Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 5 - Evidence for February 9, 2000


OTTAWA, Wednesday, February 9, 2000

The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:30 p.m. to examine the present state of the domestic and international financial system (Export Development Corporation).

Senator Leo E. Kolber (Chair) in the Chair.

[English]

The Chairman: For the record, I will introduce the witnesses: Mr. Peter Wren, Managing Director, Trade Finance, Bank of Montreal; from the Bank of Nova Scotia, Tim Plumptre, Senior Vice-President, Trade Finance and Correspondent Banking; from the CIBC, Mr. David Robbie, Vice-President, Trade Finance Division; from the Royal Bank Group, Mr. Bernard Kruyne, Managing Director, Global Trade Finance, RBC Dominion Securities; and from the Toronto Dominion Bank, Mr. John Leckie, Managing Director, Financial Institution and Trade Finance.

Please proceed with your opening statements, and then we will follow with questions.

Mr. Peter Wren, Managing Director, Trade Finance, Bank of Montreal: Mr. Chairman, honourable senators, we have sent you in writing a text of what I plan to address today. Like my esteemed colleagues from the other banks, we plan to focus primarily on recommendation 14 contained in the Gowlings report.

Before dealing with that specifically, I would indicate that our relationship with the EDC is an interesting one. We are customers and, in some areas, competitors. Issues addressed here are not intended as criticisms of EDC per se but rather comments on aspects of their business that we feel limit open competition and reduce choices available to exporters.

Also, if one reviews some of the many statements made about the banks by EDC in the past several months, one might think we are no longer in the international trade finance business. This could not be farther from the truth. In our case, we have increased resources available to support exporters considerably across several countries globally in the past five years. We have also added new resources in our structured trade finance group, which typically works on longer-term export transactions.

Yes, it is a niche business at the bank, as EDC often points out, but so are mortgages for some banks, so too foreign exchange or electronic commerce. That does not mean it is not important. We are meeting customers' demands. Competition being what it is, it would be an unprofitable niche if what we offer is not competitive. We are competing actively not only with Canadian banks but banks all over the world.

In our view, the creation of a guarantee program as proposed in the Gowlings report would help build a healthy competitive environment in medium- to long-term export finance. These are transactions that would benefit exporters.

As you are aware, EDC operates in a manner unlike other export credit agencies, as it provides direct financing and does not or rarely provides guarantees to financial institutions, which in turn might provide the funding. Other ECAs are generally forbidden from acting as a direct competitor to the private sector. EDC's advantages include its tax and bank regulation/provisioning exempt status and low government funding costs. Its goal is to be self-sustaining as opposed to creating shareholder value.

Using these advantages, EDC is able to deviate from market practice and undercut other finance institutions in what in some cases are bankable deals. Indeed, EDC's outstanding loan portfolio is heavily weighted with investment-grade assets, which could be acceptable to the banking sector, although not necessarily on the same terms and conditions offered by EDC.

EDC argues that it needs to do the bankable investment-grade or near investment-grade business to meet its self-sustaining objective. The goal of being self-sustaining appears admirable; however, upon closer examination it is problematic, for various reasons. First, it costs the taxpayer when EDC finances deals that could have been done in the private sector.

Second, EDC's more than $1.7 billion in capital as at 1998 yearend could likely be reduced if it were not expanding into areas that could be handled in the private sector. Could surplus capital then be put to other uses, uses that would benefit Canadian taxpayers? Probably.

Nevertheless, EDC has argued in the past that if they were to operate like other ECAs, they would lose money. However, to compare EDC's performance with other ECAs, the Canada Account business, whether losses or profits, needs to be added back to the balance sheets, as do other ECAs.

EDC also argues that providing guarantees, either themselves or under a new program as suggested in the Gowlings report, represents a subsidy to the banks. This is simply not true. It should in fact be viewed as a subsidy to the exporter, as is any EDC loan under the current model.

ECA guarantees are designed to benefit the exporter. Unlike EDC, banks are taxed on the revenues they earn. Such taxes indirectly help to offset any inherent subsidy.

Another issue is that the Canadian model severely limits competition. Canadian exporters are sometimes at a disadvantage in deals where they are competing against exporters from other countries where ECAs are guaranteeing or insuring local banks. Because of the lack of an effective medium-term guarantee program, the Canadian exporter often has only one financing offer, the EDC offer, whereas the competing foreign exporter has a number of banks competing to put forward the best financing offer.

Banks and other countries make use of ECA cover but also customize the proposal with other banking services, thereby resulting in a more attractive and value-added proposal and in many cases rendering any competing Canadian exporter's financing package uncompetitive.

Using its current advantages, EDC may be gradually moving towards a monopoly situation in the field of medium- and long-term export finance. This a dangerous situation for Canadian exporters and other taxpayers. Do you think it consistent that an entity with a self-sustaining profit motive and no competition would continue to benefit the Canadian exporter who is trying to compete internationally, often on the basis of price and in risky markets? Would the export market-share gains by Canadian companies not be higher via a structure where EDC uses banks as the financing vehicle? We think so. Unfortunately, we cannot quantify the opportunities lost by mid-market and smaller companies.

We have said before that a guarantee, or partial guarantee, will help us move more quickly to more and more offshore markets. If this were extended to all banks operating in Canada, whether they are Canadian or foreign, it would have the effect of increasing the total amount of financing available to Canadian exporters.

At this stage, almost all foreign banks who were or are active in export finance have left Canada or have eliminated that part of the business, as they cannot be competitive nor can they gain sufficient volume to operate this business successfully in Canada. Instead, they use their foreign country risk capacities to support exports from other countries.

Some of you may have heard of Northstar trade finance, a company that was established several years ago with the support of some of the banks, ourselves included. It serves as a very fine example of cooperation between EDC and the banks. What Northstar provides is an effective tool for small and medium-sized exporters to compete internationally. We see it as a model that could be used elsewhere.

We believe there are many reasons to let the banks demonstrate their willingness to step forward and take on more and more of the deals EDC says that we will not do. I will provide some of the reasons. There would be an indirect but clear benefit to Canadian taxpayers. Increased competition would ensure that Canadian exporters have access to competitive pricing and value-added financial packages. A greater capacity would be created in export financing in Canada.

We urge you to strongly support recommendation 14 in the Gowlings report. The Canadian export community will benefit.

We would welcome the opportunity to work with the Department of Finance, together with other banks in Canada, to define and develop an export guarantee program along the lines proposed in the Gowlings report.

We would like the opportunity to meet again with this committee in a few months and report on the progress of these deliberations.

Mr. John Leckie, Managing Director, Financial Institution and Trade Finance, Toronto Dominion Bank: On behalf of Toronto Dominion, I very much appreciate the opportunity to present our views to the Senate today.

Toronto Dominion supports recommendation 14 in the Gowlings report as well. We also support the ideas in recommendations 15 and 16, that EDC be allowed to sell assets to pension funds, provided the banks are on a level playing field and allowed to do so as well.

Toronto Dominion is not recommending that EDC exit any of its financing or insurance businesses. In fact, we are very heavy users of EDC insurance products and enjoy a good rapport with its very professional insurance staff.

The reason we would like to pursue recommendation 14 is that it will enable us to compete on a level playing field with banks in other OECD countries that have the benefit of funding such deals backed by their ECAs. Simply put, this is a profitable business that our international competitors enjoy. It is this competitive motivation that really brings us to the heart of the matter.

The EDC needs funding earnings, unlike all other ECAs in the world, to fulfil its self-sustaining mandate. The paradox arises for both the EDC and the Canadian banks, in that, to remain commercially viable, we both have a need to underwrite and fund large Canadian exporters. "Viable" means "profitable" in the case of banks. For EDC, viable would mean its self-sustaining mandate.

However, in addition to wanting to be more active in the large corporate market, supporting SMEs is a very important part of Toronto Dominion's commercial franchise. We want to be players in both the large corporate and the SME market segments. This leads me to spending a moment discussing the business balance in these two market segments.

At a macro level, Canada is very much a leading trading nation, over 45 per cent of its GDP related to trade. Given the auto agreement and NAFTA, over 80 per cent of that trade is with the United States. The Canadian banks do a good job of servicing corporate and SME clients who trade on an open account basis with the U.S., where the bulk of the trade in fact occurs.

On a more micro level, there are 75,000 significant exporters in Canada. EDC deals with approximately 5,000 Canadian exporters as clients, of which only 3,600 would be SMEs, which is less than 5 per cent. The Canadian banks, on the other hand, have virtually all of the SME exporters as clients. In dollar terms, the EDC did $34.8 billion in business last year, of which only $5.8 billion was for SME business exports. Clearly, the EDC volume is heavily concentrated on large corporate exporters.

