address follow-up on this recommendation....”
To what degree do you coordinate your presentations?
:
Thank you, Mr. Chairman.
This also gives me the opportunity to respond to the earlier comments that were made vis-à-vis our recommendations on SAC and the terms of reference and preparing for effectiveness reviews.
The first thing I'd like to say, Mr. Chairman, is, as we indicate in the report--and I absolutely agree with Mr. Horgan--the need for flexibility in the system is essential, and that was essential to the success of managing the crisis, the financial turmoil we went through a few years ago. SAC and the various instruments absolutely need to be flexible.
Nevertheless, we think it's a good practice to have terms of reference for a committee as important as SAC, the senior advisory committee. Those terms of reference themselves will need to build in the need for that flexibility, but we think that terms of reference for SAC would be a useful addition.
Mr. Horgan is also quite correct that this isn't exactly the most significant recommendation the Office of the Auditor General has ever made. This is in the context of a glowing endorsement. I don't know, Michael, but--
And thank you to the witnesses.
We're Canadians, all of us, and I think looking at reports that are positive is always good, because we're Canadians, because we learn from reports; we learn from positive things that have happened. I'm always looking at what we can learn from a report like this that can be transferred to other departments, other agencies, that will work, that are maybe not quite so positive as this one.
Madam Lafleur, on the regulatory framework in Canada, sure, we'd like to take credit, but we understand Canadian bank systems for many years have been strong. And that is very positive. To Canadians it seems this is the way it's always been. This is good. And it is.
You talked earlier a little bit about other countries. You said actually that they were interested in the regulatory framework we have. Does it go beyond that, where they're actually interested in the application of it, from some of the discussions you've had?
:
We know that around the world—everybody knows—there's still a lot of uncertainty. We want to be able to help as much as we can to bring certainty back in, because Canada is not an island. Strong as we are, we get affected by the global....
I'd like to go to the conclusion part of the report, paragraph 5.71. I'd just like to read it: “According to some international organizations, Canadian banks suffered less”—we just talked a little about that—“than most countries during the recent period of financial turmoil, in part, because its regulatory framework and supervisory approach, including communication among federal organizations, are effective.” I think all of those are so important. It says,“A recent, international peer review and the financial crisis have shown that the Canadian regulatory framework is robust.”
We also understand, I think, that the challenge for us in Canada is that things become more complex, just about like every other instance. With innovation, things are more complex where financial markets are rapidly evolving and changing, and there's uncertainty in the markets.
I'm wondering what we should be doing to ensure that the supervisors and the regulators from markets have the tools they need to do their jobs. With the national securities regulator, do we have the framework to actually put that in place?
I'll just leave that. I have others too, but I think I'm going to run out of time.
:
Thank you, Mr. Chair. I am going to share my time with Ms. Faille.
Mr. Horgan, you said the following in your opening remarks:
More recently, SAC invited the Canada Mortgage and Housing Corporation to help form advice on ensuring the long-term sustainability of Canada's housing market. With the benefit of this advice, the Government introduced adjustments to the rules for government-backed insured mortgages aimed at supporting the long-term stability of Canada's housing market.
In terms of access to housing, we know that bank rates have gone down because of the economic crisis. Yet we see that, in all the provinces, inflation has triggered a dramatic increase in the prices of houses, condos or whatever sells on the market. But if interest rates go up by 2%, many owners could lose their houses because of all the financial implications. It is not normal for house prices to go up this much during an economic crisis. You might not find the situation alarming at the moment, but have you started thinking seriously about it?
They showed on TV the financial ramifications for condos that were sold at $150,000 but were actually worth $120,000. And the Canada Mortgage and Housing Corporation is financing that. No one is losing money, but, sooner or later, someone will be. It will be the banks and CMHC. Have you been warned? Do you think we should avoid the day when interest rates go up, depression hits, and houses are repossessed?
:
If I understood correctly, there were two parts to your question. One was about capital standards for complex products and derivatives. In the new Basel Accord, called Basel III, capital standards are obviously stricter for financial institutions with products like that. The Office of the Superintendent of Financial Institutions and the Canadian government have made a firm commitment to apply the new Basel standards to Canadian institutions.
More recently, OSFI released a consultation document proposing a timeframe by which the standards should be in place. The timeframe may even seem a bit rushed. We have every intention to enforce them.
In terms of disclosure, which was the other part to your question, I can take you back to April 2008. At that time, the Financial Stability Forum, which is now the Financial Stability Board, issued a report with, I believe, 63 recommendations on how to deal with the causes of the economic crisis.
There was a series of recommendations on disclosures, especially disclosures related to derivatives and complex products. There was a recommendation on how to make more disclosures. Even a disclosure template was provided. This is all related to the new standards that Canada was the first to adopt. The fiscal year for Canadian banks is from November 1 to October 31. So they ended up making their third quarter disclosures in August 2008, before all the other international institutions. So Canada was first to adopt the new standards, well before all the other countries. They have now become generally accepted standards.
:
The way the system now works, the IMF has instituted this financial sector assessment program, or FSAP, program. Canada was one of the first countries to go through an FSAP when it was still a pilot project in 1999. We did an update in 2007-08. The commitment now is for significant financial sectors, including countries like Canada, to do an FSAP about every five years, with regular updates through the article IV process.
Roughly at the mid-point during that five-year cycle, the Financial Stability Board, through its standing committee on standards implementation, will do a peer review, not to rate countries but to check in on what they've done to implement the recommendations coming out of the FSAP. We're about halfway through that five-year cycle, so our peer review will start in May or June of this year and conclude by the end of the calendar year. The focus will be on the recommendations that came out of the FSAP, so it will look at what we've done since we've gotten those recommendations, how we've acted on them. Then it will look at how we came through the crisis, considering the strengths and the weaknesses that we've identified, and we'll have a peer discussion with our colleagues.
There have already been three countries that have been through this process. Italy and Spain just had their peer reviews released. Those were timely reviews, because there's lots to be learned from those experiences.
It's really a sharing of information, but it keeps a country's feet to the fire. You don't have five years anymore to think about implementing the recommendations. You're going to want to have something to say at the midpoint during that peer review, so it forces everybody to raise their game a bit.
:
Because of the degree of specialization within the industry, it's a matter of balance between training and development of existing staff and bringing in new people who have been there, seen it, done it on the outside, and can bring a little more current information.
Some examples of specialties at the forefront today would be credit risk, operational risk, and stochastic modelling, because of the risk assessment models that are being introduced and that we supervise. Those types of individuals are difficult to find.
One of the advantages we have, though, as the regulator, particularly now, is the good reputation OSFI has. These people are talented but scarce, and they see OSFI as a tremendous learning experience.
With respect to training, we have to ensure that the people who have been with OSFI longer keep current. So we bring in specialists. We have internal training from those new hires, who bring more recent experience. In addition, we bring in other specialists from wherever we need to find them.