June 20, 2011
Archived - Speech by the Honourable Jim Flaherty, Minister of Finance, at the opening of the International Insurance Society’s 47th Annual Seminar
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I appreciate the invitation to kick off your 47th Annual Seminar. I welcome you all to Toronto.
And let me also commend this year’s host, the Canadian Life and Health Insurance Association, an association that has admirably represented the industry for over a century, and whose members provide financial security for 26 million Canadians.
This is now the third time that the world’s insurance leaders have held their annual meeting in Toronto—an example of this city’s rising status as a financial centre, the third largest in North America. Here in Canada’s largest city, this industry is the source of highly skilled workers. It contributes 14 per cent of Toronto’s GDP. And it’s growing—between 1999 and 2009 the financial services sector has grown an average of 4.2 per cent per year on average.
Our Government participated in creating the Global Risk Institute, which will provide world-class research on financial risk management, and attract new jobs and investment in the process.
In such a dynamic financial centre, and following an unprecedented global financial crisis, your theme for this event—A New World of Opportunity—is most apt.
Yet at the same time, we need to be aware of where we’ve been. I became the Minister of Finance in Canada in February 2006, more than five years ago. No one predicted then what the world has been through in the past few years and the continuing challenges that we have, even now in June 2011. No one anticipated the extraordinary measures that we would have to take to repair the system that connects all of us.
So I suggest, first of all, that we must learn well the lessons of the global crisis. Secondly, we must work together to ensure we don’t sow the seeds of a future calamity by believing that our problems are safely behind us, because they are not.
Now I would like to say a few words about Canada and the past few years. Canada’s financial system is sound. It is a subject that was certainly not top-of-mind around the world before the crisis, but our financial system has received more attention since the crisis after withstanding a storm that overwhelmed systems of greater size and renown.
As Canada’s Finance Minister during the course of the crisis, I have experienced the recent global financial crisis at every stage—its very beginnings and in its darkest times. We had to deal with a situation in which financial institutions allegedly became too big to fail. It was a dark time when G-7 ministers met in Washington in the Cash Room of the Treasury on Friday, October 10, 2008. Lehman Brothers had just failed. Bear Stearns had been dealt with earlier in the year. British banks had failed, as well as some of the German regional banks. There was a question as to whether the markets would open on the following Monday.
And there were recriminations by some of the European countries, in particular with respect to how the U.S. administration—Hank Paulson was the U.S. Secretary of Treasury at the time—had handled Lehman Brothers and the other situations, the fact that spreads had opened up dramatically in recent weeks.
It was at that meeting that we threw away the traditional communiqué that is prepared by officials before the meeting and we created a five-point plan. And I was insistent, as others were at the meeting, that we needed to take hold of this situation and show leadership. We met with President Bush the next morning at the White House. He supported the five-point plan. We got the G-20 together that day—they were in Washington for the IMF meetings—and they supported it. We had a meeting of the Council of Finance Ministers of the Americas that afternoon on the Saturday and they supported it.
That exercise of action at a critical time resulted in some stability returning to the markets. We agreed, in essence, that we would not allow any more financial institutions to fail.
But it is easy to forget how recent that was, in October 2008, when we were facing what was in effect a seized-up global financial system teetering on the edge of collapse. It was only through the extraordinary and concerted actions of the G-7 and then the G-20 that the world averted a complete financial meltdown.
Our financial system has remained solid. I remember being in Beijing in January 2007 before the crisis and talking to some of the senior Chinese officials about the Canadian financial system and some of our financial institutions, including Manulife which has substantial business in China, seeking more business for our financial institutions in China. And they were saying that the Canadian financial system and our institutions were boring and averse to risk and that they ought to take more chances.
Then in 2010 I met with some of the same people in Beijing, and they said our financial system is solid and stable. Of course, nothing had changed except the international crisis in the interim.
We have a history of financial stability here but we also prepared in 2006 and 2007. It was apparent to us, as I’m sure it was to a number of you, that there was an excess of liquidity in the world and that there was going to be some sort of credit incident, which eventually happened around August 2007, manifesting itself as the sub-prime mortgage crisis in the United States.
So what can a country like Canada do to prepare for those kinds of incidents? We can pay down public debt, which we did. We paid down a lot of public debt. We can run balanced budgets, which we did for the few years leading up to the crisis.
And then when the crisis happened, we reacted, as did the other G-20 countries. When the leaders met with President Bush in November 2008 in Washington, we all agreed that we would try to stimulate our economies.