Toronto Dominion has the desire to grow the SME business it already enjoys. However, to do so it will need to continue to invest in new technology, such as business-to-business e-commerce, which is in its infancy but we expect it will radically change the way companies and nations trade.

Everyone is going to have a very hard time keeping up with these changes. For example, Commerce One is an Internet provider of business-to-business solutions that Toronto Dominion has partnered with for Canada. Commerce One has also partnered with General Motors in the United States, British Telcom in the United Kingdom, and NTT in Japan, et cetera.

A recent commentary by William Thorsell of the The Globe and Mail stated:

Now when TD executives face the classic question -- What business are we in? -- they will have to answer, in part, that they are in the wholesale trading business through information technology. A bank, once just a lender to business, is seeking to become the dominant broker between Canadian businesses as they buy and sell anything.

As this statement illustrates, Canadian enterprises will all need to be very profitable to support the large investments needed to keep pace with new technology for trading, and it would be wise to pool the resources as much as possible.

My point is that Canadian banks will have a better chance of being able to compete in this type of global arena if we are permitted to be on an equal footing with EDC and our international banking peers, whose ECAs do not compete so directly with them.

My colleagues and I can each provide examples where we do profitable business with U.S. corporates through ExIm Bank in the U.S.; whereas, on a comparable Canadian transaction, EDC deals directly with the large corporates with the banks excluded. Which is the best model between ExIm and EDC? The answer is a matter of opinion.

However, any profits from the large corporate end of the market do in fact allow Canadian banks to have scale to keep up with technological investments necessary to support the smaller-scale SME market. Specifically, we could never profitably put in place country credit limits for the relatively small SME segment alone. Large corporates economically justify that process of putting credit limits in place for countries.

As well, the development of trade expertise throughout the banking industry allows us to provide exporters with the concept of one-stop shopping through their bank for all their export-financing needs. This avoids the necessity of following different policies and procedures in different financial institutions. This would be of particular benefit to SMEs.

Recommendation 14 will enable us to do what I have tried to describe here as finding a healthy balance between the large corporate and small SME segments in the export market.

It would benefit all concerned if EDC, the banks, and the private sector insurers were to pool their assets and expertise through a compromise that would make recommendation 14 work. The banks vast value-added distribution capabilities, of particular convenience to SMEs, EDC's trades finance expertise, and private sector insurers capacity for risk offer the key ingredients that should make recommendation 14 work. Again, it is hoped that this would also result in improving the corporate SME balance of portfolios between EDC and the banks.

TD firmly believes that it has been demonstrated that EDC has a valuable role to play in conjunction with the banks and private insurance sector in this country but that it would benefit Canada's export community if a compromise is reached and a new model designed. What worked up until now will not necessarily work in the future.

Changes are happening all around us. We all have to wrestle with the impact of the rapid technological changes taking place and greater demands on our resources. We believe recommendation 14 is a good place to start to try to build a new model that the banks, insurance companies and EDC can all embrace to help meet the export needs of their mutual Canadian customers.

This new model will help us build scale and will particularly be helpful to SMEs. This scale will help underwrite the very significant technological investments we all face in the near future. Let us face it together. Thank you.

Mr. Bernard Kruyne, Managing Director, Global Trade Finance, RBC Dominion Securities: Mr. Chairman, honourable senators, thank you for providing us the opportunity to speak today on this important subject.

I speak on behalf of the Royal Bank Financial Group. First, we want to compliment Gowlings for its comprehensive and balanced report on this complicated and important issue. The report's 39 recommendations cover a wide range of issues. In the context of today's proceedings, on behalf of the Royal Bank, I would like to offer comments consistent with our presentations to Gowlings with respect specifically to recommendations 14, 23 and 24.

Royal Bank is strongly in favour of recommendation 14. In our view, this recommendation goes to the essence of export finance: government guarantees to the maximum permitted under the OECD consensus. This is what is practised in other OECD countries. It goes to the essence of what is required in Canada to mobilize support for Canadian exporters in their quest to be and remain competitive internationally. Such government guarantees will most directly benefit Canadian exporters.

Today, Canadian exporters have few viable options when they need competitive export finance to sell their goods and services abroad. Certainly, they can turn to EDC. EDC in many instances provides valuable support, particularly for exports to the United States, but as Canada's official export credit agency, EDC is limited by the OECD consensus. Canadian exporters need more.

Exporters need to have access to competitive ECA-supported export finance packages that combine the strength of an ECA like EDC with the considerable strength and international resources of commercial banks, including the Royal Bank and including Canada's Schedule II banks. Such export finance packages can go well beyond the limitations of OECD rules.

Canadian exporters are confronted with competition that is not just based on the quality and price of their goods and services. Particularly in emerging markets, payment terms and export financing offered to an importer are also key factors in the ultimate purchase decision. Our Canadian exporters find themselves in many instances competing with exporters from other OECD countries who can offer their products with better export financing. Better financing terms are not always cheaper. Sometimes better financing from a cash-strapped importer's point of view is more financing or financing with a slower repayment schedule. Better financing from the importer's perspective may be the financing for the full purchase price, not just the 85 per cent of export value that an EDC can provide under the OECD rules.

We argue for a better linkage in Canada of government export support on the one hand and private-sector-sourced financing on the other hand. That will create a level playing field for Canadian exporters when they compete with their international competitors, particularly when they compete with their U.S. counterparts.

When recommendation 14 is implemented, we expect that it will attract foreign banks to compete for Canadian export finance. It will provide an incentive for major international banks to use their considerable resources to support Canadian exporters with competitive export finance packages. Such financing packages, which feature, directly or indirectly, a partial guarantee from the Canadian government, are attractive to such international banks. As a result, they will no longer dedicate their resources exclusively to the exporters in other OECD countries, where more favourable export financing support programs are in place. Canadian government guaranteed loans are without question attractive to the international banking community. Market competition will ensure that such attractiveness translates into lower pricing, longer terms, higher amounts, and/or other features valued by the importers of Canadian exports. No longer will the OECD consensus rules, with which EDC has to comply, be the limiting factor to Canadian exporters that it currently is.

There is ample evidence to support this view. Let us look at the United States, home to some of the most formidable competitors of our own Canadian exporters in many emerging markets. Of the U.S. ExIm Bank-guaranteed export finance arranged by leading banks in the period 1995-1999, approximately 40 per cent was arranged and provided by foreign banks. I can leave behind papers with more precise statistics for the last four years, and you will see the significant impact that foreign banks in the U.S. make to successful exports of U.S. goods and services. In each of the last four years, at least five of the top 10 U.S. ExIm Bank-guaranteed lenders were non-U.S.-owned. These banks make their resources and country limits available to support their U.S. clients with export financing. Our Canadian exporters need a bigger share of that potential support. Just imagine the support EDC can mobilize if it manages to entice a number of large export lenders that are currently operating in the U.S. and include that in the Canadian export finance structure.

When recommendation 14 is implemented, we can expect that supporting Canadian exporters with export finance will become attractive, for both the foreign-owned Schedule II banks as well as Schedule I banks. That will help Canadian exporters and thus will help Canada.

Why would we as the Royal Bank argue in favour of more competition relative to export finance in our domestic market? We do so simply because it is good for our clients, the Canadian exporters. We expect that we, or at least some of our Schedule I competitors, will be able to capture a part of the Canadian export finance market. Whether we will or will not be able to compete successfully, the Canadian exporters will gain access to financing resources that will put them on a more level playing field with their foreign, OECD-based competitors. That is good for Canada; that is good for all of us.

I am talking about access to resources that go beyond what EDC has been or will be able to deliver, resources that go beyond what Canada's Schedule I banks can offer. EDC may argue that this reduces their revenue. I would argue that EDC could consider reducing its NIE. No foreign offices, less international travel, let the banks do the running for them. We already have an infrastructure overseas that is available if we provide the right incentives.

As a major financial institution in this country, Royal Bank Financial Group is and will be benefiting from the strength of the Canadian economy. Hence, we seek and support sound initiatives that benefit Canadian exporters. They are an increasingly important element of our economy. Consequently, we seek to find more opportunities to work with EDC to support Canadian exporters. We identified Northstar, which Peter Wren already mentioned, as a good model for Canadian institutions to work together in support of SME exporters.

We fully endorse recommendation 23, which suggests that EDC and the private sector work more closely together to develop similar business models. Apart from Royal Bank Financial Group, there are now three other commercial banks participating as shareholders in Northstar. Northstar's business model is very much based on the excellent support it receives from EDC, and the cooperation of its bank shareholders. As a result, Northstar is a success story of Canadian cooperation. We believe that this model should indeed inspire other forms of cooperation between EDC and the financial sector, as per recommendation 23.

