Finance Committee on June 11th, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 148 of the House of Commons Standing Committee on Finance.

Pursuant to Standing Order 108(2) and the motion adopted on Thursday, September 21, 2023, the committee is meeting to discuss policy decisions and market forces that have led to increases in the cost of buying or renting a home in Canada.

Before we begin, I'd like to ask all members and other in-person participants to consult the cards on the table for guidelines on how to prevent audio feedback incidents.

Please take note of the following preventative measures in place to protect the health and safety of all participants, including the interpreters. Use only an approved black earpiece. The former grey earpieces must no longer be used. Keep your earpiece away from all microphones at all times. When you're not using your earpiece, place it face down on the sticker on the table for this purpose.

Thank you all for your co-operation.

Today's meeting is taking place in a hybrid format, pursuant to Standing Order 15.1.

In accordance with the committee's routine motion concerning connection tests for witnesses, I'm informed by the clerk of the committee that all witnesses have been tested, and I think everybody is good. That's for the second hour. For the first hour, everybody is here in person—oh, no, MP Sorbara is not.

I'd like to make a few comments for the benefit of the members and witnesses.

Please wait until I recognize you by name before speaking. For members in the room, please raise your hand if you wish to speak. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as well as we can, and we appreciate your understanding in this regard. I remind everyone that all comments should be addressed through the chair.

I'd now like to welcome our witness for our first panel today, in our first hour. From the Office of the Superintendent of Financial Institutions, we have the superintendent, Mr. Peter Routledge.

Welcome, sir. The members are looking forward to your opening remarks and to asking you questions.

The floor is yours.

[Peter Routledge, Superintendent, Office of the Superintendent of Financial Institutions]

Thank you very much.

Mr. Chair and committee members, hello.

Thank you for inviting me back today, this time in support of your analysis of the public policy decisions and market forces that have led to increases in the cost of buying or renting a home in Canada.

As outlined in our recently published annual risk outlook, we remain intently focused on the key risks facing the Canadian financial system, including real estate secured lending and mortgage risks, wholesale credit risks, funding and liquidity risks, and integrity and security risks related to the geopolitical environment.

With respect to the topic under investigation by this committee, I note that higher mortgage payments are taking up a larger part of some households' incomes, leading to more borrowers finding it difficult to pay their loans and debts. We expect rising debt service costs to be a key risk for financial institutions and their customers for the next two years. Having said that, I note that mortgage and household credit quality remains high by historical standards.

The Office of the Superintendent of Financial Institutions, or OSFI, along with its federal partners, wants Canadians to access and maintain mortgages throughout the ups and downs of market cycles.

Part of my role is to ensure that lenders exercise prudence in underwriting mortgages and sound risk management practices throughout the lifecycle of those loans.

We believe OSFI's prudential rules for mortgage lending foster a safe, stable financial system and will help keep Canadians in their homes over the long term.

It's our job to make sure that lenders remain resilient while adapting to evolving risks in financial markets.

With that said, I'll be pleased to take your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Superintendent Routledge. I'm sure the members have many questions.

We are starting our first round with each party having up to six minutes of questions.

We'll start with MP Chambers for the first six minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thanks, Mr. Chair.

Welcome back, Mr. Routledge. Thank you for your service to the country and for keeping our financial system safe.

The Competition Bureau has recommended that we consider changing the stress test for people with uninsured mortgages. The government has changed the requirements or at least indicated that those who are insured don't have to do a stress test on renewal, so they can shop around and get a new, lower mortgage rate. Is OSFI considering changes?

[Peter Routledge]

Mr. Chair, the member is absolutely right in his facts. If you have an insured mortgage and you seek to renew it in an alternate lending institution, you don't have to go through a mortgage stress test or any other underwriting check.

By contrast, if you have an uninsured mortgage, you do, and that is an imbalance. The commissioner of the Competition Bureau and I have spoken about that. From our perspective, our job is to make sure institutions underwrite mortgages safely. One of the core principles of underwriting mortgages is that, when you have a new credit, you do all your underwriting discipline.