Canada did so in cooperation with the provinces. In our Economic Action Plan, we invested a lot of money in infrastructure, training, innovation and tax reductions. It meant that we had to do something that we were averse to doing.
I’m a fiscal conservative. I don’t like running deficits. But we decided we would run large deficits for a couple of years in order to protect jobs. We were, as many were around the world, fearful of double-digit unemployment with millions of people out of work.
The infrastructure program worked. We got the money out the door quickly. The projects are for the most part completed now. Some are being completed this year, but the key was to get the money out the door in 2009, particularly in the middle and latter part of 2009 so that we would not have massive unemployment. Also, we invested in skills training to help Canadians acquire the skills needed for jobs in today’s labour market. That plan was successful.
I reintroduced Budget 2011 a couple of weeks ago, and I can say with assurance that it will pass and that we will move back to a balanced budget in Canada by 2014–15.
The financial system is solid, with well-run companies based on sound risk management. It is supported by an effective regulatory and supervisory framework. And in my discussions outside of Canada I always emphasize supervision over regulation.
If you look back at the banks and other financial institutions that failed during what the economists are calling the Great Recession, virtually all of them were regulated. There were lots of rules, and there are still lots of rules. But where there were bank failures, there were many instances of ineffective supervision. So it’s key to have appropriate regulation, particularly with respect to quantity and quality of capital, and that is being accomplished through the work of Basel III.
We do not want to have undercapitalized and over-leveraged financial institutions. But it is very important that the supervision function be exercised thoroughly and be properly funded.
Regulators around the world are working on insurance measures that will enable the industry to address trouble spots before they become problems down the road. This includes work on Solvency II in Europe and risk-based capital requirements in the United States. Canada is refining its capital requirements for insurance companies as well.
The financial crisis led to increased interest in prudential regulation from the G-20 and the increased importance of the Financial Stability Board. These organizations have pushed countries and regulators to improve their regulatory frameworks. We have been an active participant in these efforts.
With all the changes occurring around the world, it is important that new regulation is considered carefully. Where risks are similar between banking and insurance industries, so too should be the treatment of those risks.
Strong regulations in Canada were essential in ensuring the stability of the insurance industry in Canada. Yet the financial crisis demonstrated the importance of effective supervision.
In Canada’s case, we have an effective prudential supervisor in the Superintendent of Financial Institutions, who reports to Parliament through me. As the Superintendent, Julie Dickson has a clear mandate—to protect the interests of depositors and policy holders—and the tools and authorities she needs to deal quickly and early when issues arise. The Superintendent supervises financial institutions on a consolidated basis, which includes all domestic and international subsidiaries of banks and insurance companies.
The Superintendent is only one of a few key players in the Canadian financial system. You could fit all of us comfortably into a minivan.
As Finance Minister, I have overall authority for legislation respecting the federally regulated financial sector, as well as responsibility for the overall stability of the financial system.
Second, there’s the Bank of Canada through the Governor of the Bank, who is responsible for monetary policy and for oversight of systemically important payment clearing and settlement systems, and is the lender of last resort to the financial system.
Third, there is the Canada Deposit Insurance Corporation, which insures deposits and acts as the resolution authority for failed banks.
Fourth, there is a separate Financial Consumer Agency of Canada, which we’ve had for many years now and is responsible for consumer protection.
These officials and my delegate meet regularly, and their job is to keep an eye on the system and watch for early warning signs. They have done a pretty good job. We are missing one part, which I’ll come back to in a moment when I say a word or two about the Canadian securities system.
So we have fiscal management in place at the federal government level and we have solid financial institutions.
One other important point is that we have a strong and stable housing sector, which we continue to monitor. There are a few things that are different about the Canadian housing sector that are relevant to making sure that it maintains that stability.
First of all, we don’t have mortgage interest deductibility. As Finance Minister, I don’t believe in using tax policy to increase risk in the housing market. So that’s not about to change.
Second, we have recourse mortgages in Canada, which means that the lender has recourse on default to a borrower’s other assets, not just recourse to the home. This helps instill a sense of responsibility and discipline among homebuyers.
Third, there are prudent lending standards and I thank our financial institutions for that.
Fourth, our originators, for the most part, hold the mortgages that they grant.
