Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 7 - Evidence - Meeting of June 18, 2009
OTTAWA, Thursday, June 18, 2009
The Standing Senate Committee on Agriculture and Forestry met this day at 8:05 a.m. to study on the current state and future of Canada's forest sector.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: Honourable senators, I welcome you to this meeting of the Standing Senate Committee on Agriculture and Forestry. I am Percy Mockler from New Brunswick, chair of the committee. I would like to start by asking the members of the committee here today to introduce themselves.
Senator Fairbairn: I am Senator Joyce Fairbairn from Lethbridge, Alberta. I am glad to see these gentlemen here; they are practically part of this committee because they were with us during the bovine spongiform encephalopathy — BSE — crisis, so they are glad to come back.
Senator Mahovlich: I am Senator Frank Mahovlich from Ontario.
Senator Cordy: I am Senator Jane Cordy from Nova Scotia.
Senator Mercer: I am Senator Terry Mercer from Nova Scotia.
Senator Eaton: I am Senator Nicole Eaton from Ontario.
Senator Brazeau: I am Senator Patrick Brazeau from Quebec.
Senator Rivard: I am Senator Michel Rivard from Quebec.
The Chair: Thank you. The committee is continuing its study on the current state and future of Canada's forest sector.
Since the beginning of our study we have heard witnesses sharing and commenting on the difficulty of accessing credit for the forest industries. At the last meeting, it was decided that we would hear witnesses on that subject. We welcome today the following representatives of the Canadian Bankers Association: Terry Campbell, Vice-President, Policy; and Marion G. Wrobel, Director, Market and Regulatory Developments.
On behalf of the committee, thank you again. I would now invite you to make your presentation, followed by questions to the witnesses. Mr. Campbell, please proceed.
Terry Campbell, Vice-President, Policy, Canadian Bankers Association: Thank you very much, chair and members of the committee. Good morning. We have circulated a package to committee members in French and English. It is our pleasure to be here today to participate in the committee's discussions on Canada's forestry industry. I would like to provide an overview of the credit and financial market developments in general in Canada, also to speak about some of the recent federal government initiatives to support access to financing and how banks are cooperating with government agencies, such the Business Development Bank of Canada, BDC, and Export Development Canada, EDC.
We know the committee will have a number of questions about the credit market and the forest sector, in particular. We would be pleased to respond to those questions in the follow-up discussions.
The Canadian Bankers Association, CBA, represents our 50 member banks as well as a quarter of a million employees across the country. Our members are key contributors to local and provincial economies and to the national economy. As members of this committee and Canadians across the country know, Canada and the rest of the global economy are facing some very serious financial and economic challenges. It is true that the Canadian banking system is in much better shape than our international peers, and it is true that the Canadian economy entered this recession in much better shape than economies in other major jurisdictions. It is also true that the impacts of the turmoil are clearly being felt in Canada. These impacts are affecting the environment in which financial markets work and in which banks operate. That is the background for some of the observations we will share with the committee today.
Let us turn to the key question of access to credit. There is no doubt that the recession is hitting some businesses very hard, and we have the example of the forest sector before us. Across the economy, a serious slowing of business credit from some non-bank sources has occurred. We know that some businesses are reporting that they are having a difficult time finding credit. Let us look at the role of banks in this environment.
The first point to bear in mind is that at about $325 billion in lending, banks provide just over 25 per cent of total business financing and about 50 per cent of business credit. The remaining 25 per cent comes from a range of other sources, including the debt and equity markets, other types of regulated financial institutions and unregulated institutions, such as leasing and finance companies. It is in these non-bank parts of the marketplace where there have been serious disruptions. Banks have been trying to fill the gaps left by these other providers, but we cannot take up all the slack. I will come back to that in a moment.
The second point is that banks make lending decisions on an individual, case-by-case basis. It is the credit worthiness of individual borrowers that determines access to credit. One key reason that the banking industry in Canada came into this crisis stronger than any other banking sector in the world and that we will emerge from it more quickly than others will emerge is that Canadian banks have been prudent and careful lenders. The CEO of one bank recently said that we are in the business of making loans to people who will pay them back. Frankly, part of the problem that we have seen in many other countries around the world is that their financial institutions were not as prudent or as careful in their approach.
My third point follows from my previous points: Banking is a relationship business. Banking and banks have a long history of helping their customers through difficult economic periods. Senator Fairbairn mentioned, in her introduction, the work that this committee has done on BSE a few years ago. That was a good example of the type of things we talked about. That was a very intense period when there were fundamental threats to a particular sector. In the majority of cases, we tried to work with our customers to see them through; and we did so.
Today we are doing the same thing with our business and personal customers. We understand that some customers are going through difficult times. We are asking our customers to come in and talk with their banker to see if solutions can be worked out. We want our customers to succeed. It sounds trite to say this, but we succeed when our customers succeed, and we want that to be the case.
