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