The SME export sector, as a result of its size and the size of each individual export transaction, is a difficult sector to effectively service. We believe that effective cooperation between EDC and the commercial banks is critically important to provide export finance support to SME exporters.

"Cooperation" means that we work together to a common goal. It means that one side cannot unilaterally determine all the rules. Both EDC and the private sector have strengths and weaknesses. Only when we find a way to cooperate and to combine our respective strength will EDC and the financial sector be able to deliver improved support to the Canadian export sector and to all Canadian exporters, in particular, to the SMEs. The SMEs will need such support most, but, at least initially, they will have the least to offer as a reward for the support received.

The support and cooperation that we envisage between EDC and the Canadian banks may well extend to the private credit insurance sector. Private insurers appear to be increasingly prepared to play a role in dealing with the inherent risks of international trade finance. As such, their involvement may further enhance the support that is available to Canadian exporters.

In conclusion, our view is that this discussion is too important to take place only once every ten years, when the EDC Act is up for review. We recommend that the Minister of Trade encourage the creation of a committee for foreign trade finance to discuss issues of common interest between the financial service sector and the government. Such a committee should at least consist of the members of the Canadian Bankers Association's foreign trade advisory group and senior executives of EDC. We suggest that this committee should meet at least quarterly and report to the minister. The Gowlings report has already provided a productive initial agenda of issues. No doubt, with this greater collaboration and cooperation, there will be many more issues for the representatives from EDC and the Canadian banks to consider.

The Chairman: Was there any effort made to coordinate your various statements? I find them quite repetitive. However, please go ahead if you will say something different.

Mr. Tim Plumptre, Senior Vice-President, Trade Finance and Correspondent Banking, Bank of Nova Scotia: There was an effort to coordinate them. We thought we were each picking up on individual points that we wished to highlight.

The Chairman: Please proceed, then.

Mr. Plumptre: My comments are also focused on recommendation 14. The fact that all of us are focusing on it gives some indication of the unanimity that the industry feels on this issue.

The House of Commons committee recommended for further study Gowlings recommendation 14. This is entirely consistent with the government's policy paper of June 1999. On page 10 of this paper, one of four fundamental principles is stated, namely, that "vibrant competition is necessary to ensure a dynamic and innovative private sector and that individual and business consumers have a range of choices at the best possible price." It is very much within the spirit of that paper that this presentation is made. It was also supported by the banks, as outlined in our letter from the President of the CBA to Minister Pettigrew. That is the recommendation found on page 69 of the Gowlings report.

As many senators may remember, four and one-half years ago we came before you with representatives from the United States of two large international banks -- one from the UK and one from Holland. These were leading banks in structure, trade and project finance, both with subsidiaries in Canada attempting to play a bigger role in providing medium-term finance for Canadian exporters of capital goods. This is the sector that we are talking about here; that is, medium- and long-term finance for the kind of exports that require that type of finance -- namely, the capital goods sector.

Today, one of these two banks has left Canada and the other has downsized its Canadian bank. Like others, it covers its business in Canada, if any, from the United States. Why is this? The answer is simple: There is nothing in it for them in Canada. The resources are better employed supporting exporters elsewhere, as Mr. Leckie mentioned earlier, in particular, in the USA, where all the banks active in Canada -- either Schedule I or Schedule II -- have a much bigger corporate customer base and where the export credit agency is prohibited in its charter from competing with them. Indeed, there are no banks that devote significant resources to this business in Canada. Again, I am focusing on the medium-term buyer credit market and not on export finance generally, which is certainly an area of focus for us.

In every other major industrialized country this is a business on which the largest and most international banks, local and domestic, compete fiercely, seeking out opportunities to finance exports for their customers. Does this matter, you may ask? EDC seems to be doing a reasonable job and the exporters do not seem to be complaining. We think it does matter -- both to the exporters and to the banks. We do not accept that the status quo is always the best solution available. We believe there are times when our Canadian customers are disadvantaged compared with their competitors. In fact, we know they are, because on occasions we can put together more attractive financing for customers elsewhere. We do well when our customers do well, and we want to see our Canadian ones have more advantage through more choice. This is why we support recommendation 14.

You will ask: What would the banks bring to the table? What are the advantages that might lead exporters to prefer this alternative? It must, after all, be their choice. Will it produce cheaper finance for their foreign buyers and make their exports more competitive? Well, let us look at that.

First, EDC can always provide the cheapest financing. It has a lower cost of funds than any commercial bank, and it has added benefits that it can pass on in its pricing regarding not paying taxes, not having to provide a commercial return to shareholders, and not having to make reserves against possible losses on the same terms as commercial banks must. You must then be asking: If it is not cheaper, then why would an exporter want this alternative? There must be some compelling reasons; otherwise, why would Gowlings recommend this after such a thorough study?

There could be many reasons. First, many exporters need to finance 100 per cent or more of their export contract, possibly the down payment and perhaps other costs that EDC is not allowed to provide. Competitors, however, may be offering this using their banks located in other countries. It is much more attractive for a bank to provide the down payment and other local risk financing if they are also providing the balance, which is usually 85 per cent of the contract value under the guarantee of an export credit agency.

As this loan requires no capital support, the income from it greatly increases the overall yields on the other lending. Banks -- that is, all banks -- are less likely therefore to provide the rest of the financing if EDC is lending the 85 per cent. Canadian exporters are often stuck for the rest. Also, the exporter may be a supplier in a large multi-country supply contract, where the importer needs to syndicate the financing for the whole package on an equal basis. This comes unstuck if the Canadian financing is provided on a different basis from all the rest and EDC cannot participate in loans supporting exports from other countries; by that, I mean enjoying the guarantee of other export credit agencies there. For this reason, financial advisors to these large projects have been known to advise against Canadian supply from the outset because they do not want this perceived problem to arise. Furthermore, Canadian banks find it more difficult to win such advisory roles themselves, which would earn taxable income in Canada because the belief is that they will recommend Canadian supply introducing perceived problems.

There are many other reasons that exporters might want to involve their bank and not be forced to have EDC provide the finance. From some of what you read in the press, you may find it surprising to know that some of our customers actually like dealing with us. Indeed, many prefer dealing with us than with EDC. One reason might be geographic location; EDC has far fewer offices. Also, they may not know EDC. Some do not like to be forced, on principle, into the arms of a Crown corporation in Ottawa. Perhaps a bank brought them the contract, possibly through an overseas branch whose ongoing services are needed. Overseas branches of banks in Canada have a role to play in this. As I said, there could be many reasons.

We are saying that exporters should have a choice. If EDC, acting on its own behalf, and/or the Government of Canada has decided that it is prepared to take the risk to support an exporter on, say, $50 million financing to a borrower in Brazil for eight years on which a Canadian exporter is bidding against international competition, then why should the Canadian exporter not be allowed to choose to have this provided by a bank with a government guarantee, as his competitors can, rather than in the form of a direct loan from the government? Some foreign buyers resent that any way. EDC is effectively seen as the Canadian government and some buyers do not like to have a loan from a government. This is so-called consensus financing, which goes beyond normal commercial market appetites of all banks, not just Canadian banks.

We are not suggesting for one moment that any bank, anywhere, will have the same appetites as export credit agencies, nor would you want to leave your money in one nor buy shares in one that did. How does the Canadian exporter know he is getting the best pricing to support his contract if there has been no competition for it? In other countries, this is usually put out to bid but not under the present system in Canada.

Let us go back to pricing for a moment. I said EDC can always be the cheapest. So what would the banks charge and how would the scheme be financed? Last month, a new record was set for export credit agency guarantee pricing to a very large medium-term package of U.S. aircraft financing under U.S. ExIm Bank guarantee. It was priced at 5 basis points. That is one-twentieth of 1 per cent. This is unusual, but so is anything over 25 basis points -- one-quarter of 1 per cent.

As I already mentioned, this lending requires no capital to support it; hence it is attractive for banks and they compete fiercely for it. This is what induces them to provide the remaining non-guaranteed finance to give their customers a more attractive bid. The government guarantee would be priced in line with the market, easily determinable by reference to what other export credit agencies charge. That rate is normally public knowledge, unlike EDC's pricing, which is negotiated case by case -- exporters never know in advance what the financing will cost them.

The guarantee fees would cover the costs of administering the scheme, as they do elsewhere. In the UK, as in most places, all government-supported, medium-term, export credit support is provided through guarantees and not through direct lending.

You may be saying: I think I understand why the banks want to do this, but why are the exporters not interested? What does their lobby group, the Alliance of Canadian Manufacturers and Exporters, have to say on this?