And finally, we monitor the housing market carefully. I’ve intervened three times in the past three years with respect to our insured mortgage market to tighten the rules, including earlier this year by reducing amortization periods, increasing mandatory down payments and lowering the maximum loan-to-value ratio on refinancing.
Now, I’d like to say a few words about the international situation.
We have been a key part of the international bodies that are deeply involved in financial sector reforms. At the request of the G-20, Canada and India co-chaired the committee dealing with the Framework for Strong, Sustainable and Balanced Growth and the Working Group on Enhancing Sound Regulation and Strengthening Transparency. We developed guidelines and recommendations which were accepted by the G-20 Finance Ministers in February and will be presented to the G-20 leaders when they meet later this year in France.
Just under a year ago Toronto hosted the G-20 Summit, which resulted in an agreement on important financial sector reforms based on strong regulatory frameworks, effective supervision, and transparent international assessment and peer review.
I should add that peer review was not an easy issue to negotiate, particularly with one or two of the emerging economies, but they did come around in the G-20 discussions of Finance Ministers in February. And we do have agreement among the G-20 with respect to mutual assessment, which is vitally important for the success of the new system.
Canada has been a clear voice in emphasizing the need to ensure healthy buffers to reduce the likelihood of failure. We have also never been shy in asserting the principle that taxpayers should not be the ones bearing the cost of financial bailouts.
Our Government has also supported the work of the International Accounting Standards Board in creating high quality, harmonized global accounting standards that reinforce financial stability. In developing new standards—for example, in relation to insurance contracts—I have encouraged in writing more than once the IASB to consult broadly, and to consider the views of all stakeholders, both in Canada and around the world, so that the implications of their proposed new standards are fully considered and unintended consequences avoided. We have and will continue to advocate that position.
As many in this audience know, in the U.S. the accounting standards board, the FASB, is working toward the development of new accounting standards for insurance contracts. For everyone’s benefit, it is important that these global efforts lead to the convergence of IASB and FASB standards to ensure high quality, harmonized standards that lessen differences across jurisdictions. The most important goal in any global financial reform, after all, is getting the final product right.
So these are challenging times. Canada, of course, is not an island. No country anymore is an island. Our economies are clearly interrelated—witness the past few years.
The global economy remains fragile and, as developments in Europe continue to illustrate, significant financial risks remain. We have to face up to these challenges that are found elsewhere. There is a real danger of contagion stemming from the situation in Europe.
And we know that delay causes more difficulties, makes the situation more expensive and creates more strife at the end of the day. So we continue to express our concerns with our colleagues in Europe, urging them to make progress with the sovereign debt situation in the European Union.
In the meantime, here in Canada we will continue to stay on track. We will continue to improve the financial system in Canada. There is more to be done to improve the system.
Earlier, I mentioned the regulation of securities markets in Canada. This has been a challenge for government at the federal level in Canada. I think the first report on this was done in the 1930s.
In the early part of our country’s history in the 19th century, the provinces and territories regulated securities. In our view, that does not work in today’s world. So about five years ago I asked the provinces and territories to join us in creating a national securities regulator in Canada. A majority of the provinces and territories have been working with us on the design and particularly the creation of the proposed regulations for a single national securities regulator in Canada.
There was some opposition by some of the provinces on constitutional grounds, so we referred the constitutional question to the Supreme Court of Canada. They heard the argument in April and I am hopeful that before too long we will have their decision on the constitutional issue. Assuming the court tells us that federally we have the authority to proceed, then we will proceed. And we will have a national securities regulator. That’s important because, as I mentioned to you earlier, we’re missing that leg of the stool at the national level to complete the system that we want to have to keep a clear eye on the macroeconomy and watch for warning signs, wherever they might appear.
We also need to work on our pension system. Many Canadians working for small and medium-sized businesses do not have access to pension plans. So we want to move forward with the proposed Pooled Registered Pension Plan. We are doing this work now with the provinces to move toward creating this, I hope within the next year, to improve access for persons working for smaller companies in Canada. Our Government believes it will make well-regulated, low-cost, private-sector pension plans accessible to millions of Canadians who up to now have not had access to such plans.
Now let me conclude by saying that the deep crisis that the global financial system just suffered through could easily have veered into catastrophe if not for our collective determination to fix it. The results of these efforts—if we all follow through on our commitments—will be the kinds of global opportunities you will be discussing over the next three days.
I wish you every success in your deliberations for the good of the financial system, for the good of your institutions and particularly for the good of all the people that you serve.
Thank you for inviting me to be here this morning.