Standing Senate Committee on National Finance
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Proceedings of the Standing Senate Committee on
National Finance

Issue No. 33 - Evidence - May 17, 2017

OTTAWA, Wednesday, May 17, 2017

The Standing Senate Committee on National Finance met this day at 6:47 p.m. to study the Main Estimates for the fiscal year ending March 31, 2018.

Senator Percy Mockler (Chair) in the chair.


The Chair: Welcome to this meeting of the Standing Senate Committee on National Finance.


My name is Percy Mockler, senator from New Brunswick and chair of the committee.

I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and available online on the Senate website at

All other committee-related business can also be found online, including past reports, bills studied and a list of witnesses.

Now I would like to ask honourable senators to introduce themselves, starting on my right, please.

Senator Cools: My name is Anne Cools and I am a senator from Toronto, Ontario, like Senator Eaton.

It is a pleasure to join all of you this evening. I hope you enjoy this meeting of our National Finance Committee.

Senator Neufeld: Senator Neufeld from British Columbia.

Senator Eaton: Nicki Eaton from Ontario.

Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.

Senator Andreychuk: Raynell Andreychuk, Saskatchewan.

Senator Pratte: Senator André Pratte from Quebec.

The Chair: Thank you, honourable senators.

I would also like to recognize the clerk of the committee, Gaëtane Lemay; and our two analysts, Sylvain Fleury and Olivier Leblanc-Laurendeau, who support the work of our committee.

Today we continue our examination of Main Estimates 2017-18.


Last week, Moody's downgraded the ratings of the six major Canadian banks and their affiliates. The agency cited the continued growth in Canadian consumer debt and elevated housing prices that leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.


Our Senate Finance Committee is concerned that an eventual housing market downturn would affect the federal fiscal framework of Canada and in turn supply. However, consequently, the committee's primary interest is to assess the level of risk that may or may not exist.

Honourable senators and the public, we have invited witnesses to discuss the issue, starting with officials from the Finance Department for the first 45 minutes of the meeting. We will have officials from the Office of the Superintendent of Financial Institutions during the second part of the meeting.


From the Department of Finance, we welcome Elisha Ram, Director, Financial Markets Division, Financial Sector Policy Branch.


Cynthia Leach, Chief, Housing Finance, Financial Sector Policy Branch, and Phil King, Director, Economic Analysis and Forecasting, Economic and Fiscal Policy Branch.

Witnesses, thank you for appearing and accepting our invitation.

With that, I will ask, according to the clerk of the committee, Mr. Ram to make a short presentation.


We will then continue with questions. Mr. Ram, the floor is yours.


Elisha Ram, Director, Financial Markets Division, Financial Sector Policy Branch, Department of Finance Canada: Thank you, Mr. Chair and members of the committee, for inviting us to be here with you today.

I have a few short comments, after which I will be happy to accept your questions. The Minister of Finance is responsible for overall financial stability in Canada. This includes ensuring that Canada has a healthy, competitive and stable housing market.

The Department of Finance works closely with other federal financial agencies, including the Bank of Canada, the Office of the Superintendent of Financial Institutions and the Canadian Mortgage and Housing Corporation, to follow developments in housing markets and provide advice to the government on how to promote market stability, access and competition.

As director of the Capital Markets Division, Financial Sector Policy Branch, my team and I, which includes my colleague Ms. Leach, provide advice to the minister on government-backed mortgage insurance and securitization programs, among other topics.

My colleague Phil King, Director of Economic Analysis and Forecasting Division, Economic and Fiscal Policy Branch, is responsible for monitoring and analyzing the overall macro-economic condition in Canada. The housing market is obviously a key element.

Most of our divisions work together and with other federal agencies to provide advice to the government in advance of the October 2016 mortgage insurance rule changes. The Department of Finance continues to closely monitor the housing market, in collaboration with other federal organizations as well as provinces, territories and municipalities.

We are pleased to be here this evening and we are ready to take your questions.

The Chair: The chair will recognize Senator Eaton, please.

Senator Eaton: Thank you for being here. We know that the government guarantees 100 per cent of the Canada Mortgage and Housing Corporation's mortgage insurance obligations in the event that CMHC is unable to make those payments.

Based on your most recent analysis, what is the likelihood that CMHC will not be able to pay compensation to certain lenders?

Mr. Ram: CMHC operates on a commercial basis. This means they charge premiums for the insurance that they provide. CMHC is also regulated by our colleagues in the Office of the Superintendent of Financial Institutions, which ensures they are sufficiently capitalized to meet their obligations.

Mortgage insurance applies to mortgages that meet certain criteria, which ensures that the borrowers meet some criteria in terms of their ability to repay. The Canadian housing system writ large is well regulated and has sound underlying practices in place to ensure that people pay their mortgages. As things stand, we feel very confident that CMHC can meet all of its obligations.

Senator Eaton: That said, our interest rates are very low and have been for a very long time. Could the Bank of Canada raise the interest rates by, say, half a point or a point without causing financial crisis in the housing area?

Phil King, Director, Economic Analysis and Forecasting, Economic and Fiscal Policy Branch, Department of Finance Canada: The Bank of Canada could raise interest rates. I don't think they would do it only to target the housing sector as a whole.

Senator Eaton: No, I'm not saying they would, but if there were other reasons.

Mr. King: It would be because the broader economy was showing enough momentum and strength.

Senator Eaton: Or the United States raised their interest rates so high.

Mr. King: We do pursue an independent monetary policy at the Bank of Canada.

Senator Eaton: I know.

Mr. King: It has maintained a lower rate than that of the U.S. for a little while now. If the bank were to raise rates, it would be because the economic situation is stronger. When you have a stronger economic situation, you have more employment. You have more income, and people are better able to service those mortgages.

It's not like rates would just go up by themselves for no reason. The bank, in raising rates, would do it because economic conditions warrant, which is to say they would be stronger. In that context, yes, the housing market would be okay. It would be able to absorb any increase in interest rates.

Senator Eaton: In other words, you're comfortable if the Bank of Canada raises interest rates by half a point to a point. You don't foresee any problem.

Mr. King: No, I have complete confidence in the Bank of Canada in how they evaluate the economy and what they choose to do with rates.

Senator Eaton: I guess you couldn't say otherwise, really.

Cynthia Leach, Chief, Housing Finance, Financial Sector Policy Branch, Department of Finance Canada: It is probably worth also adding that the mortgage insurance rule changes announced by the government on October 3rd implemented a mortgage rate stress test to ensure that new borrowers had an adequate buffer to pay their mortgage payments.

Senator Eaton: I don't argue about the newer ones, but I'm thinking of the mortgages people took out one, two or three years ago. We continuously hear about the very high rate of debt of Canadians, so this is why I'm asking the questions.