As you know from their submissions, the alliance, through its Export Finance Insurance Committee, which includes the largest users of EDC's medium-term lending, does not support recommendation 14. On numerous previous occasions, they have not supported any similar alternatives that the banks have raised.

When we asked them why, the alliance said they were "concerned it would undermine EDC." This is interesting. Remember, EDC can always be the cheapest if it wants to be, so how would the banks undermine it? Is it possible that if exporters had a choice, if there were some competition on this, that EDC might have to lower its pricing to give the exporter the most competitive pricing it could? Would this not conflict with its so-called self-sustaining requirement, which requires it to charge what it can when it can to cover inevitable losses on its inherently high-risk portfolio elsewhere? Or maybe an exporter might want to use its bank for another reason -- but the alliance say they must not be allowed this choice, that is, to choose financing from a tax-paying private-sector alternative, for fear of undermining a non-taxable Crown corporation.

The sad truth is that most exporters and members of the alliance have no idea that an alternative could exist, having been weaned on the EDC-only doctrine since 1960 when EDC was empowered to lend directly. Prior to that, EDC could only guarantee or insure.

Most exporters do not have time or resources to take much interest in this matter. They assume the alliance will represent their interests. The few that do dominate Canada's capital goods exports speak for the alliance and are in a position to obtain what they need from EDC. Thus, they have less need of an alternative and, understandably, do not want to rock the boat.

You will also ask what EDC says about this additional alternative for exporters that Gowlings -- not the banks -- have proposed and that the House of Commons Standing Committee on Foreign Affairs recommended "for careful study, based on the best interests of exporters and the country as a whole." Note that they did not say "the best interests of the banks."

EDC also opposes it. EDC have claimed that they see one of their roles as adding capacity, yet they oppose this initiative. We are puzzled as to how they can reconcile these two positions -- wanting to add capacity while opposing the inclusion of the largest financial institutions in the world. In our case, we are not one of the largest but we have offices in over 50 countries.

Does this fit with the government's policy paper recommendation to promote vibrant competition to ensure a dynamic and innovative private sector, giving consumers a range of choices at the best possible price?

We have suggested that exporters would only want to use the bank alternative in cases where the bank is also providing some lending at its own risk. EDC have correctly pointed out that the banks' risk appetites come and go with changing market conditions, as is the case for banks everywhere. However, there is no evidence of banks elsewhere turning down their own government-guaranteed lending when there is a financial crisis somewhere in the developing world.

So in times when the banks do not want to take some risk, the exporter will use the EDC direct financing alternative any way. The only loser would be the bank, not EDC nor the exporter. At the end of the day, if the bank guarantee scheme has nothing to offer exporters, they will not use it. This is not a replacement for EDC's direct financing, just an alternative. If exporters do not use it, it will go away; but if they do, it will be because they believe it would help them export. Should they not be allowed to have that choice?

In supporting Gowlings' proposal, we regret that this apparently brings us into conflict with EDC, with whom we cooperate on a number of other areas, both in the trade-finance area as well as in our syndications area and treasury activities, and with whom we continue to explore new initiatives to increase this cooperation to the benefit of our mutual customers.

Mr. David Robbie, Vice-President, Trade Finance Division, CIBC: Honourable senators, I have not spoken yet because, when we did our coordination, we clearly recognized the repetitive nature of our submission. However, I would say that CIBC supports the position of the major banks with regard to recommendation 14. We believe it brings additional capacity and additional competitive muscle to Canadian exporters.

Senator Meighen: Mr. Chairman, my questions have largely been answered but I am left with a rather puzzling situation. On the one hand, I hear you saying -- and I have no quarrel with this -- that a little more competition would probably benefit Canadian exporters, particularly the SMEs. That seems to make sense to me.

I hear you saying you want to cooperate with EDC but you want to be allowed to compete with EDC. Will increased competition likely lead to increased cooperation between the two unless and until, at the very least, the respective roles are separated or delineated in some fashion? That leads me to ask this: In this new world that you set out for us, what role do you see for yourselves? We have got that, though.

What role do you see for EDC? They will say that the role you see for EDC is simply to take all the bad ones and you will cream off the good business. I think that would be their argument, put rather crudely.

I am on your side, by the way, in singular; but underlying all of this -- and this is the most astonishing thing -- the trade association that you are so anxious to help does not want you. At least it appears not to want you. That makes it hard for us to say to them that we know better and that they really do want you; that the banks are nice and they will help them.

That is like hearing a line from the government, "We are here to help you." No one believes that. I am left with those contradictions in my own mind. Perhaps you could clarify them for me.

Mr. Plumptre: You have raised a variety of points.

Mr. Leckie: There are paradoxes around this whole question.

The scarce resource is country credit limits, which both EDC and ourselves have to sell. That is the core product, if you will. The other scarce resource is capital. We have a scarcity of capital, as does EDC, because the government has limited funds to EDC.

The paradox is that, under the consensus lending, countries compete and taxpayers are, as I learned in Economics 101, a beggar-thy-neighbour policy. So the taxpayers of various countries, perhaps unbeknownst to them, are beggaring their neighbour with less than commercial risk.

Senator Meighen: You say there is a limit. Is that a limit set by the Government of Canada or by whom?

Mr. Leckie: It is set by our risk management group. In our case, I have limits for 71 countries and I make my case with my own risk management group.

Senator Meighen: And the EDC?

Mr. Leckie: They have a similar risk management function within their enterprise.

Senator Meighen: That could be increased, could it not?

Mr. Leckie: They could decide to increase their own limits but they have a finite amount of capital. They have $1 billion plus $700 million in retained earnings. That can only support so much country risk.

Senator Meighen: Absent any infusion of capital, that is it. There is a limit for both you and them?

Mr. Leckie: That is right. They are the ones that bring to the table competitive bids for an airline export into Brazil and Canada is competing with Airbus out of Europe. The price to get that deal done is not commercial. It is called consensus lending. We would not do it on our own because it is below market, so essentially the taxpayers of each country are subsidizing their various export industries with a floor of subsidy created by this consensus.

To that extent, EDC is an export credit agency, like others in the world, and it is a monopoly in that regard. We do not want to be in that business because we are not supported by taxpayers. We are supported by shareholders who want a higher return than the 7 per cent or 8 per cent that EDC gets.

Senator Meighen: I thought you wanted recommendation 14, which implies a guarantee from the Government of Canada.

Mr. Leckie: The beauty of a guarantee is when we do an ExIm deal, as my colleagues have tried to explain, as we did a month ago to a Third World country to support a company out of Chicago that is shipping telecommunications equipment into a Third World country, much as many companies here in Ottawa are trying to do, and in fact do with the support of EDC. That was a 13-year loan supported with an 85 per cent guarantee from ExIm. The other five-year loan was the remaining 15 per cent. We did the whole thing, but the 85 per cent was guaranteed by ExIm. Therefore we do not have to put capital up against that. That is government risk. That is gravy, frankly. We can take the money from the 13-year deal, add it to the five-year 15 per cent loan that we made to the Third World country, and that essentially subsidizes that five-year deal. We love those deals.

Senator Meighen: Did you say that this was out of Chicago?

Mr. Leckie: Yes, the client was out of Chicago.

Senator Meighen: Could that same deal be done here?

Mr. Leckie: It is done here. It is often done by EDC by itself. They do a great job of it and it has all the advantages to the client here in Canada of one-stop shopping and so on. It is professionally done. They do it just as quickly as the bank and, consequently, the alliance and everyone else is asking: Why should we change that? That is tough to answer. We say that the benefit is that the scarce resource of capital gets better leverage if we are all playing in the game, plus the insurance companies.

Senator Oliver: Who put up the 15 per cent?

Mr. Leckie: We did. In terms of funding, we put up 100 per cent, but we only had to put up capital against the 15 per cent. We did not have to use our scarce resource of capital against the 85 per cent, but we funded the whole thing.

Mr. Plumptre: In response to Senator Meighen's comment about leaving the bad stuff with EDC, this goes right to the root of the issue, in that in other countries the export credit agencies are seen as complementing the private sector rather than competing with it. The Government of Canada has made the decision that EDC will be self-sustaining and not play that role. We have contested that in the past and they are not raising that again on this occasion.

However, we still think that, for the benefit of exporters, they should have the choice to get a bank involved if they wish, mainly to cover the missing 15 per cent. The point in Mr. Leckie's last example was that, if that had been done out of Canada, certainly in our case we would not have been willing to provide the 15 per cent if the customer wanted 100 per cent financing if we were not also providing the 85 per cent loan on a guaranteed basis, assuming it was in a high-risk country.

Senator Meighen: Are you allowed to do that here?

