I will call the Standing Committee on Finance to order. We are continuing our study pursuant to Standing Order 108(2), a study on measures to enhance credit availability and the stability of the Canadian financial system.
We have three organizations with us here this morning.
First of all, from the Investment Industry Association of Canada, we have Mr. Ian Russell, president and CEO, back before the committee.
From Credit Union Central of Canada, we have the president and CEO, Mr. David Phillips. We also have Mr. Ralph Luimes, the CEO of HALD-NOR Credit Union from Hamilton, I believe.
From the third organization, DBRS, we have co-president--and I'll try to pronounce the last name correctly--Mr. Peter Bethlenfalvy.
We can start. We'll go in that order. We'll start with the Investment Industry Association of Canada. We generally allow about five minutes for an opening statement. We may allow a little more time today because we have three witnesses, and then we'll go to questions from members.
We'll start with Mr. Russell, please.
Thank you very much, Mr. Rajotte.
Good morning to all committee members.
Good morning. My name is Ian Russell. I appreciate this opportunity this morning to appear before the House of Commons Standing Committee on Finance to participate in your discussion on an assessment of the measures taken to enhance credit availability in the capital markets.
I'll keep my opening remarks fairly brief, and I really look forward to questions on a full array of the subject matter, be it the credit availability questions or the regulatory reform that we're all embarked on, not just in Canada but globally.
It did not take long for the real economy to be affected. The financial impact and loss of confidence are being felt in every region and in every sector.
We've gone through a very difficult time in financial markets over the last six months, and it's unfolding quite dramatically in its impact on the real economy. Portfolio values are generally down about 20%, with equity investments down 30% to 40%. Real estate values in Canada are in the early stages of following global trends, unemployment rates are trending higher and are already at multi-year highs, and, as you're all aware, consumer spending has retrenched.
One of the areas that I wanted to touch on and elaborate on with this committee extends a bit beyond the measures we're seeing to really an assessment of the measures that were put in place during the budget.
I have to single out the efforts of the Bank of Canada really since the beginning of this crisis in the summer of 2007. Both the bank and the federal government, through its budget, have put in place very effective measures to improve the liquidity and functioning and credit capabilities within the capital markets, but there are still liquidity concerns in the marketplace.
Despite the success of some of the measures implemented to provide liquidity to the banks, such as the insured mortgage purchase program, for example, certain capital markets products have not been able to benefit from them.
Many corporate issuers still remain on the sidelines, and while the reasons are partially due to a general de-risking of investment by buyers, a significant factor in this development is a lack of robust market liquidity. Authorities must remain vigilant in monitoring and identifying the pockets of liquidity that may disrupt the normal functioning of important sub-markets, or the market as a whole, and continue to assess what must be done over and above the remedial measures that have already been taken to address these situations.
We applaud the government for following the recommendation made by the expert panel on securities regulation, and implementing a transition plan to create a Canadian securities regulator with willing provinces and territories.
I'll close with those remarks, Mr. Chair, and again look forward to questions covering that wide range of territory.
Thank you, Mr. Chairman.
I have about five minutes of opening remarks.
Mr. Chair, members of the committee, thank you for the opportunity to speak to you today.
I'm joined by Mr. Ralph Luimes, chief executive officer of HALD-NOR Credit Union, located in southwestern Ontario. Mr. Luimes is also the chair of the steering committee responsible for the Canadian business owner strategy, our system's initiative aimed at the small to medium-sized business market. But more on that later.
Before addressing the issue that brings us before you today, please allow me to begin by making a few preliminary remarks regarding the role of Canadian Central, my organization, and more generally the credit union system in Canada.
Canadian Central is a federally regulated financial institution that operates as the national trade association for its owners, the provincial credit union centrals, and through them for approximately 440 affiliated credit unions across Canada. With over 1,700 locations, serving more than 5 million members, 24,000 employees, and holding $114 billion in assets, credit unions represent an important component of the Canadian economy.
Credit unions in Canada come in all shapes and sizes and operate in almost every community, including large urban centres. Credit unions are the first choice of financial institution for many Canadians. In fact, one in three Canadians is a member of a credit union or a caisse populaire.