The financial market turbulence began in the summer of 2007 with the problems in the U.S. subprime market. I emphasize that the problems did not start in Canada but elsewhere. We have seen two major developments: First, as I mentioned, we have seen major disruptions in the non-bank part of the financial marketplace. Basically, large parts the marketplace simply stopped functioning properly. Second, the cost of the increase in funding for banks, which banks need in order to lend, was significant relative to historical norms.
We will look at those aspects. As certain parts of the non-bank financial system either stopped functioning or slowed over the last couple of years, bank lending continued to grow faster than the market as a whole. In Canada, banks were taking up a large part of the slack left by others, which meant that customers were returning to banks when other options were no longer available. Given the size of our sector relative to the marketplace as a whole and given the legislative regulatory system under which we operate, we were not able to take up all the slack, but we were able to step up to the plate to try to fill the gaps. In fact, bank lending over the latter part of 2008 expanded rapidly, growing between 10 per cent and 15 per cent on a year-over-year basis, which was faster than the rest of the financial sector over this period.
It is true and important to note that as the recession has taken hold, demand for credit has declined as businesses have put their expansion and investment plans on hold. This decline has been reflected in a slowing of bank lending. Nevertheless, the increase in bank lending year over year continues to be greater than total business financing across the marketplace. In May 2009, bank lending to businesses was 6.3 per cent greater than it was during the same period in 2008. It was higher than the increase in financing across the board.
Let me turn to the issue of the cost of credit. To be able to lend to individuals and to businesses, banks need to raise funds and borrow in the marketplace. Over the last several months, two key dynamics have been at work. First, the relative cost of the funding for banks has been higher than normal because of the turmoil in the international marketplace. Some financing sources, such as the commercial paper market, ceased to function. When that happened, other sources became relatively more expensive. Second, a higher level of risk exists in the marketplace today, which needs to be reflected in the pricing of credit.
In this context, I want to raise an issue that is top of mind for many parliamentarians — the Bank of Canada rate and the borrowing cost. Banks do not source their funding on the Bank of Canada overnight rate, which you see quoted from time to time. That rate is used by the Bank of Canada to lend to banks overnight to settle transactions between themselves. It is literally an overnight rate that is a short-term funding mechanism representing less than 1 per cent of bank funding. It does not go to the cost that banks face to raise funds in the marketplace. To raise funds, banks need to go to the bond market and so on. They need to raise capital if they are to lend more. In all of these cases, the funding costs are kind of ``sticky,'' by which I mean that as other costs have changed or decreased, the costs faced by banks have not come down. They are relatively high compared to historical norms. We can explain this in more detail during the discussion, and we look forward to that. The key point to leave you with is that the cost of funds remains relatively high.
As I mentioned, the second key dynamic is the growing level of risk in the economy. A general re-pricing of risk has taken place in the financial markets as the economy has entered the recession and as the probability of loan losses has increased. Provisions for credit losses — the funds set aside to cover losses — for the big six banks in the second quarter of this year increased 166 per cent compared to the second quarter of 2008. Total write-offs — losses experienced by the banks — in the second quarter of this year, increased 103 per cent over the same time last year. As cautious and prudent lenders, banks need to factor this new risk profile into the lending terms they set. If credit is not properly priced to risk, it becomes less available. In fact, if you can price according to risk, it allows banks to keep lending. That is the dynamic happening here.
In all of this, I would like to emphasize a key point. Although the relative costs that we face are higher, generally speaking, we are operating in a much lower interest rate environment than was the case even as short as two years ago. Last week, the federal Department of Finance Canada issued a paper wherein they noted that average interest rates have fallen steadily for both households and business. The average effective business interest rates were 4.16 per cent in May, compared to 5.75 per cent in December 2008. From a consumer point of view, times have never been so good for a mortgage, particularly if you have a rate tied to prime. We are talking about relative costs here. Over all, the actual interest rates are lower than many years.
Finally, I would like to talk about working with the government on access-to-credit issues. On the broader economic situation, as you know, the government has increased funding for BDC and EDC, both of whom provide financing options that complement bank lending. Our banks, our members, are working very closely with these Crown agencies to make credit available to creditworthy businesses. We are working quite cooperatively and intensively, and we are looking forward to continued cooperation with those agencies. In particular, we are working with the government through its Business Credit Availability Program, BCAP. We support its principles, namely, that it should be done in cooperation with the private sector, which it is; that it should lead to incremental additional financing; and that the financing should be on commercial terms and should be directed to firms that have viable business models.
In closing, I will say a few things. First, Canada's banks are very strong and secure. That is good for our country, particularly when we look at the financial sectors in the rest of the world. Canadians remain confident in their banking system. This is an advantage that Canada has relative to other countries. Keeping that advantage will be crucial to the recovery of Canada's economy and to the long-term prosperity of Canadians.