Mr. Plumptre: We are allowed to but we do not get the guarantee as inducement. It happens very, very seldom. I will not say never because there have been occasions and we are constantly seeking new ones, but as a general rule EDC prefers to do direct lending rather than guaranteeing because it is more profitable for them, which comes back to their self-sustaining mandate.

Mr. Leckie: Hence the paradox.

Senator Meighen: I do not want to put words in your mouth, but one of the criticisms of the banks' entry into this field would be that you do not have the expertise that EDC has, particularly in smaller centres, although you may well in Montreal, Vancouver, Toronto, Calgary, and Halifax. Would your answer to that be that if you are allowed into the business you will have more trained people who will be located in Moose Jaw?

Mr. Wren: First, I do not think any of us accept the premise that we do not have the skills and ability. The fact is that all the banks are doing this business; we are just not doing it in Canada. To say that we do not have the expertise is misleading.

In terms of coverage of smaller centres, I would argue that EDC is in no more small centres than are the banks. In fact, our distribution is much deeper and wider. Any branch in any part of the country can tap into the resources of the bank in an instant. We have trained specialists who are there to go directly to those areas.

Senator Meighen: I appreciate your response, although that is not what we hear on the other side, as you can appreciate.

Mr. Wren: In our case, we have structured trade specialists and we are doing business in Canada and elsewhere. The business we are doing in Canada is by and large without EDC support.

Senator Meighen: Do Canadian companies operating in foreign countries have access to banks there that are supported by the foreign ECAs so that the Canadian companies can export from those countries to a third party?

Mr. Plumptre: Canadian companies operating abroad have access to the export credit agency of that country. They also have access to EDC cover in the event that the export credit agency of that country does not want to take the risk.

Senator Meighen: Do they use those two facilities?

Mr. Plumptre: Very much so, to my knowledge.

Senator Kroft: Welcome, gentlemen. Like Senator Meighen, I am on an eternal search for truth. I do not want you to feel that this is a partisan situation.

I often try to approach a problem with a Martian test. If you had been dropped into the situation with no knowledge of any circumstance and went through the checklist that Senator Meighen did, it would be hard to understand why we are all here talking about what we are talking about. There are people who are supposed to be disadvantaged on one side, or on the side of the people who may be disadvantaging them, and it is difficult.

I would like to take a starting point that is really the one imposed on us as legislators, and that is to look at what is in the interest of Canadians. As such, we might ask the question: What elements can we bring together here that will have the net result of expanding the total amount of Canadian trade, and enlivening and enriching the activities of banking and other financial institutional activities in this country? We do not like to know that transactions are being done elsewhere when they could be done here, or if we do not have the proper structure for it, and we want to ensure that our exporters are assisted in every possible way to do the work. That will be the thrust of my intervention.

I need a little bit of factual help to start out with. Recommendation 14 seems to centre on the Canada Account. We talk about consensus deals. I understand that the Canada Account is for a special type of transaction, to achieve things that have a broader national purpose, not what you would call mainstream commercial transactions. I think you, Mr. Plumptre, described consensus transactions as not necessarily being ordinary commercial deals.

Could you tell me how much of what we are talking about is basic commercial lending business and get these other names out of the way. I want to understand what is really up for grabs in terms of real commercial banking business?

Mr. Plumptre: We are talking about transactions that the banks would not normally do on their own account without a guarantee, transactions that are beyond normal market terms. Hence, those transactions are described as coming under the consensus.

The reference to the Canada Account, I believe, came in in the House of Commons recommendations, in that the guarantee would be provided in the same way as the Canada Account is used for loans where EDC itself does not want to take the risk, which they do not take on their own corporate account.

Senator Kroft: How much of the business that you would want to do as banks would be neither consensus business nor Canada Account business?

Mr. Plumptre: None.

Senator Kroft: Anything that is normal risk then you do in the normal way?

Mr. Plumptre: Yes.

Senator Kroft: Everything at stake here, then, relates to business that is beyond the normal risk, and that is why you need a special mechanism in order to participate.

Mr. Plumptre: That is correct. We co-finance with EDC regularly under their market window financing, where it is done on commercial terms, sometimes using their political risk insurance. By and large, we often co-finance with them as commercial lenders.

What we are talking about here are those cases where the term for the country in question goes beyond what we are prepared to do and where we need a guarantee to be involved in it and to match what is being offered in other countries.

Senator Kroft: Do you mean where insurance is not the relevant factor in closing that gap?

Mr. Plumptre: Increasingly, insurance is for political risk cover only. In some cases, it would be a guarantee for both commercial and political, and that is where we would need the guarantees.

Senator Kroft: In the total amount of export business done, how much would be in the conventional risk category? Would it be 85 per cent, or 90 per cent? Of the business we are talking about, how much falls into this category that needs special treatment?

As an aside, a negative aspect of the Gowlings report, in my opinion, is that there is no index and not much statistical data here to support any of the arguments; otherwise, it is a wonderful piece of work.

Mr. Plumptre: That is something only EDC can answer, and I am sure they will tomorrow. We do not have that information.

Senator Kroft: They are not public statistics?

Mr. Plumptre: On an annual basis, I do not believe so. The majority would be on commercial terms; we are talking about a minority on the consensus.

Senator Kroft: We are talking about a minority of the business?

Mr. Plumptre: I believe that is the case.

Senator Kroft: Would you suggest a small minority?

Mr. Plumptre: I would say probably not more than 25 per cent of medium-term lending.

Senator Kroft: Is the insurance side of EDC activities in any way relevant? Their services are open to everyone, so the fact that they also have this insurance role does not provide them with any advantage in doing the business. Is that correct? You have talked about lower cost of money and non-taxability. I am wondering whether the fact that they are also insuring many of these accounts is significant in this day and age?

Mr. Plumptre: I do not think there is any connection between the two. The banks, in fact, are the largest users of EDC's insurance for short-term trade.

Senator Kroft: If we were to get at the question of what these changes that you are supporting would do to growing Canadian trade, how would you come at that question? Is there any way of making a case for suggesting that, if we brought a more competitive, broader participation, we could in fact increase the total amount of trade that Canadian companies are doing?

Mr. Kruyne: Let me try to answer that question, senator.

We believe that there are many transaction opportunities where a Canadian exporter is competing against a person who makes the same widgets in the UK, or in Germany or in the United States, and from the importer's perspective, particularly when we talk about importers in emerging markets, the financing and not only the quality of goods is important.

If the Canadian exporter can only offer an EDC loan -- and I assume that EDC sticks to the rules to which it is bound, the OECD consensus rules that stipulate that you can only lend up to 85 per cent, that you are not allowed to lend up to 100 per cent of the full export amount -- then by definition that Canadian exporter is in an unattractive position because it cannot offer as much to the importer as it wants.

If we changed the rules, as we are suggesting we should, then what we create is a situation where the Canadian exporter can do two things: First, the Canadian exporter, by talking to a bank, can arrange for a 100 per cent package, because the bank is prepared to do the 15 per cent bad risk if you will. We are not competing there with EDC; we do not want to compete with EDC. As Mr. Plumptre said, EDC does not have shareholders that need a return on capital and all those things.

When we talk about competition -- and this is the second option that the Canadian exporter has -- the Canadian exporter can come to all of us, and it can go to a couple of Schedule II banks, and say, "I have a Government of Canada guarantee for 85 per cent of the loan. However, I will only give you the transaction if you do a good deal for me on the remaining 15 per cent." That is when we get competitive, because I do not want Nova Scotia to get that deal. For a simple 15 per cent, I can get that whole 85 per cent. Well, perhaps we would go as low as 5 basis points, as Mr. Plumptre mentioned, but that was a record low and we do not like to be record low, we just like to think that we are better.

We do not mind competing with each other. We do not mind competing with foreign or Schedule II banks. Sometimes we lose; sometimes we win. What we are currently seeing is that we win some transactions in fierce competition when we operate in the United States. The Royal Bank did the largest deal with a U.S. ExIm Bank guarantee to Venezuela. At the same time, we could not put a package together for a Canadian exporter.

Senator Kroft: In addition to giving yourselves a competitive advantage, a big part of your argument is that the Canadian exporter can deal much more effectively against his or her competitor in another country.

I was looking for that argument and I have not found it as strongly articulated as I thought I might. From a national interest point of view, it does not really matter to us who does the business. What matters is whether more Canadian exporters are having a chance to do business. That is critically important.

Mr. Kruyne: That would increase the volume, if we were able to change the rules. I think your original question concerned what would happen to the volume. The volume would go up because we would make more Canadian exporters competitive as far as financing is concerned. Today, they suffer from a competitive disadvantage. By introducing these new measures, the disadvantage will be averted.