We believe these numbers reflect the system's strong cooperative values and commitment to the economic development of their communities in good times and bad. This commitment is illustrated by our continuing presence in more than 380 communities in Canada where a credit union is the only financial institution in town. Community involvement and commitment are also evidenced by the high level of the system's charitable donations, scholarships and bursaries, and employee participation in community development. In fact, in 2007 Canadian credit union community involvement reached $35.8 million.
Let us now turn to the topic that brings us before you here today: credit availability and the stability of the Canadian financial system. Let me first assure you that as member-owned institutions, credit unions are very much aware of the economic difficulties currently facing Canadians, and credit unions are working closely with their members and their communities to temper the impact of the crisis.
That said, certain reports have claimed that the availability of credit to businesses and consumers has, in recent months, shrunk. As a general observation, this may be true in that non-traditional lenders have retreated as financial market liquidity has grown tighter and the market for securitization has shrunk. However, the credit union system has not participated in this pullback from credit granting. Instead, we have pursued our more traditional relationship-based approach to lending, and credit unions continue to meet their members' demands.
In 2008, credit union loans grew by 7.2%. In the last quarter of 2008, our loans increased by 1.6%, which on an annualized rate amounts to a growth of 6.5%. Loans as a percentage of total deposits were 93.7% at the end of 2008, down slightly from 95.8% 12 months before, a reflection of strong growth in deposits in 2008. That stated, it's interesting to note that 10 years ago loans represented only 87% of total deposits.
Credit unions are committed to the small and medium-sized business market. Industry Canada statistics illustrate this as well. A comparison of Industry Canada SME lending data, looking at the chartered banks, foreign banks, and credit unions reveals that nationally, credit unions account for 18% of the SME lending market for authorizations $500,000 and under. In P.E.I. and Manitoba, this figure is 50%. In Saskatchewan it equals 62%, in Alberta 20%, and in B.C. 28%. This market is a key to credit union growth, and our system will not pull back from our SME members.
Our commitment to this important market is further demonstrated by the system's Canadian business owner strategy, more commonly known within our system as CBOS. Created in 2005 to enhance the competencies and capacities of credit unions to serve the business owner market as well as to raise awareness about credit unions with business owners, CBOS has actively engaged over 300 credit unions since the start of the program.
As for the matter of financial stability, I wish to highlight that the credit union system remains strong. Despite the economic downturn that began in the last quarter of 2008, the Canadian credit union system ended 2008 on solid financial ground. System assets, savings/deposits, and loans all recorded gains, maintaining the annual growth reported in previous quarters, although down somewhat from the rates reported in 2007.
By the end of 2008, the combined assets for affiliated credit unions and caisses populaires across Canada rose by 8.7% or $9.1 billion, to reach $113 billion. This is a 45% increase, or a $35.2 billion gain, over the last five years. Deposits and savings growth remained strong as total deposits with credit unions increased to $100.6 billion in the fourth quarter of 2008, up 9.5%, or $7 billion, from the previous year.
We believe the system is well positioned to face the challenges presented by the current economic situation and the opportunities to come in 2009 and beyond.
We wish to thank you once more for the opportunity to address you today. Mr. Luimes and I will be pleased to answer any questions you may have.
Mr. Chair, members of the committee, my name is Peter Bethlenfalvy and I am Co-President of DBRS Ltd.
DBRS is pleased to have the opportunity to provide a statement of its views regarding this critical topic. My discussion will focus on the following areas: programs to enhance credit availability and stability in the Canadian financial system; and Canadian regulatory reform. I would like to begin by providing a brief overview of DBRS including our role in the market and our regulatory status.
DBRS is a Canadian credit rating agency established in 1976 and still privately owned by its founders. With a U.S. affiliate located in New York and Chicago, DBRS analyzes and rates a wide variety of issuers and instruments, including financial institutions, insurance companies, corporate issuers, issuers of government and municipal securities and various structured transactions. DBRS currently maintains ratings on more than 43,000 securities around the globe. DBRS rates approximately 100 of the largest banks in the world, including Canada’s major banks, insurance companies, credit unions and pension funds. This gives us a unique perspective on the functioning of Canadian financial markets from a global perspective. Since its inception over thirty years ago, DBRS has been widely recognized as a provider of timely, in-depth and impartial credit analysis, and makes its ratings available to the public free of charge.