We know that the country is going through some challenging times. Our banks will do their part. They will continue to loan prudently and to protect their depositors' money. They will be there to lend to creditworthy individuals and businesses. We do that because we know that consumers and businesses are the drivers of the Canadian economy.
Mr. Chair and senators, thank you very much for the opportunity to make these remarks. Mr. Wrobel and I look forward to having a good discussion with you.
The Chair: Thank you, sir. We will start with Senator Mercer.
Senator Mercer: Thank you, gentlemen, for being here. We appreciate that you have a unique role to play in this, but you are not a popular bunch of people, bankers. From those of us who are politicians, welcome to our world. I suppose it could be worse; I could be a lawyer.
If this is really a supply-and-demand business — and, you have said that demand for credit has declined — should it not follow that the supply and the cost of the product should go down? Why does a simple business-101 principle not work this time?
Mr. Campbell: You are saying that it is in fact working. You are absolutely right. Let us look at the demand side. As I mentioned briefly in my remarks, when you enter a recession — and this is true now and true of other recessions — typically, you see that the demand for credit is lower. The reason for that is that businesses will decide to put off their investment plans and their expansions. They will hunker down and batten down the hatches to try to get through, so there is less demand for credit. We see that now.
Before we came here, I was looking at a report from PricewaterhouseCoopers that was specifically on the forestry sector. It was as of March of this year. PricewaterhouseCoopers was saying that, at that time, these were challenging times for the forestry sector and hundreds of millions of dollars in losses had occurred. What has been the industry response? They have said that they have been curtailing production, deferring capital spending and reducing working capital, all of which means that they are in hunker-down mode and reducing demands. That is on the demand side.
In terms of supply — and this is not specifically in the forestry sector, this is across the economy as a whole now — large parts of the supply side just stopped working, for example, the securitization market and the commercial paper market. There was not a single initial public offering, IPO, in the last half of 2008. The bond market was disrupted. Any company that relied upon securitization to carry on business and do lending just disrupted. Large parts of the supply were gone. Those customers were asking what they should do. They would turn to the banks in many cases, and we would service them as best we could. We have a certain profile of the types of lending we do. We are low-risk, prudent lenders. We service as best we can, but a problem existed in the marketplace as a whole. The government has tried to step up to the plate with various extraordinary programs.
The key factor with respect to the rates and terms is that, overall, you are seeing a much lower interest rate environment. On a personal level, in terms of mortgages, if you have a mortgage tied to prime you are paying 2 per cent or 3 per cent or even less. I think my colleague has such a mortgage, and he gloats about it to me every day. It is extraordinarily low by historic standards and ditto for business financing. The other thing that must be borne in mind is that we have to price for risk. We have to really bear in mind where the marketplace as a whole is going and where our individual consumers are going. It is something that is approached on a case-by-case basis. A bank or any other lender will grant credit and set terms. I think it is working relatively well.
Senator Mercer: I do not want to give you the impression that we are totally against you. We have all agreed that one of the great benefits that Canadians have had throughout this economic downturn internationally is that we do have a sound banking system and are regulated to protect not only investors and the banks but also Canadians.
At the same time, you have talked about credit losses. You mentioned an increase of 166 per cent of credit losses compared to the second quarter for 2008. Total write-off losses with six major banks were $1.9 billion in the second quarter of 2009, an increase of 103 per cent. Those are scary numbers.
Another number that Canadians see every quarter is the profit side. They look at what is happening to them. In the sector that we are talking about, 55,000 Canadians have lost their jobs. They look at their availability of credit. They recognize the risks that banks have taken and the losses that they have taken, but the profit side has not taken the same hit in many cases.
Mr. Campbell: First, there has been a hit in profit. I do not have the specific numbers before me, but if you look at this year compared to last year, quite a significant hit in profit in the banking industry has taken place. We have to be careful here. I take your point entirely about it being important in this country to have a strong banking system because we see the problems elsewhere in the world where they do not have financial systems in their countries that are as well regulated and well managed. That is playing real havoc with the economy.
It is important to have strong financial institutions and profitability is part of that. It has taken a hit, not only for businesses but for pension plans and individuals who own mutual funds or have bank stocks in their pension plans.
The continued strength of the sector is critical. To be profitable and strong on a continuing basis allows us to continue lending. My remarks today summarize it; maybe my colleague wishes to make further comments. Bank lending — we have been tracking this intensively since the financial crisis hit in September and October — has increased every month for the same period year over year. We can do that because we remain relatively strong.
Marion G. Wrobel, Director, Market and Regulatory Developments, Canadian Bankers Association: Profits add to the capital base of banks. Jurisdictions where banks are not profitable are those where they are having problems lending to their customers. It comes out of the capital base if we are losing money. The lower our capital base, the less able we are to make new lending. Profitability is actually something that enables banks to continue lending to their customers, both businesses and households.