I should like to pass around a colour chart at this time. I have left copies with the clerk. Normally, when I talk to bankers who have a driver's licence, I say, "It is simple: Green means full speed ahead, we cannot have enough of it, and red means stop, right turns only."

What you can see is that the two bars at the top are the EDC options. The first option shows EDC, which is the white column, doing all the loans and all that is left for us is the red part, which we are not particularly anxious to do. Alternatively, EDC says, "You can risk-share with us." That is the second option. We can do 25 or 40 per cent of the loan that they were already prepared to do themselves and, frankly, that is a little bit too much risk or too much red in proportion to the green. My alternative would be to use that same country limit, the red portion, in the United States, Australia or a couple of other countries that do it this way, and I get all this green for a little bit of red.

Senator Kroft: What does more red mean?

Mr. Kruyne: The worse the deal.

Senator Kroft: Does it not also mean more opportunity for you people to compete?

Mr. Kruyne: Absolutely, but we do not like to compete for bad deals; we like to compete for good deals.

Senator Kroft: If there is no red, then there is no opportunity for competition.

Mr. Kruyne: That is right. Therefore, we are not doing deals like that where there is only green.

U.S. exporters that have this program available can easily come to the banks, as Mr. Plumptre said earlier, and say, "Because I offer you 85 per cent of Uncle Sam's guarantee, can you not do the 15 per cent or perhaps a little more?" We do that. However, sometimes my risk committee does not like the pricing, and I have to let Nova Scotia do the deal.

The trick within our organization is to determine the mix. As somebody put it, we all like sweet and sour soup, but we do not like vinegar. If you consider the red to be the vinegar, then we are definitely not interested in these deals where a government Crown corporation is already doing that piece and all that is left for us is the red portion on its own.

Senator Angus: What confuses me, and I think some of my colleagues, is that Gowlings, having done their research, recommend recommendation 14 -- which I gather, if it were implemented as described in the reports, would make you all very happy. Am I correct in that?

Mr. Plumptre: Yes.

Senator Angus: However, the alliance, which I understand represents at least some of your customers, based on their presentation here, appears to be against it. Let me just make sure I understood. I think it was you, Mr. Plumptre. Their apparent opposition to it is more apparent than real; is that it? Was what we got not representative of the market?

Mr. Plumptre: It is not representative, in my view, of exporters in general across the country. I believe that view is shared.

Senator Angus: Your evidence to us, and it ties in with what Senator Kroft was getting at, is that the interests of Canadian exporters generally, based on your own commercial experience, is that they want this change, too?

Mr. Plumptre: They want the choice. I would not say they would use it on every occasion, but they would like to have the choice to facilitate particularly 100 per cent financing when they need it and to be able to check that they are getting the best possible price.

Senator Angus: That would leave just the fourth party, which, in terms of this review process, is EDC. Based on your discussions with them and the review of the evidence they gave in their initial presentation -- and I believe you know that they are coming back here again -- would you say they are modestly opposed, very opposed?

Mr. Plumptre: In their own synopsis, they say either "strongly opposed" or "in favour." For this one they have just put "opposed" rather than "strongly opposed."

Senator Angus: In the guarantee world, under today's rules that the Canadian people have to deal with, in many cases it is EDC's discretion, their call, whether or not you guys might be able to obtain a guarantee of any portion of the loan; is that correct?

Mr. Plumptre: Correct.

Senator Angus: It is completely an unlevel playing field. They decide and cherry-pick. It may not be convenient, their limit may be exhausted in a certain case, but they call the shots and you have no say; is that correct?

Mr. Plumptre: That is correct.

Senator Angus: I find the figures from RBC Dominion staggering. I think it would make sense if we could have these form part of the record, not only the colour bar chart, but these lists.

Mr. Kruyne: The source of those numbers is U.S. ExIm Bank.

Senator Angus: Your point of showing them to us is to demonstrate how it would open up the game of export finance to the private sector in Canada; is that right?

Mr. Kruyne: Perhaps I can clarify that. The point I am trying to make with those charts, and which I tried to articulate in my brief opening comments, is that if we change our system here it will not necessarily be a windfall for the banks. We are attracting competition into Canada.

What we are seeing in the U.S. is that they are getting a group of foreign banks, including some Canadian banks, who make their resources, their scarce country limits, available for their exports and then they compete with their own clients in Canada. That is bizarre.

Why should we let the Barclays and the Citibanks come into this country? If all five of us cannot compete with them, tough on us, but at least the Canadian exporters have a leg up. That is good for Canada. Maybe we will only do the payroll for those companies, but at least it is good for Canada.

Senator Angus: Could you state for the record one more time, because it flows from all of your written presentations, the difference between the regime in the U.S. as it exists today and the regime in Canada as it exists today?

Mr. Plumptre: I will open by saying that the fundamental difference is that the ExIm Bank, in its charter, is disbarred from competing with the private sector. It is only allowed to intervene when there is something required beyond what the private sector feels comfortable with, a gap.

They have the ability to do either direct lending or guarantees. The vast majority of their business is done on the basis of guarantees. They only involve themselves as direct lenders as a last resort, under specific circumstances that they have to justify.

There are many reasons for that, not unrelated to their own funding base, which is quite different from EDC. It is completely different in that sense.

Senator Angus: I think one of you said that we have visited that subject in the past, that we are not here to visit it today, that we are focused on recommendation 14.

Would that be a better system, in your opinion, for Canadian exporters, or is our market too small?

Mr. Plumptre: It could work here just as it works in almost every other country. Nowhere else is there the degree of competition where you have a public sector Crown corporation performing functions that could be done by the private sector.

Senator Angus: We are quite unique in that regard.

Mr. Leckie: Yes, we are.

The Chairman: Are you suggesting eliminating EDC?

Senator Angus: As I understand it, in international arenas uniformity tends to be a good thing. Our neighbour to the south has numerous banks, foreign, domestic and otherwise, providing credit to the exporters. The government institution is only there for the rainy day or the difficult situation; they are statutorily barred from playing. In Canada, the absolute reverse seems to be the case. It is a terrible thing.

Mr. Plumptre: To answer the question, we received a response from another export credit agency somewhere else in the world when we asked them about this. They said that to argue against introducing this product suggests an underlying belief that the Canadian market, the exporters, the banks, or EDC itself is unique and that balance of the world has it wrong.

Senator Angus: Is there a relationship between what you are advocating and the capital requirement rules and the proposed changes? If so, could you explain that, please?

Mr. Robbie: Under the Ball rules, assets that are guaranteed by OECD countries and the calculation of the capital allocation that you have to attach to that risk is a zero-weighted risk.

Senator Angus: If the guarantee is in place. If it is not, do the banks have to put up a big amount of capital?

Mr. Robbie: In that case, you would go into whatever the risk was for that particular country and that particular transaction. Depending on how you are weighting within your own rules, the capital could be very heavy weighted against that. The advantage here under the Ball rules and these transactions is that you get 85 per cent, which is zero. You might get 15 per cent, which would be 100 per cent weighting according to the Ball rules. However, because it is of a higher risk, with the internal risk-rating mechanisms within all of the major banks, they might in fact say that this is about the equivalent of 300 per cent. Therefore, the averaging of the two will get you to a position where you can be competitive. That is where the advantage is.

Senator Angus: These rules are about to be implemented?

Mr. Robbie: That part of it will not be changing.

Senator Angus: Other parts are charging.

Mr. Robbie: There is discussion around that, yes.

Senator Angus: For the purpose of this last question, I am assuming that if recommendation 14 of the Gowlings report is implemented and if the changes being contemplated on capital requirements are instituted there will be an ability for financial institutions like yours to aggressively seek new business. I am assuming that that will be the case -- and as a Conservative senator I think that is a good thing.

If that happens, do you envisage a trickle-down effect and a situation where other Canadian enterprises, not necessarily banks, would benefit? Would there then be new business opportunities for other private businesses in Canada?

Mr. Robbie: The principal trickle-down effect is that the large transactions will get a lot of attention. As you do large transactions, you build your business and tend to move down market. In fact, that is where the SMEs gain because there is a greater emphasis on that business as it moves down market. With greater capacity, it does benefit the SMEs. There is more opportunity out there. You have more people doing this business and there will be more support for this.

Senator Angus: What about insurance products, as an example? There is a debate as to whether or not EDC should be allowed in. The Gowlings report indicated that they visited it again and decided to EDC keep it. On the other hand, however, I heard a rumour that maybe they will be getting out. I do not know what the truth is.

Is it not logical that, if this new regime were would prevail, there would be more potential business for insurance companies or brokers?

Mr. Robbie: Not under the recommendation 14, which relates principally to the medium-term actions, which are not within the insurance market.