Given its extensive role in the market, DBRS is committed to ensuring the objectivity and integrity of its ratings, the independence of its analytic staff, and the transparency of its operations. DBRS has adopted a business code of conduct in accordance with the International Organization of Securities Commissions, also known as the IOSCO code.
The IOSCO code is a globally recognized framework of practical measures designed to improve investor protection, the fairness, efficiency, and transparency of the securities market, and to reduce systemic risk.
An IOSCO review published on March 12, 2009, found that seven out of 21 global credit rating agencies, with DBRS being one of the seven, have implemented the 2008 IOSCO code on credit rating provisions. IOSCO noted that DBRS substantially incorporated the IOSCO credit rating agency code with few exceptions.
DBRS believes the IOSCO code continues to serve as an appropriate foundation for prudent regulatory oversight in all jurisdictions, and that globally consistent regimes are critical for well-functioning markets.
In addition, DBRS is registered with the SEC in the United States as a nationally recognized statistical rating organization, also known as an NRSRO, and has achieved global regulatory recognition, including recognition as an external credit institution in the United States, Canada, the European Union, and Switzerland.
With that context, let me now turn to our views on the programs to enhance credit availability and the stability of the Canadian financial system, while minimizing risks to the public.
The extraordinary financing framework introduced in January under the federal budget--much along Ian's comments--was a welcome move to improve access to financing for consumers and allow businesses to obtain the financing they need to grow and create new jobs.
In October 2008 the Bank of Canada introduced measures to provide exceptional liquidity to the financial system, as long as conditions warrant. Collectively, these programs are critical vehicles to stimulate liquidity and provide funding if and where necessary, or, as I like to put it--and I think this is a fundamental point for Canada--funding if necessary but not necessarily funding.
Investment grade corporations have been able to tap the public and private term markets, including the credit unions, that issue short-term commercial paper, as evidenced by a flurry of new issuance activity over the last few months. The commercial paper market continues to be robust, and many Canadian companies manage their liquidity prudently; however, securitization, in particular the term asset-backed market, remains frozen, unlike the asset-backed market, which continues to function and has approximately $50 billion outstanding.
DBRS appreciates the comprehensive consultation efforts regarding the Canadian Secured Credit Facility--the equivalent, I guess, of the TALF in the U.S., the Term Asset-Backed Securities Loan Facility; however, more needs to be done to stimulate this market. Term asset-backed issuance year to date has been just over $1 billion, versus $9.5 billion for the same period in 2008.
Depending on how rapidly these markets thaw and/or markets freeze again, additional programs may be necessary. DBRS is also supportive of quantitative easing should the need arise regarding this market, and it believes the Bank of Canada’s role as lender of last resort is fundamental.
This brings me to my second topic: Canadian regulatory reform. DBRS believes the Canadian approach to banking oversight has shown itself to work very well compared to other jurisdictions. The U.S. regulatory landscape has a patchwork of institutions that requires a significantly different response. A systemic view of risk is prudent and necessary. The U.S. proposal for a new super-oversight body for systemic management of exposures in the financial system is a good step forward.
In contrast to the U.S., DBRS believes that Canada has the right mechanisms in place to oversee systemic risk. At present, Canada has a Financial Institutions Supervisory Committee, chaired by Julie Dickson of the Office of the Superintendent of Financial Institutions, and includes, among others, the chairman of the Bank of Canada, and members from the Department of Finance, CDIC, and CMHC. They meet to discuss broad issues.
DBRS suggests that the Bank of Canada should continue its monitoring and liaison role to OSFI and as a lender of last resort, but not as a regulator. There is a necessary separate but integrative role for each of the Bank of Canada, OSFI, CDIC, a national securities regulator, and the Department of Finance.
Turning lastly to the global markets, the global credit crisis was caused by a super bubble of debt, but the lack of transparency and disclosure was the accelerant to its unwinding. DBRS believes that enhanced transparency and disclosure are key to normalizing credit markets, including greater international regulatory harmonization.
Over the last 18 months, DBRS has implemented a number of changes across this business, with particular focus on structured finance, to enhance the quality and transparency of its credit rating process and to help restore confidence in the credit-rating opinions.