Senator Mercer: I am glad we put that on the record. It is a difficult concept for those 55,000 unemployed people to grasp and understand.
The Business Development Bank of Canada has finally activated a program, which was announced a number of times, called the Operating Line of Credit Guarantee. I understand Bank of Montreal, RBC, Scotiabank and Desjardins are all participants in that.
Mr. Campbell: Add CIBC as well.
Senator Mercer: The BDC did not give me CIBC when I spoke to them, but that is fine.
It seems to me that this is a product that we need not only from BDC but also the banks themselves need to add to their market mix in how they service their customers. This is a good program where the federal government offers guarantees for extending lines of credit for small business people to continue operating in rural communities across the country. Has that begun to take hold in the industry?
The program is there, but the BDC does not operate in all the communities in which your banks operate.
Mr. Campbell: It is an interesting new and innovative program. It is not something BDC has done before. They had a different line of business that offered term and specialized loans and sometimes venture capital. This is new for them.
We have been in close dialogue with the BDC for the last several months. We know they have been working on it intensively. It is exactly as you describe it. If a financial institution, such as a bank, already extends a line of credit to a business and you want to be able to provide additional incremental financing, the client — the business — and the bank can say to BDC that if they can guarantee this, the bank could increase it. Credit is not increased willy-nilly. It has to be secured by accounts receivable or inventory, and the plan has to be viable. If BDC agrees, they will guarantee up to 80 per cent.
You talk about take-up from the banks. We listed the banks who have signed up. It is a new program, and, to my understanding, it was only announced within the last few weeks. It is in start-up mode. Let us see how it works. However, the concept is a very good idea.
Senator Eaton: You talked about mortgages. I heard a story from an American this winter, a Ford family member. They said that Ford mortgaged everything they had a couple of years ago and would be able to see themselves through the recession until 2011 or 2012.
Have you seen many forestry companies mortgage their assets and take money from the mortgages to redevelop or reorganize themselves?
Mr. Campbell: We do not have that level of detail. Those would be individual business transactions between a specific company and a specific lender. Our members do not share details of that for confidentiality and privacy reasons. Generally, Ford might have been in a better position to be able to do that more readily given their breadth and scope.
I believe Mr. Marcotte from Export Development Canada, who appeared before your committee last week, was talking about the issue of getting the right level of debt. The concern is about piling more debt onto a business already deeply indebted. We have to be careful because we must think about the capacity to manage that through.
It may make sense to do exactly what you said if the company has, generally speaking, a strong balance sheet, a business plan for the next 18 to 24 months and a good glide path to get out of the problem. However, we have other cases where simply piling more debt on a business may not be the best way to go.
Mr. Wrobel: On that point, senator, the Bank of Canada released its financial system review a couple of days ago. A chart in the review looks at the wood and paper industry. The debt-to-equity ratio over the last couple of years has gone up a little, but it is still within the range in which it has been operating for the last few years. The problem with the industry is that the return on equity is heavily negative. That is the real issue with that industry.
Senator Eaton: Has the recession given banks an opportunity to look at more imaginative ways of helping sectors, such as the forestry industry, retool or see themselves through to the next better time?
Mr. Campbell: I think the answer is, yes, generally. We are speaking specifically about forestry here, but I will talk about the economy as a whole.
Let us focus on two aspects. First, in terms of banks being creative and innovative in helping their clients, I made brief reference to this in my remarks. Since the financial crisis and then the actual economic crisis hit, banks have been proactively reaching out to customers, both individuals and businesses. You may have seen full-page ads in newspapers and television ads.
Banks will reach out to customers also on a client-by-client basis where they perceive there might be some difficulties managing finances and loans. They are asking clients to go in and talk to them so they can look at putting together a restructured package. In other words, they can be creative on the financing: restructure the financing, put it on different terms, repackage it or have interest only payments. A range of options is possible. A much more intensive focus is on that currently, and they are doing that quite actively.
Second, in working with customers to put in place a different business plan, banks are more than simply lenders; they are business advisers.
Mr. Wrobel: I will give another example outside of the forestry sector. Mr. Campbell talked about the automotive sector. Other parts of the market were not working well last year. Many leasing and capital financing companies were simply not able to operate. Bank lending to consumers for the purchase of automobiles rose 30 per cent in one year. Part of the market was not functioning well and those customers came to the banks, which expanded their lending substantially. Financing the sale of cars is important for automobile dealers. It enabled that part of the industry to continue selling cars because the banks were able to take up the slack.
Mr. Campbell: It is a relationship business, part of which is the advisory function. To continue financing, we would like to see a business plan 18 to 24 months out. It is not a one-way street because there is a dialogue. I believe that what you were pointing at is happening.