Senator Grafstein: Thank you for allowing me this opportunity to participate. I find this is very interesting. All of us have gone to banks for loans overseas or for things we are doing overseas, with mixed results. I am very interested.

I would like to look at it through the perspective of the small companies, the SMEs. Let my take you through some steps to understand what we are talking about.

First, we are not talking about Canadian-U.S. trade at all, are we? That is off the table. Therefore, 80 per cent of our trade is not included here. We are only talking about the 20 per cent that relates to all other trade, everywhere in the world.

When we look at that 20 per cent, we take a look at it through eyes of the SMEs and we find that they get less than 5 per cent of the $34 billion that the EDC does. In effect, there is not a lot of trickle down at this moment for SMEs as a percentage of total business that even the EDC does. We are talking about a fight for major corporate clients in the consensus range as opposed to focusing on SMEs overseas in risk-diverse countries. Is that a fair enough comment?

Mr. Plumptre: Yes.

Senator Grafstein: Very well. We would not do much if we opened it up to small business. We would not be doing a lot to help small business because, as one witness said fairly, the fight would be for the large accounts and there might be some trickle-down effect for smaller accounts at the end of the day. Therefore, the small accounts would get the short end of the activity. I assume that that is a fair comment.

Do not debate me on this; I will get to my fundamental point. If the banking committee took the position that we welcome competition -- and you have heard from senators on both sides that as a question of principle we do; more competition, more loans, and so on.

If you were allowed to compete fully with the EDC, what would be the total amount of new business that you think would be generated in this category?

The business currently is $34 billion. It is a fairly small percentage of our total trade. What percentage increase do you think would result from more institutions being in the field?

The Chairman: Is it a fact that trade with the US is not included in the numbers?

Senator Grafstein: I take it that when we say that 80 per cent of our trade is with the U.S. -- I would say that the overwhelming proportion of that is covered by natural, normal commercial transactions -- there is not much risk.

The Chairman: We were told by a witness recently that EDC was financing some small airlines for purchases from Bombardier.

Senator Grafstein: I would assume that it would be de minimis. We will hear from EDC on that.

Mr. Plumptre: It would be on commercial terms, not consensus terms.

Mr. Wren: They are doing some export financing transactions through the United States. There is large capital goods financing which we just cannot compete on. The EDC proposals often make it prohibitive for the banks to enter into it.

In terms of your other question, it is very hard to quantify what the actual trickle-down effect is. If you take the Northstar example -- and some of my colleagues hate me talking about that -- I think it is a very good example of a company that was created to fill a need that was not being met. We had smaller companies that could not get five-year financing on their export transactions to include in their bid on the transaction. There are numerous examples within Northstar of successes of companies because they have had that financing package available. This is a collaboration between EDC and the banks, and it is almost the same thing we are talking about here. You have what almost amounts to a government guarantee, and you have the banks doing the funding and the management and all the other things that go with it, the packaging. It has been successful for exporters.

This gets back to Senator Angus's questions on the issue of the mid-sized exporter. Right now they do not have a choice of financing proposals from which to choose. People often say that the smaller exporters are not complaining. With all due respect to the exporters, one has to ask: Compared to what? All they have to compare it with is an EDC proposal. They do not have access to other export credit agencies or the ability to source materials from other countries. They have not had exposure to other ECAs, so they do not know the type of financing that is available and what it would look like if they had five banks and the EDC bidding on the same deal. I think there would actually be more opportunities for smaller exporters to be competitive if a number of banks were competing for their financing.

We talked about management in these situations. You get your feet wet in a country by doing a deal that is 85 per cent guaranteed. Then, as that loan rolls off, you do not necessarily discard that capability or that capacity in that country because you now have other capacity or other lines that you can use for other deals. I would argue that that will trickle down into the mid-sized and smaller companies as well.

Senator Grafstein: Let me ask another specific question. Assuming our objective, based on what Senator Kroft says, is to pursue Canadian interests abroad and at home, what would you say if this committee decided to tell the government that it agrees with your contention that recommendation 14 be adopted but with a caveat that there be a ratio of SME loans to larger loans -- let us assume a 60-40 ratio, 60 to small as opposed to 40 to large -- and then we would fight about definitions and then satisfy ourselves that we in effect have been supporting all Canadian interests, not just major corporations? What would you say to that?

Senator Angus: No wonder you are not on this committee.

Senator Grafstein: I am not a full member of this committee. Perhaps my colleagues will see to it that I am no longer allowed to ask questions after this.

Mr. Robbie: There is a difficulty with putting in ratios such as you suggest, although they are definitely ones that you want to have so that there is a greater efforts to bring the SMEs into the marketplace and to give them that opportunity to pursue those markets. If you bring that in at the outset, it would be self-defeating, because there will not be the capacity in the SME market or the demand in the SME market, so it would inhibit the ability to do any of the larger transactions. You must remember that the larger transactions are where you will make the greatest amount of money and where you put the resources. You will build the business based upon that. Then it is a natural thing that you move down the market as you have the money to invest.

Senator Grafstein: I will conclude with another question, if I might. As a question of evolution, has there been the expertise within the Canadian banking system dedicated to certain regions of the world? I am very familiar with Bank of Nova Scotia overseas, and the Royal Bank. I am not as familiar with others. We looked at this question in another committee. Canadian banks were over in Germany and they expanded magnificently, but then, two or three years later, they came home dragging their feet because they got clobbered by the German banking community. That affected a lot of Canadian growth in that market. If you look at Canada-German trade, it is really a sad story -- for many different reasons, but that may be one.

Is there some built-in natural evolution where banks specialize? For example, one bank might specialize in South America, one in Africa, one in Asia. That would make it much more efficient for us to allow competition and at the same time develop expertise within a market that would ultimately trickle down to SMEs.

Mr. Kruyne: I will try to answer that. I think there is efficiency in specialization, a bank saying, "My strength happens to be in Latin America, that is where I have been for a couple of hundred years." We would claim we have been for 100 years in certain parts of Latin America. Each of us, when we talk to our clients, and when we talk to our own staff, will say, "This is where we focus." We talk to where we have our competitive strength. I do not think you can regulate that. We are constantly shifting and moving and searching for the best opportunities to support our clients, and by supporting our clients, cost effectively and properly, we support our shareholders because we make a return in doing what we do right.

The world changes. Five years ago, we thought that more exports to Asia was just absolutely great. It only lasted two years and then all of Asia collapsed, although now it is blossoming again. Different banks have different ways of dealing with that.

That specialization is part of what the whole open market system is built to do. We in the Royal Bank are looking at our Schedule I competitors and at some of our Schedule II competitors and asking: Where are they? How can we get better than they are so that we can build the business? I do not want to run a commercial, and I will keep this brief, but I would say that soon the Royal Bank will have the largest network in Asia. I am not sure Mr. Plumptre will agree, but will say, "You just closed your branch in Korea." Yes, but stay tuned. We will just find a different way of delivering service better than we could do it any other way for Asia because we think there is a lot of potential.

Banks are making those shifts, but it is not something you can regulate. You have to be very nimble to find the opportunities and ask yourself some questions: Is there a way to do it cost effectively? Can we do it ourselves? Should we do it with another bank? Do we form an alliance or do a takeover? Those kinds of issues come into play. It is also why we could ask: Why does EDC want to open offices when banks are already moving around and deciding if we can justify the cost of having our own office in Sao Paulo or Beijing? Why do we need to duplicate that? There seems to be an inefficiency built in. I hope that answers the question.

Senator Oliver: I am a member of the committee. I was the first person here and two hours later I get to ask a question. Needless to say, many of the questions I wanted to ask have already been answered. However, I do want to cover a few things.

If you have read the transcripts, you will know that I have been concerned that EDC was a monopoly and that it was putting a squeeze on Canada's commercial banks and that they were at an unfair advantage. I am happy to see you here and see you responding to some of those concerns that I had.

I am aware, however, that you are here really in support of recommendation 14, which talks about a guarantee that would make it easier for you to compete. What I do not know, and what has not been made clear here today because you have elected to talk largely about recommendation 14, is in what way have you been prejudiced. In what way have you been limited? In what way have you lost out on business? How can you quantify it? I think the record would be deficient unless you told us some of that information. What if recommendation 14 is not acted upon? Then what? Where are you vis-à-vis EDC and what are you losing out on? How will this affect your growth?

Mr. Leckie: As the unit head of our business, I have a fair amount of control. Once I the get the capital allocated to me to run the business, I have a fair degree of control concerning where to allocate that capital, both financial capital and human resource capital. I will move that around, as any business person would, to where the activity is found. For example, if I am doing a lot of ExIm stuff out of Chicago, that is where I am moving the capital and the people and that is where I will get the business. That is a clear part of the answer.