Senator Pratte: Moody's decision of last week to downgrade Canadian banks rang a bell for many ordinary citizens who consider Canadian banks to be extremely solid, like almost everyone. I know that doesn't mean Canadian banks suddenly became weaker because it is just a downgrade from very high ratings.

The reason that Moody's gave certainly is a source of worry. Can you tell me how you interpret this decision and what it means?

Mr. Ram: Moody's is a credit rating agency. Their job is to look out for the worse case scenario. They are looking for tail events. When they look at an institution to try to assess where they stand from a credit rating perspective, they're not necessarily looking for the greatest probability. They're looking at what happens if worse came to worse. From that perspective they felt that it was appropriate to have a small downgrade in the rating of the banks.

It's fairly clear that banks continue to be well regulated. They have a high level of capital. Certainly the reaction in financial markets suggested that no one is particularly worried about where major banks stand right now.

Senator Pratte: They are certainly not alone to be worried by the high level of private sector debt and especially consumer debt. The minister and the Bank of Canada have expressed the same kind of concern over a couple of years and a couple of months also.

Their worries are the department's worry and the banks' worry. I guess there is a reason for concern, is there not?

Mr. Ram: We are certainly concerned about Canadians being vulnerable when they take on high levels of debt. That makes them less resilient to a change in economic conditions.

For example, if they were to suffer a loss of income or if the interest rate they face increased without a commensurate increase in their resources, those are the things that our department monitors quite closely. We also have ongoing discussions with our colleagues in other federal financial agencies, including OSFI and the Bank of Canada.

We continue to track that. We believe the economy is resilient. There are no suggestions that we are in a difficult situation, but that's certainly not something we take lightly.

Senator Pratte: I'm thinking, for example, of people who work in sectors that could be affected, for instance, the softwood lumber sector where maybe thousands of jobs would be lost. Some of those people probably hold mortgages and could rapidly find themselves in a difficult situation. That could be tens of thousands of workers who could lose their homes.

They are included in people who have high debt, and that could have an impact on the economy, could it not?

Mr. King: It could. You're talking about an idiosyncratic risk there. It's a very particular sector. It's not a particularly large sector. It's particularly difficult for those people involved obviously, but on a national level it would not have much of an impact at all.

In fact, this is one of the reasons that the government not only announced the October 2016 measures. There are a number of times they've intervened in the housing market to help ensure the stability of the financial sector and of the households that participated in that market since 2012.

I note that we have a high debt ratio, as high as some other countries but not as high as many others. Lots of other advanced economies have higher debt ratios, household debt to income ratios, that is.

The rate of growth has slowed quite a bit since probably 2009, 2010 and 2011. It went up rapidly during the 2000s, but it has slowed quite a bit since that time. However, it is still inching up and it's still higher than it has been historically. It does pose a risk. We flagged in at least the last five federal budgets that it is the key domestic risk for Canada.

Senator Marshall: I will pick up on your last point. Are you saying it's the housing sector that is the key risk?

Mr. King: It's not so much the housing sector. It's that we have an elevated household debt to income ratio. Around 66 per cent of most household debt goes into mortgages. It goes toward buying houses. Therefore, there is obviously a link between the housing sector and the debt load we carry.

Senator Marshall: When I look at the housing sector one of the things I'm trying to reconcile is that we are told we are okay and not to worry, but over the past year we keep seeing things that give us the impression there is a looming problem. You referred to the rules that were changed last October. CMHC increased their insurance premiums. Then we saw home capital as an issue. We have low interest rates now and consumer debt is very high.

In a way we are boxed in, in that the rates are so low and consumers have borrowed so much the Bank of Canada almost can't increase interest rates. People are on the border now of going over. There are polls saying half of Canadians are $200 or less away from not being able to pay their bills. They have this high debt and low interest rate. They are sort of boxed in. If interest rates go up, they will be in trouble. We look at CMHC and see all the mortgages they insure in the billions of dollars. Then Moody's downgraded the banks.

On the one hand, we are left with being reassured the housing sector is okay, but then all these signs keep cropping up and say, "Gee, something else has happened.'' We are getting the impression that we are not on a good road, but nobody is telling us that we are on a bad road. Perhaps you could comment on that. Why is there reassurance that we are okay but we are seeing all these signs that we're not okay?

Mr. King: I will jump in. You covered a lot of ground. I will talk first about the housing sector.

It is important to realize that you can't talk about the housing market in Canada as if it were one market. Geographically we are very large and we have a very small population. We are made up of a number of small regional markets, principally the big cities of Vancouver, Toronto, Calgary, Edmonton, Ottawa and Montreal. They behave differently. If you look at smaller markets as well, what happens in say the Winnipeg market has no bearing or influence whatsoever on what would happen in the Halifax, Thunder Bay or Victoria market. They are completely heterogeneous. We see no systemic risk common to all cities.

When we look at the market, you can more or less divide it into either three or four broad regions. I'll put Toronto and Vancouver aside for a second. You have Calgary and Edmonton, whose markets have been quite weak for the last two years for obvious reasons. We had a huge oil price shock. They were at the epicentre of that shock, so their markets have suffered the most. They have started to stabilize. The economy of Alberta has started to stabilize, and things are firming there.

Outside the resource producing provinces, you have the rest of the country, which includes Ottawa and Montreal. Things have been going along steadily in what I would say is a fairly well-behaved manner for the last several years. There were no concerns whatsoever in the rest of the country outside the resource producing provinces.

The two cities where the most interesting things have been happening are obviously Vancouver and Toronto. They share a lot of similarities. Principally, they have very strong fundamentals. The factors that should be driving housing prices have been driving housing prices in those cities. I could go on quite a bit about this, but basically it means they have the highest population growth rates. All our immigration tends to migrate to those two cities. They have very strong job creation and very strong income gains, so people are better off there. Those two cities are wealthier. There's a lot more wealth in them, so you don't necessarily need income to buy a house and to service a mortgage payment. You can pay for it out of existing wealth. They consistently rank as among the best and most attractive cities in the world to live in. International capital is highly mobile. The influx of capital is a factor that has influenced those two markets as well.

If you want to have a world-class city in Ontario and B.C. on par with Paris, London, Seattle and San Francisco, one of the things you will get, along with that, will be higher house prices in the core areas. That influences prices there as well. They have very strong fundamentals driving prices.

Having said that, perhaps in the last year or so we have had exceptionally strong growth in prices in those two cities, which is somewhat more concerning. Prices were up around 20 per cent year over year in Vancouver, but they've fallen back down now. As well as the federal government, the B.C. government has put measures in place to help cool that market. They appear to be working.

Toronto seems to be in a similar situation but slightly out of phase with Vancouver. The Ontario government has also put in place similar measures to what the B.C. government recently did. They have just taken effect. They also had very strong price gains. I wouldn't make any conclusions based on one month of data, but in the most recent data the market has pulled back quite a bit in response to those measures. I also note that the measures the federal government put in place will take some time to work their way through the system.