Senator Mahovlich: With the housing problem in the United States where building starts have slowed, are we looking to China and the European Union for the export of our lumber? Are we doing enough? Do Canadian banks borrow money from China?
Mr. Campbell: On the first question, you have touched on an area where more effort and attention needs to be placed. A great deal of focus has been on the U.S. market to export Canadian lumber and probably insufficient diversification around the rest of the world. In some ways, it is easy and natural because they build their houses in the same way that we build our houses. Going forward, there is an opportunity to educate, showcase and market Canadian wood-framing construction methods. Much more could be done in that regard.
Over the course of the committee's hearings into this issue, it has likely become evident that it involves more than marketing our traditional ways of doing business, such as selling our lumber. We see are opportunities for more value- added approaches, such as selling the so-called ``house in a box.'' In other areas, we see additional opportunities for value added in pulp, nanotechnology and biomass. Certainly, we have focused on the United States, and with the collapse of that market, we are seeing the ripple effect in Canada.
In terms of Canadian banks borrowing in China, I do not think that is typical of our funding patterns. However, capital markets are international and separating the origins of the dollars is difficult to do. I stand to be corrected, but I do not think much capital is being raised in China.
Senator Mahovlich: I have heard that the United States borrows frequently from China.
Mr. Campbell: That applies more to the U.S. government. China owns an awful lot of U.S. Treasury. Most people have said that quite a bit of imbalance exists that is only now working itself out.
Senator Mahovlich: Our forest sector is having problems and borrows money at 3 per cent. How many years are they locked into that rate? If the market turns around and interest rates rise, does their rate increase?
Mr. Wrobel: It depends on the terms of the loan. As with consumers, they can borrow at fixed rates or variable rates. Many of the rates are tied to the prime rate and will fluctuate as the prime fluctuates. Alternatively, fixed rates are available, which are generally higher than variable rates. It depends on who is taking the risk. The Bank of Canada prime rate is at historical lows and will stay at its current level for the next year unless things change dramatically. Borrowers will make decisions based on that.
Senator Mahovlich: In 1980, my mother was receiving 18 per cent on her investment at the bank.
Mr. Wrobel: Inflation was high at that time. Today, the Bank of Canada is targeting a 2 per cent inflation rate with 1 percentage point on either side. That drives the Bank of Canada's policies.
[Translation]
Senator Rivard: In the course of our study, we have heard testimony from representatives of forestry company associations. Some have told us that they have members who have been forced to refinance their bank loans at rates as high as 20 per cent. Can you explain under what circumstances that happens and, especially, what chances of survival those companies have?
[English]
Mr. Campbell: We have been pouring over the testimony of the committee's hearings and found the 20 per cent figure mentioned from time to time. I must say that this has taken us by surprise because that is not the sort of lending that banks do. A 20 per cent rate on a loan is far outside the bank's comfort zone and is not the type of lending they do. We have been canvassing our members, and they have said universally that it is not the sort of lending that they do. I am not saying that the 20 per cent figure is not out there, but I return to my comment earlier that banks represent only part of the financing marketplace. Other financers are out there, whether a leasing company, a factoring company or a boutique financing company, which will often go into a situation where the rates could well be as high as 20 per cent. That is much more characteristic, to the extent that it is happening, of the non-bank part of the marketplace. It does not sound like bank lending.
To your question about the viability of such firms, when a customer, who has a history with a non-bank lender or a foreign institution, for example, that has been forced to up and leave its customers because of the marketplace, comes to the bank, the bank will make a pretty careful assessment. They might be able to take part of that loan only because the terms might not be such that the bank, as a prudent lender to protect its depositors' money, cannot take on the entire loan. The bank will make an assessment in such a case and possibly partner with EDC or BDC to take another part of that loan. These determinations are made on a case-by-case basis as to the viability.
Coming back to your original point, we have heard the rate of 20 per cent, but it is not characteristic of bank lending.
Mr. Wrobel: We have canvassed some of our members, and they have told us that they are lending in the neighbourhood of 3 per cent to 7 per cent. The 20 per cent rate stands well above the lending that is characteristic of banks.
[Translation]
Senator Rivard: Thank you. You know that the federal government is asking EDC and BDC to become involved in agricultural financing. Do you think that those two organizations should be asked to compete with you in the lumber industry?
[English]
Mr. Campbell: That is an issue on which we have focused quite a bit in the last few years. Let us focus on BDC and EDC in particular. The key element is the complementary aspect of what they do — and that is something that the government itself has emphasized specifically in the recent budget, in the legislation covering those agencies and in all the discussion about the programs that they have put in place. They do not compete but, rather, complement the private sector. We think that is the appropriate way to go.
