Toronto, Ontario
April 21, 2010

Archived - Speech by the Honourable Jim Flaherty,
Minister of Finance,
to “The Canada Forum” Euromoney Conference

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I am very pleased to be here for two good reasons. The first is personal.

I do appreciate, of course, that Euromoney magazine named me Finance Minister of the Year for 2009. I assume your invitation today means that you haven’t changed your mind, which I appreciate.

It was an honour to receive that award, which is really an award to Canada, recognizing some of the smart choices our country has made during the global economic and financial crisis and even before it. As Euromoney magazine put it, “Canada’s performance over the past year has further boosted our country’s reputation on the global stage.”

The second reason I wanted to join you here today concerns this conference, which focuses on a number of key issues for Canada and the world.

Nations are beginning to emerge from the worldwide recession and the credit crisis. This period of fragile recovery brings with it a series of new and important questions for the global economy.

How do we cement the recovery? How do we make it sustainable for the longer term? How do we help prevent, or at least lessen, the likelihood of a repetition of the types of crises that we’ve been through in the past 30 months or so?

Conferences like this, which Euromoney is holding around the world, can play an important role in building a consensus on the best strategies for the way forward. I was also interested to see the theme chosen for the next two days, which is “Financing Success.” That certainly marks a major change in focus from 18 months ago.

These are challenging times. There’s a tendency for some to forget the high degree of uncertainty we had just 18 months ago. I remember well October 2008 in particular, for several reasons. It was during the course of the election campaign that global events were accelerating, and the challenges were becoming quite obvious, not only to banking systems elsewhere but our own banking system and financial system in Canada.

During election campaigns, normally governments do not govern. We simply do what we must do to keep the machinery of government working, but we don’t make any important directional decisions. That was different in October 2008 because I was spending a lot of time, despite the fact there was an election, in Ottawa and discussing issues with my G7 colleagues in particular, including the Secretary of the Treasury. And things were degenerating rapidly.

European governments started to guarantee the debts of their banks. It started to look like quite an uneven playing field for our banks. We were watching carefully the levels of liquidity in our own system and the ability of our system’s participants to raise capital.

During the week before the election, on Friday October 10th, I made the announcements that the Government of Canada would purchase insured mortgages from the banks in order to provide adequate liquidity and also to guarantee the wholesale debts of the banks. That was to try to maintain a level playing field for our financial institutions vis-à-vis financial institutions elsewhere in the western industrialized economies.

I was in Washington for the fall meeting of the G7 finance ministers. But this was a meeting unlike the others. People spoke quite sharply and frankly about the situations being faced by all of us. Regional banks in Germany and the United Kingdom had failed. Lehman Brothers and Bear Stearns in the United States had collapsed.

We took the position that we needed to deal quite directly with the issues. There was concern that equity markets would not open on the following Monday, that there would be additional bank failures in G7 countries. There was a crisis of confidence.

We tore up the draft communiqué and prepared a five-point plan about what we would do that we could take to the G20.

That plan was essentially that we would not allow any more financial institutions to fail. The next morning, a Saturday, we met with President Bush, who endorsed what we had agreed to. We subsequently met with the IMF, the G20, and the finance ministers of the Americas. By the end of Saturday, we had a global agreement on the five-point plan.

I say all of that in recognition of the continued relevance of the G7. The financial crisis arose in G7 countries and institutions, and the G7 has an obligation to make sure that we work our way out of this together. There is an important role to be played by the G7 in the development of ultimate recommendations for the G20 to consider.

Let me say a few words about the Canadian economy now. I’m happy to report that our situation here in Canada is better than in many other countries. Since the worst days of the crisis, we have managed a turnaround.

Our financial institutions, as you know, have done relatively well. I remember being in a large Asian country in January 2007 and having discussions with leading officials there about Canada, including our financial system, and being told more than once how staid and risk-averse the Canadian banking system was. I was back last August in the same country and was told how impressed they were with the stability and reliability of the Canadian banking system and how much they wanted to invest in Canada. So it just shows that staying the course has its benefits, particularly in a financial system.

We’ve suffered some job losses. Our unemployment rate is about 8.2 per cent now, which is about 1.5 percentage points lower than the U.S. unemployment rate. That kind of gap hasn’t happened since about 1975.

I’m a fiscal conservative and our January 2009 budget included a large deficit, not in G7 terms but in Canadian terms.

We did that because we actually went and listened to Canadians, Canadian businesses and the participants in the financial system. There was a serious concern that we would go into a much deeper recession that would be significantly elongated were we not to replace private demand with substantial public demand.

So we made the decision to do that and to do it quickly and boldly. The risk was, in my view, that we might not do enough. So we had to make sure that we did enough, or more than enough, but not less than enough to avoid having to come back and try to do a second stimulus package for the Canadian economy.

So in that budget, we announced our Economic Action Plan.

Governments are slow-moving vehicles at the best of times, but we were able to work with Treasury Board and the other central agencies of government to get the stimulus package out the door quickly. It has had its desired effect on jobs by keeping the jobless rate below what it could have been had we not acted, and to maintain and create new jobs.

So our stimulus plan helped slow the decline in Canada’s real GDP in the second quarter of 2009 after we went through the last quarter of 2008 and the first quarter of 2009 in recession. And then in the last quarter of last year, we had 5 per cent real GDP growth and similar growth in the first quarter of this year.