To loop back to the beginning, you can't say there is one housing market in Canada. We don't think there is any systemic risks across the country. There are specific pockets of concern, which seem to have ameliorated somewhat in the very near term, but we're keeping a very close eye on those. For the rest of the country, I think we are far more comfortable with the way things are evolving.

Perhaps a quick word on the notion that people are boxed in with higher debt loads and the possibility of rising interest rates. That's absolutely right. Again, the government has mentioned this in the last several budgets. The higher your debt load is, the more constrained you become in terms of going out and borrowing and buying new housing or cars or durable goods. Again, to reiterate some of the remarks I made earlier, the Bank of Canada would only increase rates when there is a generalized strengthening in the economy, when the unemployment rate has gone down further, more and more people have jobs and incomes are starting to rise. In that context, people would be able to pay for those increased interest costs.

Again, interest rates tend not to go up for no reason. Certainly the bank would not raise them for no reason whatsoever. They would raise them in the context of a stronger overall economy.

Senator Marshall: What kind of analysis do you do in the Department of Finance? For example, CMHC is a Crown corporation. They do all these risk assessments and stress tests and everything. If something happened, it comes home to rest with the federal government.

What kind of analysis or work do you do in the Department of Finance to track what is happening in the housing sector and what is happening at CMHC? Is there a separate division in the Department of Finance?

Mr. King: I will speak to the work I do on the macro-economy and then perhaps turn it over to Mr. Ram and Ms. Leach who look at more of the financial sector, which is intimately linked with the housing market.

I have to look at and advise on all developments in the macro-economy: GDP, the labour market, inflation, trade, and housing, which is a key component of the economy. It occupies a fair bit of our time. It always has. We follow it closely from monitoring the monthly data that come out to looking at the regional markets in the way I described, to looking at how differences occur in different price segments, to looking at how things develop in those regional markets in terms of the market segments: condos versus apartments versus semis versus singles. You do get big differences in those segments. If you were to segment housing in a city from the lowest price to the highest price, where is the pressure? It has been happening in Vancouver and Toronto. Price pressures have been at the very high end, the $1 million plus homes, although many more houses are selling for a million dollars.

Senator Eaton: That is not the high end of Toronto anymore, I was just about to tell you. The $4 million mark is where people start.

Mr. King: That is where a lot of the pressure has come from. That has filtered down to the lower end of the market so it is more generalized pressure.

We look at whether it's new housing starts by city or existing resales. We cover all aspects of the market. It is not just ourselves. We follow what CMHC, the Bank of Canada and private sector economists do as well. We are very intimately attuned to what is happening on the macro-side.

Mr. Ram looks at it from the financial point of view.

Ms. Leach: Mr. King was mentioning when the housing market analysis was done. We also look on the borrower side and indebtedness of new borrowers. As Mr. King mentioned, while there has definitely been a slowdown on overall growth in debt to income, there has been a segment of highly indebted borrowers.

You are sensing a disconnect. Certainly high household debt and what we call housing market imbalances is a vulnerability to the economy, to the housing market. If an adverse event materializes, it could have significant impacts. The Bank of Canada references in its financial system review that while those impacts could be significant, the probability of such an event is considered low.

Senator Andreychuk: I am interested in your public relations pitch for Toronto and Vancouver, that everything is positive there and that is why people go there. I think that is one of the problems. There are advantages of living in other cities, such as lower housing prices, sometimes greater access to community services at a closer distance, and perhaps different kinds of job opportunities.

What I have seen, only in the last little while, is showing that in Toronto, Vancouver, maybe Calgary and maybe Montreal. There has been a price differential in places like Saskatoon and Halifax. They are not earthshaking, but they are for people who are not making as much in those communities, so $500 means something different there than $5,000 elsewhere.

I see your policies really attracting Toronto and Vancouver, and I am asking: What about the rest of the country? What are you doing to cushion some of the difficulties that are happening in other centres? I would love to give you a half-hour pitch on the joys of living in Saskatchewan, because there are many and I would hope that you would be factoring some of them in, but the chair won't let me go on that long.

Mr. Ram: That's a good point. We certainly agree that other places are wonderful to live in other than Toronto and Vancouver.

The federal government housing policy is national in scope. The program that CMHC has is national in the sense that they offer the same terms to someone who wants to borrow in Saskatoon relative to someone who wants to own a home in Halifax, Ottawa or Victoria.

In fact, the existence of these programs means that it is easier for someone in smaller communities where the housing market is not as vibrant to still benefit from terms that are similar to what someone can get in a housing market that is stronger, for example in Toronto or Vancouver. Typically, you face the same mortgage terms and the same qualification standards. There is not a lot of differentiation between the terms that you can get across the country because of the support the federal government provides.

Senator Andreychuk: You have not looked at having different policies for different sizes. We are a diverse country, and what you are saying is uniform. What troubles me, then, is your drive to a consensus that works best in Vancouver and Toronto.

I would argue with some of your points that it is easier to get a house in Yorkton, Saskatchewan or Saskatoon. I don't think so because there are other factors that work into it. I am concerned we are not treating every region and every area with the same sensitivity.

Mr. Ram: I take your point. I think what I would say in response is that the federal government's tools tend to be national in scope. It can be difficult to tailor them in a way that is meaningful and fair across the board, unless you take a uniform approach.

That said, nothing prevents local, provincial and municipal governments, if they feel that the situation warrants it, from taking other measures. We have seen it. We have seen B.C. and Vancouver take some steps because they felt the housing market was getting perhaps a little too hot. We have seen more recently in Ontario and Toronto similar measures being taken, as my colleague mentioned.

Those policies taken at the more local level can be much better tailored to local situations because those people are closer to the ground, understand the communities better, and are able to tailor what they feel is appropriate for their markets.

Senator Andreychuk: Are there any examples of the federal government supporting those initiatives financially?

Mr. Ram: We work in the Financial Sector Policy Branch, so we tend to look at financial sector policies which are more national in scope. Having said that, the federal government has any number of programs that are more regionally targeted.

One could talk about the regional development agencies and programs they operate, as well as the national programs like employment insurance that have different terms depending on where you live.

Senator Neufeld: What I read all the time and what I have heard from you folks is that there is high consumer debt. What is high consumer debt? Give me some numbers. I know what consumer debt is; I want to know what the percentage is.

You don't just say it's high consumer debt. Is it in relationship to the average salary? If that is the case, then what is it? What is high consumer debt today and what was high consumer debt 30 years ago?

Mr. King: We look at household debt, mortgage debt and lines of credit: any way you can borrow money as a household. Today it is approximately equal to 165 per cent of income the average household brings in, in terms of salary in a year. For every dollar in salary they have, $1.65 in debt.

That sounds high but don't forget that two-thirds of that is housing. No one expects that you pay for a house with one year's salary. Typically houses are amortized over a 25-year period.