In early 2008—my final comment—DBRS took the initiative to restructure its reporting to provide more timely and transparent disclosure on securitized asset-backed transactions, and this is a leading disclosure type among all asset-backed commercial paper markets in the world. In fact, DBRS will decline to rate asset-backed commercial paper programs when an appropriate transaction level of information is not forthcoming.
As a result, we believe DBRS and Canada are providing leadership to other jurisdictions in the area of transparency and disclosure.
DBRS has a long and proud history of playing a role in the Canadian and global capital markets. We take this role very seriously and are appreciative of being given the opportunity to share our insights with members of the committee.
I would be pleased to answer any questions you may have. Thank you.
There are many questions in there. Let me address the issue of contrition or our responsibility as a major participant in not just the Canadian capital markets but in global capital markets.
We accept our share of responsibility for the ratings, for all ratings that we provide. They are opinions. They're based on public methodologies. We're very public about how we got to those ratings. In fact, the day after we met with interested parties—investors, media, anyone—to talk about those ratings.
So we accept responsibility in the context of unforeseen events in the global market.
Since that time, we've taken a number of steps to improve our rating process. First of all, as I said in my remarks, our level of disclosure now for asset-backed commercial paper is the highest standard in the world, and we provide more disclosure on a transaction-by-transaction basis on what's in the portfolio, the type of assets. We provide that on a monthly basis.
Secondly, we've enhanced a number of our methodologies, based on some of the learnings we've had, not just in asset-backed but in a whole range of securities. The securitization market is a massive market, and asset-backed is just one part of it. So we've enhanced a number our methodologies. We're created a structured finance committee, which now approves any methodology or model from many areas of the firm, so that not one area can dominate its view. As I've said, we now follow, and fully subscribe to and have been approved by, the IOSCO code, which is securities commissions—Quebec, Ontario, and all the securities commissions, major ones, on the planet.
I want to shift a little bit away from your rating agency to rating agencies in general. As we speak, the G-20 is meeting, and there's a big push among at least some countries in the G-20 to have much tougher regulation. When I read these reports, it seems there are three groups that are lumped together as in need of regulation: tax havens, rating agencies, and hedge funds. They are entities that have fundamental governance issues and therefore need to be brought under greater control.
In the case of rating agencies, one of the issues--and I'm not talking only about yours--is what some would regard as a fundamental conflict of interest, that the people you rate are the people who pay you. That causes a little bit of a conflict, not just for you, I hasten to repeat, but for rating agencies in general.
So my question is, would you concede that those countries, notably France, but not only France, I believe, that are pushing for far greater regulation of rating agencies at least have a point?
Again, you have a number of questions there.
With regard to the point, we accept oversight, absolutely, and we subscribe to that oversight. In fact, the SEC has published its rules for regulating rating agencies, with which we're compliant. In fact, those rules come into effect on April 10 and we're fully compliant as of March 31.
With regard to the G-20, as you know, Canada is a co-chair of the working group, along with India, on regulatory reform, including credit rating agencies. Their communiqué on March 12, so only three weeks ago, talks about the G-20 finance ministers and central bank governors having agreed to regulatory oversight, including registration of all credit rating agencies whose ratings are used for regulatory purposes and comply with the IOSCO code.
So that's the G-20. France, Germany, the U.K., Canada--which is a key member, as I just mentioned--have subscribed to the IOSCO code of which we're one of seven that are compliant. And we are fully compliant with the SEC rules that were published in February and need to be followed in April.
I'll take a run at the question.
I think the debate over mark-to-market is one dealing with the pro-cyclicality of mark-to-market, which is the point you made. In up markets, you're marking up the assets, so you're encouraging a lot more activity in the financial sector and there's the potential of bubbles. The counterpart to that is the transparency argument, which is the argument that accountants use, which is that whatever a value is, it should be disclosed.
I think the issue gets much more complex than that, and I think that's the reason--you cited the C.D. Howe Institute--to provide recommendations that give a little more flexibility in terms of some discretion in marking to market. One of the reasons for this is that it's very difficult to in fact mark to market securities that are not actively traded in the marketplace.
Part of the problem we've encountered in our markets is it's these more esoteric securities that we've had trouble valuing. The risk in a mark-to-market scenario, without some kind of discretion involved, is mismarking the assets.