Mr. Wrobel and I have been busy on this over the last two years. There was a time when the degree of dialogue and cooperation between the banking sector and, say, EDC on the one hand and BDC on the other hand was not as close it is it should have been, and a degree of tension was the result. Over the last couple of years, both sides — that is, the Crown agencies and the banking industry — have made strong efforts to collaborate and work more closely to sort the problems out. Both of those Crown agencies, BDC and EDC, have a clearer understanding of the need not only to coordinate and cooperate with us but also to work on a complementary basis. Also, we have a greater understanding about where we can make use of those two agencies to help us service a client.
Therefore, we have been improving over the last two years; and over the last six months, particularly under the government's Business Credit Availability Program, the degree of cooperation has ramped up geometrically. A good and effective working relationship is under way now.
Mr. Wrobel: It is clear that the goal of the government is to get more credit into the marketplace. If these Crown corporations simply do what we would otherwise be doing, you will not get more credit into the marketplace.
Mr. Campbell: You would be competing rather than complementing.
[Translation]
Senator Rivard: I would just like to respond to Senator Mahovlich's comment about his mother's time. In 1981, I had the pleasure of being mayor of a major municipality in the Quebec City region. I remember having to take out a $5-million loan at 20 per cent interest over five years. At the time, inflation was 18 per cent and municipal salaries were going up by 18 per cent. That was a crazy period that I hope we never go back to.
[English]
Mr. Campbell: I agree.
Senator Cordy: I remember being really excited because the interest rate on our mortgage was only 12 per cent. I guess we are all old around the table. I remember bragging to our friends about that.
I understand much of what you said, although my background is neither in banking nor finance. I always tell people that I married an accountant to do that stuff for us.
About 55,000 forestry workers have lost their jobs. We heard from witnesses earlier this week that the job loss in 2009 will be greater than in 2008. You can understand the frustration of the witnesses we have had before us who represent those workers who are losing their jobs.
You explained that the Bank of Canada rate is an overnight rate. However, you see on the news that the Bank of Canada rate is less than 1 per cent. You see your kids getting a five-year, locked-in mortgage at a rate of 3.6 per cent. If your kids are at university, they can get bank credit cards when they have no income except what their parents give them or from student loans. You could see their frustration when they appeared before us. They universally talked about the cost of a loan from the banking system. As you explained to us, it is not just the big banks that are involved in the banking system.
Senator Rivard asked you about the interest rates, and you said that they ranged from 3 per cent to 7 per cent. However, that is not what we heard as a committee and does not reflect the frustration that we heard from the people who were here before us who are looking after their industry. We also heard that the industry is in crisis now. I do not know if you should say that you hope the Canadian dollar goes down, but it is certainly having an effect on manufacturing — it is sort of the double-edged sword. Hopefully, the housing market in the United States will improve because that is where our exports in the lumber industry go.
In the last budget, the federal government put money forward to increase our foreign markets. We must be ready. We cannot have our forestry industry bankrupt when the economy comes around. What do we tell these people?
Mr. Campbell: You have painted a scenario such that anyone who looks at the forestry sector has a degree of sympathy for that sector. This is an overused expression that I swore I would never say, but this is a sector that is facing a perfect storm. We have roller coaster energy costs, a volatile currency, the pine beetle infestation and commodity prices that have collapsed. We have the collapse of their major marketplace and protectionism south of the border. We also have new, low-cost competitors from South America and South Asia coming on stream. We have regulatory and other provisions that are cramping their style, as we hear from Mr. Lazar from the Forest Products Association of Canada. It truly is a perfect storm. They have 55,000 employees without work, and I think 250 mills are closed. This is a real challenge for the sector. I must say, senator, and with a great degree of sympathy here, that this is such a broad crisis that it goes beyond the role of lenders. More debt will not solve those problems in many cases.
To your essential point, though, we are at a real crisis spot now, but we hope to see sunlight in a few years. We understand that as well. This is why I was saying that we really do believe in relationship banking. Banks are continuing to lend to this sector. The demand is down; we are seeing the numbers of customers declining because of the problems. However, if a customer — that is, a mill or a forestry company — comes to us and says, ``Here are the problems we are facing. This is how we propose to get through it, and this is how we will restructure,'' and if they are creditworthy, we stand by them.
The other point to bear in mind is that in many cases — not only in this particular sector but also in other sectors — for reasons good and bad, non-bank lenders, for example, many foreign institutions, just up and left. Those companies affected are left high and dry and have had to seek other lending. Sometimes the terms of the previous lending are difficult to match. The fact that the non-bank institution just up and left shows us that that was not a viable loan. We try to work with these people as best we can.
We are continuing to lend; I do not want to leave the impression that we are not. In fact, we are a major presence in the sector and want to work it through. However, we are looking at something that the solutions to which are more than just banks as lenders or important players in the financial marketplace; we cannot address all the problems.