That is up quite a bit from the 1990s and 2000s where it was close to or a touch under 100 per cent. One of the main reasons is that interest rates have come down. That means debt is more affordable. To say something is high, it has to be relative to something. The real benchmark for us is affordability.

If you look at the debt to service ratio, or the amount that Canadians are paying on both the principal and the interest that goes toward that principle, that has been relatively stable for quite a number of years. As interest rates have gone down, people have taken on more debt, but what they are paying on a monthly basis has remained more or less the same, as a share of their income.

Senator Neufeld: It would have been the same 30 or 40 years ago?

Mr. King: No, it's up from 30 or 40 years ago.

Senator Neufeld: How much?

Mr. King: I don't have that at my fingertips. It is around 14 per cent now. Maybe 15 years ago it was around 12 per cent. You were paying 12 per cent of your income in debt servicing costs. I would have to dig up that figure of 30 years ago. If you are interested, I can.

Senator Neufeld: If you could, and give it to the clerk. I wasn't 40 years ago, and I would like to have some comparison to what it was back then.

Mr. King: The financial order has changed since then. One of the reasons that debt has arisen is that we are better able to identify and to discriminate who is a good candidate for lending money to, or less good candidate for lending money to. People have more assets, which enables you to take out debt because it is guaranteed by your assets. As our assets have increased, and the household assets of Canadians have been increasing, it has permitted more and more debt. On a net basis, things haven't changed as much.

Ms. Leach: Senator, may I add that looking at debt to disposable income and the cost of servicing debt on an aggregate basis is something we do. Something very important is to look at the distribution of that debt, because an average number can hide differences in the extremes.

One thing that has been of particular attention is the proportion of highly indebted households. I would refer you to the Bank of Canada financial system review, the last two editions in December and last June, where they describe the increase in highly indebted households in insured and uninsured mortgage spaces. Indeed the mortgage world changes. As the Minister of Finance said in October, we were targeted to highly indebted households and insured mortgage space.

Senator Neufeld: I lived through the time when we had 20 per cent interest rates. I don't know, I lived. I came through it. My family did. I would like to know about comparisons. You talk about lots more assets and those kinds of things. Obviously people will borrow more money to buy all the things that are for sale out there, in the enticing way advertising goes.

It would be interesting to me to see some of those numbers. I look back at some housing prices and the average incomes many years ago. They are laid out for people. I have seen those. It is interesting that it was not much different then than it is for the average person today, going back 50 years or so.

If you could do that and provide them to the clerk, everyone will get it for sure.

Mr. King: I will.

The Chair: I want to follow up on what Senator Neufeld said. Could you provide us with a graph for the last 50 years?

Mr. King: I will give you as much data as are available. I can't say it is 50 years necessarily, but whatever is available.

The Chair: Thank you very much.

Senator Marshall: You were talking about the rules that were changed last October. Someone mentioned it was targeted toward highly indebted households.

Are you able to explain the impact that the change in the rules had? When the rules went in, you must have had some objective in mind. What has the result been? It has been six or seven months now. Do you track what is happening, and could you tell us what is happening with the change?

Ms. Leach: Yes, absolutely we track these things to the extent that data permit. What we have seen so far in the insured space is that there have been some adjustments, as expected. The insured mortgage activity and indebtedness are down. In other words, the proportion of highly indebted new insured borrowers is also down, but I would say it is still early. Data are lagging, obviously. These measures were introduced when it was a slow seasonal period. It would take a few more months to get more data.

The other complicating factors, when you are trying to identify certain impacts, is that there are other things happening. Since the minister's announcement in October, there have been other policy changes from other jurisdictions. We will be looking closely at the data in the next few months to try to identify the various impacts.

Senator Marshall: You have to break out to see, if a change has occurred, if it is attributable to this or that change.

It has now been seven months and you are following the changes to see what has happened. Is it just that you see it is down, or are you able to say it is down 10 per cent? Do you measure it or is it more general? Are you able to attach numbers to it?

Ms. Leach: We do have specific numbers. I don't have them at my fingertips. They are pretty early, so they may not be indicative. We only have data from early in the rule changes. A lot of activity was grandfathered, so it is not that helpful yet.

We did some impact analysis in preparing our advice for the minister to assess what could be the impacts of the measures. We looked at data over a historical period and asked the counterfactual: How many of these mortgages would not have qualified for insurance had the new rules been in effect over the historical period?

The department has provided these estimates before. We estimated that up to 8 per cent of new home purchases could be affected in the first year that the measures were in effect, that borrowers and lenders would adjust, and that over time these impacts would dissipate.

Senator Marshall: Would that information be publicly available, or is it just used for internal purposes?

Ms. Leach: It has been provided publicly. I forget in what context. Maybe it was to a media request, but we could provide a written response.

Senator Marshall: Could you provide it to the clerk?

Ms. Leach: Yes.

Senator Marshall: Since CMHC is a Crown corporation, would it be the Department of Finance that would be monitoring CMHC? There is a big commitment there for the federal government. There is a large guarantee there. Who monitors that? How does that work?

Ms. Leach: CMHC's responsible minister is Minister Duclos, the Minister of Families, Children and Social Development. The Minister of Finance has responsibilities to approve the borrowing plan of CMHC.

Senator Marshall: Is it the corporate borrowing plan?

Ms. Leach: No, the corporate borrowing plan is not related directly to the guarantees.

Along with Minister Duclos, Minister Morneau has a role in approving the corporate plan of CMHC. My team at the Department of Finance works closely with CMHC on multiple fronts, including in a challenge function capacity to understand their activities and to discuss them.

Senator Marshall: Who oversees the guarantees? Is that the Minister of Finance?

Ms. Leach: Yes, that is the Minister of Finance.

Senator Eaton: Mr. King, you paint such a rosy picture of our financial state in Canada. It is very reassuring to me, because I live in Ontario and I know what our provincial debt and the provincial debts of other provinces are growing to be. I also think about Moody's because I don't think they downgraded the bank in 2008 during a recession that was considered one of the worst recessions since 1929.

I see your government debt will grow by $120 billion over the next five years. I worry about the U.S., if they do get their act together under President Trump and pass a tough tax bill which brings down their corporate tax to 15 per cent and their income tax.

I am sure you will have taken that into account and you still feel confident that we don't have rough seas ahead. It is going to be clear sailing.

Mr. King: Hopefully, I haven't been too sanguine on the housing market in particular. We do have concerns about it. That's why the government has implemented measures so many times over the last five years or so, but we think they are well contained.

I think you are getting into the broader economic picture of how Canada is faring.

Senator Eaton: You are the policy people.

Mr. King: Momentum is starting to pick up and things are starting to firm in Canada, certainly. Over the last few years what has dominated the landscape for us has been a weak global economic environment. Everybody has been in the same boat. We have had very little trade and very little investment, and that slowed growth. We have also had the oil price shock. Canada is big oil producer and a very big oil exporter. That has been a huge cut to our income.