We want to work with the EDC. This country is too small to have them and us. We need the EDC and I think they need us. Some days, we even agree upon that. EDC should also be permitted to sell its assets and do pension funds and create more leverage of the scarce capital that there is in this country. We want to be able to do the same thing, though.

The name of the game now is syndication and distribution of these assets. As bankers, we have the skill base, as do the EDC, who are very professional. We should all be brought to the table, along with private insurance sector. We should all sit down and figure out how to make recommendation 14 work, how to package deals competitively, and how to sell them into the rest of the world. Our own pension funds in Canada have an appetite for this, in particular as the government pays off its debt. There are less bonds to invest in and there is an opportunity to find places in which to package these deals and sell them off to get more leverage out of the capital that EDC and the banks have, and so on.

This trickles down to the SMEs by virtue of knowledge. In the end, we are selling knowledge and advice to the SMEs. We learned how to do the cable business at the TD Bank by dealing with Ted Rogers. He taught us how to do cable business. As a result of that, we can drive that down into the communications business at a very low level. We can do the same thing with trade. We learn it by dealing with Nortel, Bombardier, and the professionals at the top end of the segment. Through that knowledge, our people become skilled and are able to sell it in Smoky Lake, Alberta, and so on. That is my attempt at an answer.

Senator Oliver: I would like to hear more. That is not what I was looking for in response to my question. I want to know how you have been aggrieved. If recommendation 14 is not passed, what is your status? Shall we leave things as they are? How serious is this recommendation? What will happen?

Mr. Leckie: The resource and financial capital will tend to gravitate to other parts of the world where they do more activity.

Senator Oliver: It is not that serious a problem to you, then.

Mr. Leckie: It is to Canadian SMEs and corporate companies, who will not have the benefit of more choice. We will exit. As Mr. Plumptre mentioned, Citicorp is not here and many companies have left. The players will pull out.

Senator Oliver: That is not the reason Citicorp is not here, though.

Mr. Plumptre: You asked how we felt disadvantaged. I am very encouraged that you are worried about us. However, I do not think the issue is whether the banks are disadvantaged; it is more a question of whether the exporters are disadvantaged.

From a bank point of view, compared to other banks in other countries, we are disadvantaged in that we do not have in our portfolios a large part of export credit guaranteed lending; that is, the income from which we can use as a base to develop the skills that we have been talking about.

Senator Oliver: The disadvantage is that, once the guarantee, which is recommendation 14, is in place, then you are on an equal footing.

Mr. Plumptre: That is right. We would develop the skills. At the moment, there is very little motivation to do that in Canada. Many of us have those skills in other centres, just as banks in those other centres have become market leaders because they have that motivation in the local markets.

The Chairman: Is not the simple answer that you do not have access to government guarantees at this moment?

Mr. Plumptre: Yes; that is right.

The Chairman: That is why you are disadvantaged.

Senator Oliver: The United States, as you have explained in answer to other questions, certainly uses the guarantee system. You have told us how effective it is there and how successful it is there for them. In Canada, we are a committee of Parliament, and we are always looking at good, new public policy. Apart from the guarantee, what other role do you think the Government of Canada should be playing with its Crowns to ensure that we can enhance the ability of our exporters to compete internationally?

Mr. Plumptre: For many years, we have been advocating a program similar to ExIm Bank's working capital guarantee program. I am afraid the "guarantee" word invariably arises because these agencies are there to complement and supplement the private sector. Over many months of examination at the time of the review of the EDC legislation six years ago -- that is, in many committees with three ministries -- we looked at the needs of SMEs. Overwhelmingly, the fundamental requirement was preshipment working capital guarantee with working capital finance beyond what the banks were already prepared to do. The ExIm Bank program, their working capital guarantee program, which is delivered through the banking system, has been a resounding success. I still believe -- and I believe my colleagues agree -- that need is still there in the Canadian marketplace. The other alternatives, some of which have been mentioned, do not come anywhere near meeting those needs and have not generated the volumes of preshipment finance that is required. That would be one specific instance that I would cite.

Senator Oliver: Is there any evidence that, in relation to your bank commercial export clients, when you are getting ready to finance a deal for one of your clients you find yourself in competition with EDC? Is that a problem at all?

Mr. Wren: It happens constantly. In fact, there is a general reluctance among banks to refer a client to EDC for fear of being left out of the picture. Most of the deals that we do work on directly with large exporters and large deals are those where, because of the type of transaction or the choice of the exporter, they do not want to involve EDC. It is because they think they can do it using the banks only and they would rather reserve the EDC for the more difficult transactions.

We have examples also of very commercial, viable deals where three banks were competing for the transaction. We won the bid and then EDC came in and underpriced the deal. It was a very bankable deal.

Senator Oliver: It was a pricing issue. You are now answering my first question. On pricing, then, you cannot compete.

Mr. Wren: Not by and large. Even in the short-term sector, if EDC decides that they will grow their market share in a particular country, they can compete with us on price aggressively. The beneficiary of that normally is the foreign buyer, not the Canadian exporter. The exporter is not paying the fees, they are taking business away from Canadian banks.

Senator Oliver: Do the rest of you agree with that?

Mr. Robbie: Yes.

Mr. Plumptre: Yes.

Senator Oliver: That was my first question.

Senator Kelleher: I wish to explain to the members appearing before us that I am not getting involved here because I am counsel to Gowlings. Since we are focused on recommendation 14, I felt it would be inappropriate for me to get involved in this discussion.

Senator Tkachuk: I want to get to the crux of this issue, because I fail to see it as a problem. If recommendation 14 were implemented, what negative effect would it have on Canadian businesses? Would there be any negative effect?

Mr. Plumptre: Not that I can see. No exporter would use it if it did not offer an advantage.

Senator Tkachuk: I am having a difficult time understanding why exporters would object to this provision. Surely, the only reason cannot be, as one of you said, that they were weaned on EDC. It seems to me that with five banks that have offices all over the country it would be easier to get information. Besides the point about weaning, is there another reason?

Mr. Plumptre: The exporters who speak as the lobby group, which is the Alliance, are represented by a few very large exporters on whom EDC depends for its large ticket business. Indeed, they depend very heavily on EDC for their flagship export contracts overseas. For that reason, those exporters are able to get what they need. As I said, they do not want to rock the boat. In our discussions across the country with other exporters, there is not quite the same degree of comfort with the status quo. We have canvassed many exporters. We have asked them: Are there occasions when you might look to do this? Predictably, their answer has been, "Yes." It would not be as an alternative to EDC in every case -- but to be allowed to have the choice. I do not see that there is a disadvantage there.

Senator Tkachuk: I am not an exporter and I do not understand the business. It seems to me that the reason for this is that they are all indebted in some way for the work that EDC may have helped them with. Would this also not impede competition? After all, what we are trying to promote in this country is more competition, more exports, more productivity and cheaper products.

For example, let us say that EDC, which is the monopoly that it is in this business, were funding a snowmobile exporter that was sending machines to Sweden. Let us say that in British Columbia there is a smart little operator building a better, faster and cheaper snowmobile. How can he do business with EDC? Would this not put at risk the contract that the original company has?

Mr. Plumptre: I take it that you are referring to a conflict of interest.

Senator Tkachuk: That is right.

Mr. Plumptre: I am sure EDC, as a Crown corporation, would say it is completely even-handed. They would not differentiate to whom they give cover. Everyone has equal access. I am not used to speaking for them, but I think that is what they would say.

Senator Tkachuk: May I ask how they would deal with that situation? I think it is a problem.

Mr. Plumptre: They would give the same terms. There have been occasions when two different Canadian exporters have been bidding for the same overseas contract. I am quite sure EDC would give the same terms to both. I am sure they are bound to do that. They are not allowed to offer preferential cover to one and not the other. That would be my understanding.

Senator Grafstein: In Canada, EDC does $34 billion worth of business. I tried to get from your charts what ExIm Bank does. As a percentage, what is its total volume? Canada accounts roughly for 10 per cent of what the United States does. What is ExIm's total business, both in terms of what it does directly and what it does with the banks?

Mr. Robbie: Are you asking what they would provide in terms of guarantees?

Senator Grafstein: Yes.

Mr. Robbie: I do not have the answer.

Mr. Leckie: It is a lot lower. I do not know the number. However, it does not fit the 10 per cent rule. That is probably because American companies line up their financing independently and do not need as much help at this stage of their development. They are multinationals. They are on the ground locally. They, perhaps, even manufacture locally.

The Chairman: Thank you, gentlemen. The meeting has been very informative.

The committee adjourned.


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