Senator Cordy: When you talk about relationship banking and when you look at the rural areas and the small towns, many of the banks there have closed. It becomes more of a challenge because forestry and agriculture are located in the small towns in rural areas.
Mr. Wrobel: Our banks have about 2,100 branches in rural and small-town Canada. In the past, bank branches were consolidating, but that has stabilized now.
Statistics Canada does a survey regularly of small-business customers. They look at both urban and rural customers. Results of those surveys have been fairly consistent over time in showing that rural customers have access to the same products as urban customers at essentially the same prices. In fact, small-business lending approval rates are noticeably higher in rural Canada than in urban Canada.
You are right that consolidation of branches has occurred. However, given that we have nation-wide institutions, competitive pressures in large urban areas set the price. Although rural Canada may have only one bank in a small community, they enjoy the same competitive prices as customers in Toronto, for example. Therefore, we think the banking system we have in Canada serves rural Canada quite well. Of course, there are the other players as well.
Senator Cordy: I am not trying to be critical of the banking industry. We understand that these are also challenging times for you as well.
I was watching CPAC on television this morning and saw forestry union leaders speaking. They are extremely frustrated. That frustration was at the $1 billion announced by government. They said that this will help those who are strong, but it will not do anything for those who have lost their jobs, and it will strengthen the strong and weaken the weak. Their issue was that there has to be loan guarantees at prevailing rates for refinancing.
It goes back to Senator Rivard's earlier question. Should the government get involved, as it has with agricultural farm loans, to ensure that those who can be viable in two or three years — if they can survive this perfect storm — are given the help, so that when the economy recovers the forestry industry will be ready to go? Would that be helpful to the banking industry?
Mr. Campbell: A number of programs are in place already. It is not as though we are starting from scratch. We have loan guarantees and loan support programs such as the Canada Small Business Financing Program that the government has put in place. It is still new and maybe has not penetrated as fully as it should yet, but it is underway. An extraordinary financing framework was announced earlier this year in the budget, the Business Credit Availability Program, as was mentioned earlier. The government has also created a secured lending facility in other areas.
A range of supports is available. We talked earlier about the Operating Line of Credit Guarantee. These programs are either available now or are coming on board. I think the demand you are talking about is something additional or all-encompassing.
I have one caution that goes to your point that a company might be having difficulties now but will be able to get through at the end of the day. That is the type of company that a banker or anyone will deem creditworthy and can stand beside it. However, no amount of loan guarantee will make an unviable company viable. If someone is under water and he or she cannot survive, a loan guarantee will not change that. It is not the panacea.
Mr. Wrobel: When our member banks participate in these loan guarantee programs, they are required to engage in the same due diligence that they do for regular loans. It is just a matter of shifting some of the risk to the government, allowing banks and other lenders — credit unions are part of this as well — to move up the risk scale a little.
Mr. Campbell mentioned the Canada Small Business Financing Act. The previous federal budget increased limits a bit and increased the government's exposure somewhat as well. The government has done the same on the agricultural side. Both of these are designed for relatively small companies. Mr. Campbell mentioned this new product to guarantee operating lines of credit. The other two are asset based; they are for loans against assets.
Another question might be whether we need another program with higher limits. That is for Parliament to decide. We work closely with various government departments that run these programs to ensure they are run efficiently. The industry will work with government whatever Parliament decides for these programs.
Senator Cordy: I want to reiterate what others have said, namely, that we are very fortunate in Canada to have such a strong banking industry.
Mr. Campbell: Than you senator, we very much appreciate that.
Senator Brazeau: I am not a regular member of this committee, but I am pleased to be here. I will not be talking about 1980s mortgage rates this morning unless I consult with my father.
I want to touch upon the working relationship that you mentioned that you have with BDC and EDC. Obviously, their role is complementary in terms of lending. I am assuming — and you can correct me if I am wrong — that the increased level of cooperation between commercial banks and those two Crown corporations is because of this global economic downturn.
If this working relationship is a good and viable one, is that allowing for easier access to credit, and if not, why not?
Mr. Campbell: That is exactly the question of the hour, is it not? Is additional credit available? I will break down your question into a couple of parts.
Mr. Wrobel and I talk regularly to our bankers about this. The government has established a steering committee for the Business Credit Availability Program where representatives of banks, the EDC, the BDC and the Department of Finance meet regularly to work through this program to enhance that working relationship.
These organizations have been around for a long time. It is certainly true that the financial crisis and economic downturn has ramped up the degree of cooperation. It is not only cooperation; the government recognizes that EDC and BDC can do certain things that banks cannot do and have given them more powers and money. However, they have also told them that they have to work with the banks and that they have to do it in a cooperative, collaborative, complementary way.