Senator Eaton: We have to get the pipelines built.

Mr. King: It would help to get pipelines so we can get the oil to saltwater, certainly.

The impacts of those are starting to fade. The global economy is firming. It looks like we have seen the worst of the oil price shock. It looks like it is behind us, in no small reason because the price of oil has stabilized. It went from about $100 a barrel in mid-2014 to about $27 a barrel in early 2016. Now it's around $50 a barrel. Most people think, insofar as you can project where oil prices will go, it will continue to firm.

The economies of resource producing provinces have stabilized in terms of retail trade and housing markets. Even their labour markets are starting to grow again. That's benefiting Canada. As a country, we have had strong performance over the last six to eight months.

Senator Eaton: I will stop you, because Senator Pratte,Senator Mockler and Senator Maltais have spoken here and in the house about the terrible job loss that will be felt in the Atlantic provinces, Quebec and B.C. over softwood lumber. Don't you think it will have big effect on Canada?

Mr. King: It will have an effect, certainly. It's obviously much more acute at the individual level and at the local town and city levels, but for a country the size of Canada I'm not sure how many people are actually employed in the softwood sector and in how many jobs?

Senator Eaton: Thousands.

Senator Pratte: I think over 200,000.

Mr. King: You are talking about a job market in the order of 18 million at the national level, so it would have an impact.

Senator Eaton: A blip.

Mr. King: It wouldn't be significant, but that's not to say it wouldn't have an impact at the very local level, of course.

The Chair: As we move to the second set of witnesses, the objective of the committee is to look at the fiscal framework. It is important to be mindful of predictability, accountability and transparency.

This will be the last question. In view of what you said here, that housing is a key component of our economy, do you believe that the Department of Finance could have taken action to limit the growth of consumer debt?

Mr. Ram: To some extent, measures have been taken to limit the growth of mortgage debt, particularly on an insurance basis, and that would have had impact. Beyond that, it's not obvious what those channels would be.

Interest rates, and the level at which they have been, are clearly the dominant force in terms of how Canadians look at their debt load and what they feel they can afford. From a national government perspective, we have an interest in ensuring that people won't put themselves in harm's way from that perspective. That's certainly something we have kept an eye on. However, it is difficulty for the government to effectively reach down to the level of the consumer and say, "You should not take that loan.'' People have to exercise some personal responsibility and understand where they need to be.

This is something that my colleagues from OSFI can probably expand on, but there are prudential policies in place to look at what lenders can do and the amount of risk they can take on when they lend money to consumers. Some level of control can be exercised for those policies as well.

The Chair: With that, witnesses, thank you very much for sharing your views and your comments with us.

Honourable senators, for the second part of the meeting, we have invited the Office of the Superintendent of Financial Institutions. We have Carolyn Rogers, Assistant Superintendent, Regulation Sector and Judy Cameron, Senior Director, Legislation, Approvals and Strategic Policy.


We also welcome Michele Bridges, Managing Director, Finance and Corporate Planning.


I have been informed by the clerk that Ms. Rogers will be making the presentation. Thank you, witnesses, for accepting our invitation. Ms. Rogers, the floor is yours.

Carolyn Rogers, Assistant Superintendent, Regulation Sector, Office of the Superintendent of Financial Institutions Canada: Mr. Chair and members of the committee, thank you for the opportunity to appear before you this evening. You have already introduced my colleagues so I'll skip that part of my prepared remarks.

The Office of the Superintendent of Financial Institutions, OSFI, is an independent agency of the Government of Canada, established in 1987, to contribute to the safety and soundness of the Canadian financial system. OSFI supervises and regulates federally registered banks, insurance, loans and trust companies, as well as private pension plans subject to federal oversight.

In pursuing our mandate, OSFI works in close collaboration with other federal agencies and regulators and the Department of Finance. Parts of this collaboration are formalized through committees.

The Financial Institutions Supervisory Committee, FISC, is a committee created by statute to facilitate consultations and the exchange of information on all matters relating to the supervision of financial institutions. FISC has also been viewed as a means to strengthen the supervisor's will to act and is the central mechanism for communication and coordination of actions in a crisis situation.

FISC is chaired by the Superintendent of Financial Institutions and its members are the Deputy Minister of Finance, the Governor of the Bank of Canada, the CEO of Canada Deposit Insurance Corporation and the Commissioner of the Financial Consumer Agency of Canada. At a minimum, FISC meets once per quarter.

The Senior Advisory Committee, SAC, is an informal, non-legislated body to facilitate discussions on key financial sector policy issues, including financial stability and systemic vulnerabilities, in order to inform the advice provided by the Department of Finance to the Minister of Finance.

SAC ensures coordination among the economic agencies and assesses how policies may affect federally regulated financial institutions and the financial system more broadly. SAC is chaired by the Deputy Minister of Finance and has the same membership as FISC. It also meets once per quarter.

The mandates of these committees and the agencies that participate in them are distinct, and by design there is minimal overlap in responsibilities. Together, they comprise an interlocking federal oversight framework for promoting public confidence in a strong, stable and competitive financial system.

We also collaborate with our colleagues in provincial regulatory agencies. The Heads of Agencies Committees, HOA, is an informal, non-legislated committee that provides a forum for federal financial sector authorities and provincial securities regulators to exchange information and views on issues related to the Canadian capital markets.

It brings together the Governor of the Bank of Canada, who chairs the committee; the Superintendent of OSFI; the federal Department of Finance; and the heads of the B.C., Alberta, Ontario and Quebec securities regulators. The HOA also meets quarterly.

As important as these formal committees are, though, it's the close professional working relationship that exists at the working level among the senior officials in these agencies that really contributes to coordination. I speak with my colleagues across these agencies on a frequent basis and our staff regularly collaborates and consults in the course of carrying out our respective roles.

OSFI executes its oversight responsibilities through two key activities: regulation and supervision. Regulation is about setting policy, standards and rules that financial institutions and pension plans must adhere to in the course of carrying on their business. It also involves interpreting and applying the relevant legislation for financial institutions and pension plans, including issuing licences to carry on business and approving certain transactions.

Supervision is about the ongoing oversight of institutions to ensure they are complying with the regulatory standards and rules we have set and, more broadly, to ensure they are conducting their business in a safe and sound manner.

What is important to know about the OSFI is that we are very deliberately a principles based regulator. This means that, in most cases, rather than setting very specific and prescriptive rules, we choose to set out clear principles generally in the form of published guidelines that we expect institutions to adhere to. It also means that when we supervise we do not look merely for compliance against a given rule or standard but, rather, we look for whether or not an institution is meeting the intent and spirit of regulatory expectations.

We take this approach for two reasons. First, it is consistent with our firm belief that it is the responsibility of a financial institution's board and senior management to manage the risks in their business in a prudent manner. By setting principles rather than rules, the onus is on the institution to understand their own risks, to be proactive in managing those risks and to provide evidence to our supervisors on how they are doing this.