I would agree with the recommendation of the C.D. Howe Institute that says we have to look at this more carefully, and we probably have to treat the accounting of financial institutions a little bit differently than maybe we have in the past because it has exacerbated some of the problems we're facing.
First of all, Mr. Bethlenfalvy, I would like to apologize for how we massacred your name on the name card prepared for you, but I take some solace in seeing how DBRS also massacred your name, at least in the signature of the French version. That must happen to you a lot.
I would like to come back to what my colleague, Mr. McCallum, was saying, because I think it is very important. As you can see, we do not always have enough time to really delve deeply into these matters. I would like to come back to something you said in English. You justified the triple A rating you granted to asset-backed commercial paper, citing credit quality. Also, referring to the absence of any conflict of interest, you said you were in no more of a position of conflict than the lawyers who prepared the contracts in question.
For six years, I was president of the Office des professions du Québec, a regulatory structure responsible for overseeing all professional occupations and ensuring that these professionals do their job to protect the public. I can assure you that I am very familiar with the subject and I have never heard this theory whereby the group that performs an assessment, and is paid to do so, is in no more of a position of conflict of interest than the lawyer who prepared the contracts.
Can you explain to me how, with this notion of credit quality—to use your terminology—you could have granted a triple A rating to that paper? I am a lawyer, and spent most of my career practising corporate and commercial law. I think it was very clever, from a marketing perspective, to call these “asset backed” transactions. That evoked the notion of some sort of guarantee, while it was nothing of the sort. No one was in a position to follow the owner of that truck all over the place.
Please use clear terminology so that everyone will understand. Even though I have been working in this field for a very long time, I must admit, I am having a hard time understanding your justification of triple A credit quality for something that caused one of the worst economic disasters this country has ever seen.
As you can see, we have only a very short time.
Hello everyone. I would first like to commend Mr. Phillips, who gave an excellent presentation on the state of credit services for members of credit unions. I have always been a member of a credit union, on principle. Credit unions have investment programs, investment trusts.
Personally, I was indirectly affected by this, since I had investments in credit unions, and the infamous ABCP did not perform well. That is why I will immediately move on to Mr. Bethlenfalvy, and I would like to address the question of the ABCP that was rated by his credit rating agency.
I have already asked Bank of Canada representatives who controlled the rating agencies. I came to the conclusion that no one was exercising control over the rating agencies. I was told that the need to have a good reputation forced them to do a good job.
Concerning how you bill your clients, since that is how you operate, if I understand correctly, you charge a flat fee to those who need a rating. Can you tell me if the flat fee is the same every time you are asked for a rating or is each case different? Thus, in the case of ABCP, could the cost have been higher because there was greater risk or because it was more complicated?
I know how to say that one correctly.
I can't disagree with my colleagues. I sat through the meetings at the finance committee here in the last session--or Parliament, I guess we call it--with the discussion of the asset-backed commercial paper. We had people here who--let me put it this way--were not really sophisticated investors and who relied completely on your rating.
It's not just us hearing it here. The National Post talks about you as the major international debt-rating agency that refused to give ratings to Canadian ABCP, commercial-backed paper, because they were not backed by levels of liquidity agreements and standards elsewhere, and so on and so forth. So it was not just us here. The financial world was on top of your rating of these things, and you've heard a lot, so I don't want to.... We would agree with some of the criticism that you've heard from across the way, and you came here today to sort of give us advice.
I talked to a witness at our Tuesday meeting about how I want to make sure that the public, and I, understand the difference. We had a problem with the commercial paper, called asset-backed commercial paper, but that pool you talked about had a lot of things in it that were questionable, in terms of.... Securitization is a need. That's what we were hearing about. My concern, and I want to make sure I'm accurate, is that the $12 billion facility that we're offering through this stimulus package is really for hard assets, assets people can understand—whether they're cars, trucks, or floor plans for dealerships.
A year ago, we were complaining about commercial paper and how it wasn't understandable, wasn't fully disclosed. It had a lot of things in there that I think Mr. Mulcair is absolutely...uncollectable if things went bad. Obviously, they did go bad. That is not what we're doing here, and I want you as a rating agency to tell me what the difference is, if you could.
There are a couple of things.
First off, I share the concerns about the asset-backed commercial paper, and I welcome the opportunity--as painful as that may be--to sit before you and take the majority of questions. It's the right process, and we don't want to shirk from that responsibility.