We were the last nation to enter the recession with a decline in real GDP that was virtually the smallest of all G7 countries and, unlike the debt levels of other G7 countries, we expect Canada’s federal net debt-to-GDP ratio to begin falling in 2012. And we will be back to balanced budgets in the medium term by 2014 or so. That could happen earlier if economic growth is greater than we anticipated in the budget, and it is currently greater than we anticipated in the budget.

The strength of Canada’s financial system is widely recognized. The World Economic Forum and Moody’s rank Canada’s banks as the world’s soundest. In contrast to many other countries, none of Canada’s banks required any bailout, any taxpayers’ money. Even during the worst days of the credit crisis, our financial institutions’ health allowed them to continue to raise equity capital. A number of leaders, including President Obama, have praised the Canadian financial system as a model for others to emulate, and I will no doubt remind some of my colleagues of that this weekend. It is an important point to remember.

I’ve been to lots of meetings with my colleagues since these credit issues began to manifest themselves in August 2007. There’s lots of talk about regulation. The point that we repeatedly make is that many of the institutions that failed were regulated and so having regulation is not necessarily the answer to the problem. You must have effective regulation. In Canada we have a coordinated regulatory approach and that includes the Bank of Canada, the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation and the Department of Finance, all of whom work together in a coordinated way to monitor macroeconomic issues.

So effective enforcement is key. Our model does work. I’m proud of the fact that we have led the financial sector review, part of the G20 process which we’ll be discussing this weekend. We’ve been active participants in the three summits in November 2008 in Washington and subsequently in New York and Pittsburgh, and we will host a summit at the end of June here in Toronto.

There is some tendency now for people to forget how dark things were 18 months ago. That creates some risk to reform momentum. We want to make sure that the reform momentum in the G20, which our leaders have told us to advance, continues. We cannot allow a loss of reform momentum to occur. We cannot afford to slip backward. We must follow through and implement the reforms to our financial systems to which we all agreed at Pittsburgh, and for good reason.

The core foundational element of the reforms, in our view, is new standards for capital and liquidity. We in the G20 are committed to develop, by the end of this year, rules to improve both the quantity and quality of bank capital, to strengthen liquidity standards and to discourage excessive leverage, which includes a cap on leverage.

Most recently, some countries have begun to focus on additional elements that go beyond what has been agreed to in the G20. The idea of some sort of ex ante bank tax has gained support in some European countries and some support in the United States. Their view is that these levies would penalize institutions that trigger a global recession and would create a cushion against future crises.

Now I understand the desire to recover taxpayer losses in those countries where taxpayers had to pay to bail out their financial sector. I also agree with the principle that taxpayers should not bear the costs of bailouts of financial institutions.

In February, I hosted the G7 finance ministers and central bank governors meeting. We agreed at the end of that meeting that, in principle, financial institutions that contribute to a financial crisis should bear the costs of that crisis and that taxpayers should not.

Now there are various ways of implementing that principle, so the question now is how we do that. Different options are being put forward by different participants. While some countries may choose to pursue an ex ante systemic risk levy or tax, I do not believe that this is an appropriate tool for all countries, including Canada. Such a levy would remove capital from an institution to an external fund or to general government revenues. This could result in weakening an institution’s ability to absorb losses.

There is also a component of moral hazard in levies and taxes like this that we must not overlook. A levy could result in excessive risk-taking because of the perception of a government guarantee against an institution’s failure.

Canada prefers an alternative scheme that focuses on embedded contingent capital. This approach would create a security that converts to common equity when a bank is in trouble, increasing the core capital of the bank without the use of taxpayers’ dollars. The use of contingent capital would create self-insurance, prefunded by investors, to protect the solvency of the bank.

A week ago, I sent a letter to my G20 colleagues explaining Canada’s position on a global tax or levy on banks to make them bear the costs of future financial crises. I urged my colleagues in the G20 to instead consider new rules for contingent capital that would shift the costs of excessive risk-taking away from taxpayers and toward shareholders and subordinate debt holders.

From our perspective, it’s a question of financing success, which is the theme of this conference. We do not want to see our financial institutions in Canada penalized because of their relative success and their stability during the course of the crisis.

Canada has a well-regulated, free-market economy with a private financial sector of substantial strength with demonstrated endurance. We want a system that maintains this strength and endurance and that protects taxpayers. Our banks did not require bailouts during the global financial crisis. We believe that Canadian taxpayers should not bear the costs of bailouts of financial institutions in other countries.

Let me make that even more clear. Canada will not go down the path of excessive, arbitrary or punitive regulation of its financial sector. As I said a moment ago, Canada has been highly praised for the health of our financial sector, a system that has held its ground under intense pressure.

We are determined to strengthen Canada’s rising global position in the future.

At the Toronto Summit in June, G20 leaders will focus on key issues. A strong, coordinated strategy for strengthening financial institutions will be one of the most important issues to be discussed then.

In the months ahead, we will urge the adoption of practices that have served Canada so well: first of all, ensuring institutions are well-capitalized and placing a cap on leverage; second, promoting transparency in the marketplace; third, linking risk, performance and reward; and fourth, encouraging a culture of prudent behaviour focused on the long term.

We have our work cut out for us. But I am confident that, acting together, we can and will adopt the strategies required to strengthen recovery in the global economy and help ensure a better future for Canada and the world.