Second, risks change over time. Institutions change as the economic environment changes and as the operating environment changes. They are impacted by competition, technology and consumer behaviour, for example.

A principles based approach gives OSFI the flexibility to adapt our expectations of institutions to reflect these changes. Our principles based approach does not, however, mean that we don't have rules. In some cases rules are appropriate. In the case of capital and liquidity levels, for example, OSFI sets clear minimum standards that all financial institutions must meet. Indeed, OSFI sets standard for minimum capital and minimum buffers over and above regulatory requirements that will provide institutions with additional ability to withstand periods of stress.

OSFI also prescribes minimum standards in the area of liquidity. Like capital standards,liquidity standards are set with a view to positioning institutions to withstand stress conditions rather than just a normal operating environment.

In addition to being principles based, OSFI is also very purposefully proactive in our regulation and supervision of financial institutions. We think of our job as continually planning for the unexpected, and we encourage financial institutions to do the same. In that sense, much of what we do is not highly visible. We aim to prevent things from happening rather than waiting for them and then responding.

The last thing I think is important to mention about OSFI's mandate and our approach is that we do not aim to eliminate risk taking in financial institutions. Risk is inherent in the provision of financial services. For banks to provide Canadian consumers and businesses with the products and services they want and need, at competitive prices and in a convenient manner, they necessarily have to take risks.

Indeed, the ability of banks and insurance companies to take risks is fundamental to the health and functioning of the Canadian economy. Our job is not to guarantee the absence of failures in the financial system but, rather, to protect the interests of depositors and other creditors of financial institutions. This requires an ongoing balance to restrain excessive risk taking while allowing financial institutions to take reasonable risks and compete effectively both here and broad.

Let me now turn to the topic of OSFI's funding model and our budget. OSFI is almost entirely funded through assessments and fees paid by the entities it regulates. In total, OSFI regulates over 400 banks and insurance companies and 1,200 pension plans. These entities pay an annual assessment, generally calculated as a function of their size. They also pay for certain services such as approvals on a transactional basis. OSFI is also funded by cost recovery for certain services. Together, these funding mechanisms cover more than 99 per cent of our costs.

A very small portion of OSFI's budget, less than 1 per cent, is derived from a parliamentary appropriation. This small amount is used to fund an important office, the Office of the Chief Actuary, an independent unit within OSFI, that provides actuarial evaluation and advisory services to various public sector pension and benefit plans.

The Office of the Superintendent of Financial Institutions Act stipulates that we must recover our costs. Section 17 of the OSFI Act provides that the Minister of Finance may spend any revenues collected under the act to defray the expenses associated with the operation of OSFI. This means that any increase in OSFI's costs of regulation and supervision is funded by industry and, similarly, any decrease results in a lower charge to industry.

The act also grants OSFI the ability to draw up to $40 million from the Consolidated Revenue Fund in excess of total revenues collected and appropriations granted. Subject to this limit, OSFI may draw from the CRF at any point in time to ensure the availability of funds prior to collecting receivables. This means that our cash flow can be supplemented at any given time by up to $40 million, if necessary.

OSFI's planned spending in 2017-2018 is slightly more than $150 million, which is consistent with the budget presented in the 2016-17 Report on Plans and Priorities. Over the three-year planning horizon in the Main Estimates, OSFI's overall spending is expected to increase slightly to $152 million in 2018-2019 and just over $155 in the following year, 2019-2020.

Mr. Chair, before I close my remarks and we move on to questions, I want to make the committee aware of some important confidentiality obligations that my colleagues and I are bound by. All OSFI employees are bound by provisions in the Office of the Superintendent of Financial Institutions Act that preclude us from sharing publicly any information related to a specific company that we supervise or regulate, or to OSFI's opinions on those companies.

As you can appreciate, in carrying out our mandate, we gather and we are privy to a considerable amount of information that is commercially sensitive and not in the public domain. Many of the institutions we supervise are publicly traded. In addition to our clear legal obligation, our ability to do our job well relies on our ability to preserve confidentiality.

I share this with you because it may prevent us from answering some of the questions I know that committee members have. I appreciate this may be frustrating for you; it's frustrating for us at times as well. It's our genuine intent to be helpful to you in exercising your mandate, and we will do our best to answer your questions. I know members of committees are professionals in their one rights. There are lawyers and businesspeople here tonight, and I trust you understand and respect these obligations of confidentiality.

To close, I want to acknowledge the conditions and events, particularly those recently that I expect attracted the interests of the committee and led to our invitation to appear before you this evening. Record low interest rates, which my colleagues talked about, record high consumer debt levels and housing prices that sometimes appear detached from economic fundamentals are all putting pressure on our financial system, and many experts are sounding alarm bells. I hope our discussion tonight will assure you that OSFI takes these risks seriously and remains vigilant in protecting its mandate to protect the depositors and other creditors of financial institutions and to contribute to the safety and soundness of the Canadian financial system.

My colleagues and I look forward to your questions.

The Chair: Thank you very much, Ms. Rogers. Just before we move on to questions, there is a section in your presentation where you say:

We aim to prevent things from happening rather than waiting for them and then responding.

I can assure you that the order of reference of the Finance Committee received by the Senate of Canada certainly ensures that predictability, accountability and transparency are part of the fiscal framework and our obligations to Canadians.

I appreciate your presentation. With that, we will start with Senator Eaton.

Senator Eaton: Thank you very much. I'll try not to be indiscreet.

You are an independent self-financing agency that reports to Parliament through the Minister of Finance. Do you have complete access to all ministry financial data? Are you given the budget to look at before it goes out? Can you comment on the budget the minister brings to Parliament, for instance? Do you have all access to CMHC's financial data?

If you see something that you find disturbing with the budget or what is going on in Finance or something like CMHC, what can you actually do about it?

Ms. Rogers: Our mandate is to regulate and supervise financial institutions. On that matter, we collaborate closely with our colleagues, including the Department of Finance, as I outlined in my opening remarks. That's our mandate.

We oversee financial institutions. When you mentioned the budget, I think you meant the overall budget.

Senator Eaton: Yes. You have no input.

Ms. Rogers: No, but we do play a role with CMHC. We supervise CMHC's insurance activities.

Senator Eaton: In other words, if you see something that sets off bells, what kind of clout do you have? Do you go to the head of CMHC and say, "We don't like what you are doing here'' or "We are not comfortable with it?'' What is the next step if you see something you don't like in the one of institutions that you oversee?

Ms. Rogers: We use a supervisory framework, something that's available publicly. You can find it on our website. Our supervisors apply the framework, make recommendations and set requirements for institutions.

In the course of supervising an institution, if we identify activity, policies or things that are outside what we consider to be prudent, we can make recommendations or require the institutions to change.

Senator Eaton: You can require them to change.