One of the things was that we backed up these pools of assets with something called “market disruption liquidity lines”, and what we learned is that not all firms honour their obligations, that the conditions in there are relevant. So in January of 2007--even before this crisis hit--we said we were not going to do any more asset-backed programs without global liquidity standards, meaning you can pretty well back up the CP with an unconditional bank line of credit. In fact, in September 2007, we announced the conditions. We can now say that every conduit is 100% backed up by global liquidity standards. So in terms of how you make sure this doesn't happen again, that's an important thing.
On my point about the underlying assets, I do agree with you that there are real assets, that they're real needs, and one of the goals of that Canadian secured credit facility, I think, is to help get confidence again in the market. The rules aren't public. I suspect they'll require ratings again.
Obviously, you don't get too many kicks at the can. Our integrity is our reputation and whether the market will continue to use our ratings. So far the market continues to embrace our ratings. We were very open and honest with all of the investors. I dialogued with them extensively throughout the crisis, and continued to do so, through the Montreal accord and beyond. So I think we will continue to try to do our best, to take lessons from the past, and to ensure they don't happen going forward.
The witness of the day is definitely Mr. Bethlenfalvy, so I guess I'm going to continue with that. I have a whole bunch of questions based on the same subject matter. I'm trying to get clarity. I understand you want to protect your corporation. But if you don't survive, somebody else will take over what you're doing today, so the idea—and I think Mr. Wallace just alluded to it, and I think everybody else around the table—is to protect the future and how we correct.
I've been hearing what you're saying. You're talking about complexity. I don't believe that. I don't believe that things have gotten too complex. For me, if I have $50 I want to put in a bank, I want a return on it. Either it's a GIC or it's dividends in an asset growth company. The reason it's gotten complex is that there have been people who have gotten greedy out there. I expect people to protect me, whether it be a securities regulator, a rating agency, my bank, or my credit union. It doesn't matter who. However, the feeling out there is that's not what is happening.
I think Mr. Mulcair asked you about assets versus non-assets. I'm still no further ahead. You're saying that some instruments are no longer being rated by your agency. What is the difference? What's stopped? Now you're saying there are instruments that are market disruptions. What is that? You're being regulated, but who's regulating you? Who's verifying that? You're assuming that the regulator is regulating you, and the regulator is assuming you're verifying what you're rating. But you're saying, no, we never rated what was being put together because that's not our job.
I still don't understand who your customers are. Are they third parties? Is your customer just a person who's issuing the issuing item or instrument? If you're not rating that instrument, could a third party actually hire you and ask you to evaluate or put a rating on that security?
I guess I'm going full circle. The idea is this. How do we prevent this from happening again? It will happen again where 1% is not good enough for a GIC and then 3% is not good enough. Eventually these instruments will get complex again.
My question is this. How do we avoid this? What happened in the past? Let's just look at the last 12 months. How can we avoid it happening in the future? What is your part in preventing this from repeating itself?
That's a great question.
First of all, I would say at the outset, I know Canadians don't like to boast. I wouldn't boast too much about our Canadian banks, because who has a crystal ball better than mine? Who knows what's around the corner? One thing about banks: no risk, no bank. Banks take risks, including Canadian banks.
Number two, the Canadian banks had less leverage. As I mentioned before, partly due to regulatory involvement and I think because of our conservative risk culture, the banks had less leverage. The U.S. has a system of massive leverage. The financial institutions are levered one times to their GDP, over $14 trillion. The U.K. banks, in particular...their banking system has 450% of GDP. Iceland has nine times; Ireland, six times. The problem is going to be massive in western Europe, for a number of reasons, partly because of the leverage.
So on a relative basis, I think less leverage and more prudent risk management, going back to credit principles and not getting involved in a lot of toxic assets, helped the Canadian banking system. But I'd be careful to boast too much, because we still are in unchartered waters.
Yes, I'd be pleased to answer that question.
I'll start by saying that regulatory regimes around the world are in the process of reform. We've talked a bit about that, and you're exploring that in the context of ratings.
It's my view that for us to embark on vigorous comprehensive reforms of our capital markets—and I think we need to do that—moving toward a single regulator would certainly facilitate that. I'll give you two examples.
