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Fernand Robichaud

The Hon. Fernand Robichaud, P.C. Appointed to the Senate by the Rt. Honourable Jean Chrétien, Senator Fernand Robichaud represents the province of New Brunswick and the Senatorial Division of Saint-Louis-de-Kent. He has served in the Senate of Canada since September 23, 1997.

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Bank of Canada Act—Bill to Amend—Second Reading

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Statement made on 31 March 2009 by Senator Jerahmiel Grafstein (retired)

Hon. Jerahmiel S. Grafstein

Honourable senators, this week in Europe, the G20 are meeting to define an action plan to pull the global economy out of the current economic malaise.

In my view, the debate is divided roughly into two schools with obvious overlaps. One school is what I call the "big bang" school. This school emphasizes outsize budget deficit spending to stimulate consumer demand and create jobs. The critics of this school argue that the stimulus packages may be too large, not very well focused and may trigger negative side effects, spiralling structural deficits and, inevitably, inflation.

The other school is what I call the "big brother" regulator school. This school emphasizes global oversight and regulation of the global financial players and the financial markets.

In a study the Banking Committee started some years ago but never finished on hedge funds, the committee received formal and informal evidence that the cause of the economic meltdown in the financial sector, to a large measure, was due to a lack of appropriate and transparent risk assessment of opaque financial instruments such as asset-backed securities and derivatives, and the lack of appropriate oversight of both regulated and unregulated financial players. They include banks, insurance companies, hedge funds, mutual funds, pension funds, et cetera, to the extent that each of these institutions was exposed and had unfunded leverage.

One critical area that all analysts and experts agree must be reformed is credit-rating agencies that understated and probably failed to clarify the credit risks involved in the sale and the distribution of these opaque financial instruments called toxic assets.

At the same time, a growing consensus is that the central banks individually and collectively should play a much larger role as an early warning agency in systemic risks to our financial sectors, domestically and internationally, to ensure that financial meltdowns do not overwhelm our economies and ultimately, without clear warning, end up costing the taxpayer.

One simple and cost-effective way is for opaque financial instruments to be more appropriately analyzed and assessed for the risks entailed in the sale and distribution of these financial instruments. is necessary in the form of more transparency of the financial players, the inventory, their assets and assets sold to consumers, investors and themselves.

Accordingly, the purpose of this bill is simple, not complicated. Honourable senators, let us give the Bank of Canada a new tool to rate closely and cost financial instruments and financial entities that create, distribute and originate their own and other financial instruments.

Currently, credit rating agencies are not subject to any formal regulatory oversight in Canada. Credit ratings produced by these agencies are referenced in a variety of laws and regulations aimed at ensuring that risk assessments have been done properly to protect the consumer. Regretfully, these risk assessments were not done properly, at the cost of consumers, investors, stakeholders and ultimately, of course, the taxpayer. Accordingly, support is growing not only for greater oversight and transparency of our financial institutions and instruments but also formal oversight of credit rating agencies.

The Canadian Securities Administrators, which includes securities regulators from each of the ten provinces and three territories, recently released a consultation paper that contains a number of proposals in respect of oversight for credit-rating agencies.

The main proposals are: First, implement a regulatory framework that requires, among other things, the adoption of the International Organization of Securities Commissions, IOSCO, Code of Conduct, to address issues such as potential conflicts of interest and the quality of information used in making credit-rating decisions; second, consider requiring public disclosure of all information provided by a security issuer that is used by a credit-rating agency, CRA, in rating an asset-backed security; third, consider reducing reliance on credit ratings in Canadian securities legislation; and fourth, amend the current short-term debt exemption to make it unavailable for distributions of asset-backed short-term debt.

At the federal level, I have not been able to discover any agency or department that has commented publicly on the need for formal oversight of credit-rating agencies in Canada. However, the federal government is involved in a number of international organizations that have made recommendations with regard to the regulation of credit-rating agencies.

The Financial Stability Forum, of which Canada is an active member, has recommended the following: First, implement the revised IOSCO Code of Conduct Fundamentals for CRAs to manage conflicts of interest in rating structured products and to improve the quality of the rating process; and second, differentiate ratings on structured credit products from those on bonds and expand the information that rating agencies provide.

As we speak, the Group of 20, G20, is working in Europe on recommendations in response to the global crisis. In its most recent communication, the G20 states that we have agreed to regulatory industry oversight, including registration of all credit agencies whose ratings are used for regulatory purposes and compliance with the International Organization of Securities Commissions.

Mark Carney, Governor of the Bank of Canada, in evidence before the Finance Committee in the other place on February 10, 2009, stated that in addition to isolating toxic assets to create a core of "good banks," measures to improve transparency and to implement a macro-prudential approach to regulation and to adequately resource the International Monetary Fund are vital. Mr. Carney went on to say that if these measures both national and multilateral are not timely, bold and well-executed, Canada's economic recovery will be both attenuated and delayed.

So said the Governor of the Bank of Canada four weeks ago. No viable reforms have yet been made public by either the Bank of Canada or the Department of Finance.

This proposed amendment to the Bank of Canada Act in no way, shape or form changes, alters or impedes any existing credit-rating agencies utilized presently in our financial system. Rather, this proposed amendment gives the Bank of Canada one new tool at a crucial time in our financial system. It will bring greater credibility, stability and confidence to our financial system, which will better protect the consumer, the investor, the taxpayer and all stakeholders. There is much more to accomplish on the regulatory front in a way that will not inhibit the growth of our capital or credit markets but will make them work more efficiently.

Honourable senators, I commend this bill for study to the Standing Senate Committee on Banking, Trade and Commerce as soon as possible. We must take measures that are timely, bold and well-executed and, in the case of this proposed amendment, cost-effective and surgical.

Honourable senators, now is the time for a full and informed public debate on the shape of regulations that will govern our financial institutions today and in the future.

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