Ms. Rogers: Yes, yes. If they are not meeting regulatory standards, we can compel them to change, yes.

Senator Eaton: You have the clout to do that.

Ms. Rogers: Yes. I would say, though, Senator Eaton, the most effective tool that OSFI has is our credibility and our relationship with the institutions we supervise. We rarely rely on, if you mean by "clout,'' legal powers or that type of thing.

Senator Eaton: I'm saying if you saw that you didn't like the risk involved or, as you say, it was not prudent, you would have enough clout if they didn't agree with you to stop them in some sense.

Ms. Rogers: We rarely find that the institutions we regulate don't agree to do the things we ask them to. It almost never happens.

Senator Eaton: But in the end you have the clout if you need it.

Ms. Rogers: Yes.

Senator Marshall: In your opening remarks you spoke about the relationship on the Department of Finance and the committees. What kind of relationship is it? Are you integrated with Finance, or do you more operate? Do they have their job and you have your job? Do you feed information into them? What is the relationship?

Ms. Rogers: It's important to know that we are an independent agency, but we do have a high level of collaboration, both as I outlined in my opening remarks on a formal basis through a number of structured committees, and informally through professional relationships.

The folks that met with you previously are folks that we work with regularly.

Senator Marshall: Would you be providing information to them? Is there a routine sharing of information either for you to give to Finance or for Finance to give to you, or is it more collaboration as opposed to sharing of information?

Ms. Rogers: I would say it's both. There are some formalized structures where we share information through these committees. Then there are more informal channels. We can sometimes provide technical advice to the Department of Finance if they are considering certain policy decisions.

Senator Marshall: Finance would do certain risk assessments, I would think. Then I would think OSFI would also be doing certain risk assessments. Is that the way you work?

I'm just trying to get a handle on what happens within the organization, like how you do your work and how you do your supervision.

Ms. Rogers: Our role relates specifically to the safety and soundness of financial institutions. We set regulation and supervision policies and practices as they relate to financial institutions. The Department of Finance has a much broader role.

Senator Marshall: You wouldn't have any modelling. Would you assess the risks of individual institutions or a group of institutions?

Ms. Rogers: Yes.

Senator Marshall: You would do that.

Ms. Rogers: Yes.

Senator Marshall: Would yours be consistent with the Department of Finance, or are they doing their own thing and you are doing yours?

Ms. Rogers: Our mandate focuses particularly on financial institutions. We also gather broader economic information to help us understand how those might impact financial institutions.

We try not to duplicate the same work. We share information that would be relevant to each other's roles, mandates and decisions.

Senator Marshall: I notice in your closing remarks you really did hit the nail on the head when you said:

Record low interest rates . . . record high consumer debt levels and housing prices . . . are all putting pressure on our financial system, and many experts are sounding alarm bells.

That is concerning to me. I feel that consumer debt is going up. The interest rates are really low. At some point I would expect that interest rates will start to increase and then we will have a group of consumers who aren't going to be able to manage their debt.

What sort of work do you do on that? Is there any work done within OSFI on that, or is that something that's left entirely to the Department of Finance?

Ms. Rogers: Our role is to set regulatory policy and to supervise financial institutions. Our role as it relates to consumer debt would be to ensure the financial institutions lending to consumers are setting prudent standards and managing the risks their borrowers take on, which in turn they take on.

Senator Marshall: Is the way you deal with CMHC consistent with the way you deal with all financial institutions? CMHC is of special interest to us because it's a Crown corporation. I know that what happens in the overall economy affects the government, but if something negative happens with CMHC, it will certainly affect the financial position of the Government of Canada.

Do you deal with them differently or are they just in the group with everyone else?

Ms. Rogers: Our role is slightly different as it relates to CMHC, but we perform very similar activities in terms of our supervisory oversight. We apply many of the same regulatory policies as they relate to risk and capital that we would to the other private mortgage insurers.

They are subject to a regulatory standard, but because they are a Crown corporation, as you point out, our role is slightly different from what it would be for a purely private mortgage insurer.

Senator Marshall: It is different, then.

Ms. Rogers: Yes.

Senator Marshall: When I heard on the news that Moody's had downgraded the chartered banks, I was in almost in shock, and then when I heard about Home Capital, I was in shock.

Do you see events like that coming or is that a question you can't answer?

Ms. Rogers: We don't get any advance notice from Moody's, if that is what you mean. Did we know in advance that Moody was going to make that decision?

Senator Marshall: No, I was wondering if you were as surprised as me.

Ms. Rogers: If you read the material that Moody's put out in support of their decision, the material is very familiar. It is not dissimilar from the material that the Bank of Canada has been publishing twice per year in its financial system review.

I don't think the information Moody's referred to in support of their decision was new.

Senator Marshall: Is it the same with Home Capital? What happens when you hear of those events is that your confidence in the overall financial system is shaken. Most people are surprised but I guess if you are in the industry or working in that area, you wouldn't be surprised. Do you usually have a sense that these events are coming?

Ms. Rogers: I won't comment on Home Capital. Our job is to keep an eye on the institutions and the systems they operate in, so we try to avoid surprises. We like to be on top of things and to understand the risks in the environment that our institutions are operating in. There are probably things that might surprise the general public which wouldn't be as surprising to us.

Senator Marshall: You should be aware that the general public is relying on the work you do and have confidence in it.

Ms. Rogers: Yes, we take that responsibility seriously.

Senator Pratte: Continuing on that line and your closing remarks about the present situation, I am trying to get a better handle of your role in periods when there seem to be particular risks. Those risks are not the result of financial institutions that make bad decisions or take higher risks than they should. They are market conditions.

You mentioned some of those situations and said that they are putting pressure on the financial system and that OSFI takes these risks seriously. When those situations happen or those kinds of market conditions arise, what changes, not in how you regulate but in how you deal with financial institutions?

Ms. Rogers: We do a number of things differently. From time to time we change regulations or standards. That why I mentioned that we take a principle based approach. That gives us the kind of flexibility we need to change what we expect when the conditions change.

When we see increased risk building up in the environment that financial institutions are operating in, we make adjustments to our expectations, both in the form of the regulatory standards we set and in the intensity of the supervision that we are applying to institutions.

We have teams of people that spend time on site at these institutions looking at their controls, underwriting standards, looking at their governance and management frameworks and stuff like that. When we are in an environment where the risk is higher, we would do more of that. We would be more involved. We would spend more time on site and more time talking to the institutions and paying close attention.

Senator Pratte: For instance, if there are regulatory changes, are these things that you announce publicly?

Ms. Rogers: Yes, our website is full of documents that outline our standards and guidelines. We set out our capital and equity standards, our risk management guidelines, and the supervisory framework that we supply.

There is a lot of information about the tools and processes we use to supervise institutions available on our website.

Senator Pratte: We would expect, in periods like the ones we are in, that there would be changes.