The first one is that it's very clear in these reform discussions that there has been a lack of effective coordination among the regulators themselves, both domestically and internationally, largely because there's this interrelationship or symbiotic relationship between banking and the capital markets. And it's important that one hand knows what the other hand is doing.
It was alluded to in this discussion that in Canada, while we do have a Financial Stability Forum, I believe it's called, which is a round table bringing the regulators together, the one seat that's missing at the table is probably one of the most important, a national regulator who represents the regulation of the capital markets.
We can talk a lot about greed—and I agree that greed was pretty rampant—but the fact is that greed is historic. What we have here is the failure of regulation, not so much in Canada but very much so in the U.S.
So I think that, first of all, the case for a national regulator can be more effectively made, again, in the context of facilitating greater coordination and greater consultation among banking regulators, insurance regulators—the Bank of Canada plays a very key role as lender of last resort—and the securities regulator.
The other point I want to make—
And thank you very much, all four of you, for being here.
I'm afraid I'm going to have to go back to you, Mr. Bethlenfalvy.
There have been, of course, a number of questions already this morning. We're trying to ask specific questions about the non-bank ABCP that we started to see problems with in 2007. But the answers we're getting are not specific. The answer we're hearing is the global financial crisis.
We had a question about TD Bank in particular, about Ed Clark and Don Drummond both having said that they looked at this stuff, didn't get it, and didn't buy into it. And your answer was, “Well, the TD Bank does ABCP”. There's a difference between the non-bank ABCP...there's a difference between the products out there generally and the specific batch that caused, and I would suggest continues to cause, considerable difficulty for an awful lot of people. So I would like more specific answers on the batch of non-bank ABCP that is actually at question.
I will repeat a little bit of what my colleague Mr. Mulcair focused on, and that is the credit quality. Your answer was the principles of diversification. Then the question was, “But you can't realize it. It's all bunched in. You can't realize on the specific creditors that form part of the larger securitization.”
I don't think it's just a question of not being able to realize; it's the underlying value of what was there. And you had an answer that had to do with liquidation value. So I would say that it's not just the fact that you can't realize on the individuals, but rather that the valuation underneath was clearly much less than anything that would have warranted a triple-A rating. Liquidation value—clearly much less than anything that would warrant a triple-A rating.
I have yet to hear anything from you today that suggests you wouldn't do the same thing all over again. I haven't heard yet anything that suggests that “we actually made a mistake”. I would really like to hear from you a more specific answer, not general global crisis. What on earth possessed you to give a triple-A rating to that non-bank ABCP that so clearly did not have that underlying value?
Well, I think we are different. We're committed to member service, we're committed to working with our members, and we're committed to the communities in which we're active and in which we're located. The ethic or ethos is to work with the members. We know them. We're traditional lenders in that pure sense, that loans are made on character. Deposits are sourced in the community and then loaned back into the community. So there is a big difference.
What I am looking at are the aggregate numbers. When I look at the aggregate numbers, I see an increase in lending across our system in the fourth quarter of 2008; it was an increase of 1.6%. That was actually the time when the market was dropping. It was when we really hit the decline. What is interesting, when I look back at the numbers, is that it is higher than in the first quarter of 2008. The second and third quarter increases were higher than 1.6%, but there's no real evidence of a decline in the fourth quarter of 2008. Our numbers for the first quarter of 2009 aren't out, but I would be very surprised, from anything I hear anecdotally across the system, if we were to see a decline across the system.
What's notable—and I mentioned the Canadian business owners strategy—is that we've really committed to small and medium-sized business lending. Two years ago, we initiated the first national advertising campaign in the credit union system in over 25 years, directed at increasing our presence and increasing the awareness of the services that credit unions can provide to small and medium-sized business. We had done some calculations and had seen that we actually had a fair share of that market, but the level of awareness of it was very limited.
So we got the system together and said this is something we need to address. We launched the campaign, with a lot of other parts to it, including a network for small and medium-sized businesspeople to connect with each other, and training for our own credit union staff to sensitize them to the needs of small and medium-sized business. We're going to keep that going. We're not ramping it; we're going to keep it going and keep promoting our services to small and medium-sized business.