In our view, for uninsured mortgages, which guideline B-20 applies to, we ask lenders to underwrite new customers in full. That doesn't apply for insured mortgagors, because they have purchased a mortgage insurance policy.

[Adam Chambers, Conservative, Simcoe North, ON]

I'm going to run out of time. The question is whether you are reconsidering that for uninsured mortgages.

[Peter Routledge]

Not at this time, no.

[Adam Chambers, Conservative, Simcoe North, ON]

Do you believe the government made the right choice, or did you advise the government when they made the choice on insured mortgages?

[Peter Routledge]

From our perspective, the rules from an underwriting standpoint—what is sound underwriting—make sense to us. If you're taking new credit risk, you reunderwrite. If credit risk stays with the same counterparty, in the case of mortgage insurers, we don't think you need to reunderwrite.

[Adam Chambers, Conservative, Simcoe North, ON]

Okay.

By definition, uninsured mortgage holders are less likely to default. They have more equity in the value of a house. Why are we asking uninsured mortgage holders to effectively cross-subsidize the mortgage rates of insured mortgage holders?

[Peter Routledge]

What we ask financial institutions to do is to underwrite new credit risks. I acknowledge that there is an imbalance from the experience of a borrower who doesn't have mortgage insurance, as opposed to one who does. It's an imbalance we accept because of the sound underwriting principles behind it.

[Adam Chambers, Conservative, Simcoe North, ON]

If the government has made a choice on insureds, we're creating a two-tier kind of borrower, where the borrower who has less risk to default actually has more strenuous stress test requirements.

In 2021, when stress tests came in, I supported that. It made sense because rates were at an absolute rock-bottom level. We're now at the top of the rate cycle, according to the central banks. Shouldn't we be giving consumers a little bit more flexibility to shop to get a better rate?

[Peter Routledge]

Our mandate is prudential, to ensure that the lenders who provide mortgages are safe. We think that in maintaining sound underwriting policies, which includes reunderwriting or underwriting new credits, even if they're switching from another institution, is the appropriate thing to do.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

I'd like to talk about Basel IV for a second.

The Fed has been very clear. They are making material changes that may even include delaying. They may even put out new rules for comment again. They said that they have never seen as much feedback as they have on these new rules.

Why is Canada sticking to an accelerated timeline to implement Basel IV?

[Peter Routledge]

In implementing the new changes from Basel IV—we also call it Basel III endgame—Canada is actually behind its initial schedule but ahead of most of its peers. We moved on these because they're based on sound prudential principles that lead to a more stable financial system, in our view.

With respect to the final leg of the changes we're making, which is known as the “standardized floor”—which is very complex but is basically a check on the models banks use to allocate capital—we are well ahead of our peers. Over the last nine months, it has become quite evident that our lead will at least stay the same or increase.

For that reason, we've been engaging with industry to consider what the right schedule should be for that rising floor, and we'll have more for you on that this summer.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

You're aware that at least some banks have said that, in the Canadian context, it may require banks to shed about $270 billion of risk-rated assets. Do you dispute that this may occur?

[Peter Routledge]

My math doesn't quite align with that math.

However, what is indisputable is that a rising floor will increase risk weights, which will therefore increase capital. While we think that is a sound approach, it is imbalanced with our global peers. The industry players argue that it is an imbalance we need to look at. We would agree with that, and we've been looking at that.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

I have a last question before the chair cuts me off.

Will you commit to not making a decision until we see what the U.S. decides to do?

[Peter Routledge]

I don't want to make any firm commitments here today until we're done with the due diligence behind this process.

However, perhaps I could come back to that answer later this summer.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

Now we will move to MP Baker.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks, Chair.

Thanks, Mr. Routledge, for being here today.

Just for the folks who are watching at home, for constituents and Canadians who aren't familiar with you and your organization and what you do at OSFI, could you just share very briefly what OSFI's role is? What is your supervisory and regulatory role?

[Peter Routledge]

Basically, Parliament asked us to do two things, ensure the institutions we supervise are in sound financial condition and ensure they have policies and procedures in place to protect themselves from threats to their integrity and security. That's it.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

What would happen if they weren't in a sound financial position?

[Peter Routledge]

What would happen if they were not?