Ms. Rogers: Yes. As it relates to housing, something I know that you are interested in and were talking about earlier, OSFI has a guideline specific to mortgage underwriting standards. It was first published in 2013. It sets out in quite a bit of detail the types of controls and risk management practices we expect banks to apply. We also have a guideline that applies to mortgage insurers, so that guideline would apply to CMHC, in response to your earlier question.

Last year in July we didn't change the guideline, but we did issue a public open letter to banks reminding them of the particular risks that go with the conditions we were in then. At that time last year, we were seeing in Vancouver the conditions that exist in Toronto this spring, so OSFI was on high alert. We let the banks know that we were on high alert. We told them we would be increasing our supervisory intensity. We also told them if based on that supervision we saw any need to make policy changes, we would.

In fact, we are in the final stages of making some adjustments to our mortgage underwriting guideline. I would expect that will be out for public consultation in the coming weeks.

Senator Andreychuk: Following up on that, when you said you increased your resources and attention on housing, was that made public or are we only going to find out about it through your making changes now to some of the guidelines?

Ms. Rogers: The fact that we were increasing —

Senator Andreychuk: The fact that you increased your supervision and attention, et cetera. How do you communicate that to the public?

Ms. Rogers: That particular decision was communicated publicly in an open letter. Again, I think that letter would be on our website.

Judy Cameron, Senior Director, Legislation, Approvals and Strategic Policy, Office of the Superintendent of Financial Institutions Canada: It is on our website.

Ms. Rogers: It actually got a fair bit of media attention almost a year ago.

We operate with a high degree of transparency. Despite my earlier comments, where I said I couldn't comment on any particular institution, we are transparent about the actual tools, standards and processes, almost all of that information is on our website.

Senator Andreychuk: I think you have a high degree of confidence from the community. The difficulty is that the world is changing very quickly with what happened in the housing markets in the United States and with many of the problems in Europe. Things seem to go well until they go really bad, really quickly, and it is the post-mortem that asks, "Why didn't we; why didn't we?''

Who do you report to and who plays the oversight role? The public does have the right to know. You are funded by the people that you supervise, if I can use that term. You are doing a good job. We have to take your word for it. I have watched OSFI for a long time and you're much more transparent now than you used to be. Still, in this day and age, everyone wants some oversight. A double-check is what we are looking for, so who is your double-check?

Ms. Rogers: I would say the FISC committee I mentioned in my opening remarks operates an oversight body for OSFI. Certainly we view it in that way. I said in my remarks that we see one of the roles of the FISC committee, the Financial Institutions Supervisory Committee, as strengthening our will to act, holding our feet to fire, and making sure we make those tough decisions and act proactively. I would say that is one.

We are funded by the institutions we supervise, but they don't get a vote in that. We consider ourselves accountable to them. We do share information about our budget and plans and priorities, but at the end of the day we have the ability through our act to assess them for the costs that it takes. If, in our judgment, we need to spend more and increase our resources, we have the ability to do that.

Senator Andreychuk: Has there ever been a total analysis of OSFI to say: Is this the best procedure, the best way of approaching the issue of the supervision of financial institutions?

Ms. Rogers: One of the ways that is done on a regular basis is the International Monetary Fund and the Basel Committee on Banking Supervision. International bodies come in and assess Canada's overall financial framework and regulatory framework. They assess our job as a regulatory agency. Those reports are all public as well.

We are subject to a bit of a taste of our own medicine from time to time when somebody comes in and assesses our risk management practices and our policies against best practices and global standards, and issues a report card and recommendations for change.

The Chair: As we close, the chair will recognize the deputy chair, Senator Cools.

Senator Cools: I would like to welcome these wonderful ladies to our Standing Senate Committee on National Finance explorations.

I am reading something in the Financial Post. I would consider it to be a bewildering profundity, and I want to ask your reaction to it. This is about Moody's:

It is the second time in the past five years that the banks' exposure to increasingly indebted Canadian consumers and elevated housing prices has led the credit rating agency to downgrade their debt en masse. But Moody's noted that the country's banks remain among the highest rated globally

What does that mean? They are meant to downgrade but they are still the highest. What did they downgrade from or to?

Ms. Rogers: My understanding of that comment, senator, is that Moody's is comparing the rating of our banks against the rating of their international peers.

As you might have read in the press, Canada's banks, although Moody's has recently downgraded them, are not suffering from some of the pressures and difficulties that banks in other parts of the world are, for example in Europe, as you mentioned.

Senator Cools: That has been so for quite some time. It's no accident of history. This was all settled years ago in what they used to call the "pillars'' of the financial institutions. We used to hear Senator MacEachen wax poetic on this, but that is the history of Canada's banking institutions. They set very high standards very early in the game. It is no surprise to me. I trust Canadian banks.

If you go to the United States of America, first of all, there are so many banks you don't know which one to choose and on what grounds.

Anyway, I was just curious. Yes, they downgraded them, but they are still the best. It was a strange downgrade. You have to laugh at some of this.

Senator Marshall: I have one question in response to an answer that you gave to Senator Pratte. You said something about when you determined that the risk is higher. How do you determine when the risk is higher?

Ms. Rogers: We look at many things, but the two primary things are the environment the banks are operating in, what we call the "macro-economic environment.'' That is largely what you discussed earlier with my colleagues. Then we look inside the bank at their own controls, practices and policies.

As the risks go up in the environment the banks are operating in, we expect to see the banks commence their controls and policies.

The Chair: We are privy to the comments you made about our asking a question on certain of your clients. The legal side of that is very reasonable.

Do you have any relations with Moody's or other rating agencies in the world?

Ms. Rogers: Relationships?

The Chair: Yes. Do you consult them? Do they consult you, especially in the view of macro-economics and geopolitics?

Ms. Rogers: No. I think the rating agencies, as you would have seen in the comments they made about our banks, take an interest in the regulatory oversight of the banks. Sometimes, as they are forming their views, they will ask questions, but we don't give them any information that isn't publicly available or that we wouldn't give anyone else.

The Chair: How often would they connect with you or call you, for example, in the last 24 months?

Ms. Rogers: The agencies are more likely to talk to the banks themselves than they are to OSFI. They would only talk to us if they were seeking clarification about something like our capital framework or something like that. We might provide them with technical information, but the rating agencies form their views about the banks in large measure by talking directly to the banks, not to OSFI.

The Chair: In the last 12 months have they communicated with OSFI?

Ms. Rogers: You know, senator, I can't say that for certain. It is possible someone in the rating agency might have asked a technical question, as I said, of someone in our capital department.

There isn't a formal structured channel where we feed the rating agencies information. Rating agencies are not privy to information that OSFI wouldn't otherwise make public.

The Chair: To the witnesses, thank you very much for sharing information and enlightening us on our objectives of predictability, accountability and transparency.

With that, honourable senators, we will close.

(The committee adjourned.)