So I'm confident that our numbers will increase. We certainly haven't seen anything that suggests that, on an aggregate basis, there's been a decrease.
I would like to ask Mr. Luimes to comment, though, because he's a real on-the-ground lender and can give you that perspective.
Mr. Russell, a question for you.
I will read a headline from today's Toronto Star.
||YESTERDAY: How regulators have failed to crack down on stock market miscreants
--their term, not mine--
||while developing an international reputation for inaction and ineffectiveness.
||TODAY: How a big-budget police squad set up to take on corporate crime degenerated into a bureaucratic mess with few results.
That bureaucratic mess is IMET, the integrated market enforcement team. It is exactly as the Toronto Star describes it today, and we've been saying it for some time. It doesn't work--centralized, single, Ottawa- based, and incompetent.
What is it that makes you believe that bringing the regulation of markets to Ottawa would somehow make it work? Let's look at some facts. In Quebec there's the rather famous Vincent Lacroix case. He's in the slammer right now doing 8 to 12 years, so he's in appeal on the length of his sentence. He's been convicted on dozens of regulatory cases in Quebec under the provincial statutes. He faces several thousand criminal charges under the Criminal Code of Canada. Not the first day of the first trial on the first charge has ever been held under those criminal charges, and the only reason he's in jail is because Quebec's Autorité des marchés financiers does a very good job of enforcing its rules.
I find when I meet groups that just affirm that it would be better if we just brought everything together in Ottawa, like IMET.... I'm not the one who is saying they're incompetent, the Toronto Star is, but I happen to agree with them, because they don't get results. What is it, other than your sentiment, your feeling, and I dare say your prejudice, that says that somehow Ottawa is good at this and it would be really great if we threw more bureaucrats at it, rather than the people who are actually fighting a little bit, like Mr. Bethlenfalvy's team? If you don't do a good job of regulating your market, people won't come to you. So Quebec is doing something not only for individual investors and for the corporations involved, it's also doing something for itself, because people will come to a place that is well structured and well regulated.
I'm trying to get into your head and figure out, other than what I detect as being just a pro-Ottawa prejudice, a centralizing tendency, what makes you believe factually that they can actually do the job better.
I fundamentally agree with Mr. Laforest that we need to do this.
We've been talking about this before and during the meeting, and our apologies, Mr. Chair, for discussing it then.
But fundamentally, I'm concerned that this will have three committees studying the same thing. The optics of that, when Canadians are losing their jobs, I don't think are good.
I was of the understanding that the industry committee was willing to pass it back to us, but that it needed unanimous support. Now I understand they don't have unanimous support. Having said that, whether we deal with it today or not is irrelevant.
I would like to propose or suggest a friendly amendment to Mr. Laforest's motion. I'll read it into the record:
||That the Finance Committee conduct a study of the credit card and debit card system in Canada consisting of at least (10) meetings to examine, but not limited to:
|| (a) Transaction fees imposed on merchants;
—as Mr. Laforest had referenced—
|| (b) Proposed changes to the credit card interchange fees and the debit payment system; and
||report its observations and recommendations to the House.
I would put that forward—
We discussed this at the subcommittee, and I don't see the rush. We have enough work to do until the beginning of May. I talked to my colleagues in the industry committee, and we have no consensus on our side as to whether it should go to the finance committee or the industry committee. The finance committee members believe that it should come to our committee here, but we don't have agreement, and I am not comfortable that....
The Senate will be looking at this and they'll also be ready to issue a report by the beginning of May, or the end of May. The industry committee is going to look at it, and if the finance committee also looks at it, I just think it would be an inefficient way of spending Parliament's time and taxpayers' money.
My suggestion would be, if I can say so, just to defer this until we have further discussions with our colleagues. We all have colleagues on the industry committee.
Mr. Wallace, you might be the broker on that, but I haven't been able to get a firm answer.
You were supposed to speak to their chair, Mr. Chair.
So I think we should just defer the vote until the next meeting, and I think that's what was agreed upon in the subcommittee. Then we also agreed in the subcommittee that we needed, maybe, only up to two, three, or even four meetings. Now we're up to six meetings. I'm not sure we need that many meetings. It would mean we're going to do this work until the end of the session, which means precluding any other work we have to do.
I think we can defer debating this motion until we get back from the two-week break.