What does that mean in practice? For example, we know that BDC and the banks are getting together closely to compare their credit adjudication systems so that they do not duplicate; they can literally have one window when a business client comes in. There was a time when there were two parallel universes. Today, they are working on a system where they can have a one-window picture of the creditworthiness of a company and a decision that the bank will do part and BDC will do part. It has come to such a level of cooperation.
On whether it is resulting in additional credit, the government has said that the new Business Credit Availability Program with new powers from BDC and EDC is supposed to ramp up an additional $5 billion. The program is only just underway this spring. I believe the government made its first report to Parliament last week. I would describe it fairly, senator, as a work-in-progress. Absolutely, yes, we are seeing more deals made than might have been done before, although I do not have the numbers. It could be considered a stretch on the part of banks and EDC to not let a deal go even when it is assessed as marginal. I think it is working.
Senator Brazeau: You talked about the forest sector in terms of the perfect storm. Obviously, you have outlined many of the challenges and barriers that the industry faces. Are you concluding that the challenges laid before the forest sector are insurmountable in today's realities?
Mr. Campbell: Avrim Lazar, the president and CEO of the Forest Products Association of Canada, said that the sector is going through difficult times. Some companies will survive and some will not survive. The industry as a whole will come through this, absolutely. There is no question about this because it has some good strong management and a will on the part of many players — the government, management, lenders and so on — to see things through.
I would characterize it from a lender's perspective: We do not look at the sector as a whole but, rather, at individual companies. We make credit decisions and support decisions on a case-by-case basis. We will look at a company's prospects, the quality of its management, the strength of its balance sheet and its capacity to plan; as well as whether the company has a business plan for a certain number of months ahead, a firm understanding of the problems they face and a game plan to resolve those problems. We will look at the quality of the company's customers and its suppliers. It might be a strong company, but if its customers are failing in the marketplace, we know problems will arise. We will stand by a company that is on top of its situation. We approach it on a case-by-case basis. My personal perspective is that the forest sector has a future, although the lumber sector is probably the stronger side of the industry. Newsprint is seeing a long-term sector decline, but that does not mean no viable components exist.
I am a big believer in technology. In addition to the traditional uses of forest sector products, biomass and nanotechnology are moving forward. We have barely scratched the surface in those areas, but they have a big future given that they are green products. We will get through it.
Senator Mercer: With representatives of the bankers association here today, I cannot pass up this opportunity to change topics slightly, although my question is directly credit related to small institutions.
I have been made aware by several of Canada's leading universities that they are considering no longer allowing students or parents of students to pay tuition on their credit cards because of the high cost of services charged by the lenders. To the extent that many of the universities, in their words, are losing millions of dollars in revenue because, for example, that $4,000 tuition fee becomes $4,000 minus the service charge. At the same time, those same lending institutions are on university campuses, at high schools and at community colleges extending credit to young people. In many cases, in my opinion, the credit extended is far beyond the means of students to pay. Not only are students leaving school with large education loan debt but also large personal credit card debts. Is the CBA aware of the problem? Is it studying the problem? Is there a solution on the horizon? I come from a province with the highest number of institutions of higher learning per capita of any province in the country. It is an important part of rural and urban Nova Scotia.
Mr. Campbell: I must say, senator, that I was not aware specifically of the matter you raise about universities and the payment of tuition by credit card. Thank you for making me aware of it. Certainly, we will look at the situation and scratch our heads about it. We know that the Standing Senate Committee on Banking, Trade and Commerce has studied credit cards, that a House of Commons committee is currently studying the issue and that the government has put out draft regulations. The issue is attracting a great deal of attention.
Reflecting on other comments, I would say that the situation in Canada relative to that in many other jurisdictions is such that the system here works well. In the credit card system south of the border, we see many problems. People often suggest focusing on credit cards that have a higher percentage rate, but we must bear in mind that there is a card for every profile. More than 60 low-rate cards are in existence. The government has a wonderful service with an interactive website that lists every card available. You can type in your preferences and come up with the cards that work best for you, whether low-rate or standard or other. Some people like to have a card that offers rewards, for example. There are many players and a great deal of competition.
In the competitive marketplace, the best thing for consumers is more financial literacy. We have emphasized that and the government has emphasized that. People need to know more about managing their financial affairs. We take it seriously and try to do our part. We support the government in that. We could spend the next hour talking about credit cards, but, in summary, we see a great deal of choice and competition. We are ever mindful of trying to do the best value proposition for customers and to ensure that customers understand their rights and obligations.
Senator Fairbairn: Listening to you today on this issue casts one's mind back to the BSE issue you mentioned earlier, which caused a great deal of problems. The situation was quite desperate then. I am wondering about some of the assistance that you were able to give at that time. This is a different unfortunate effort that is happening in Canada now. In comparative terms, how much are you able to do with the industry that you are looking at now as compared to what you could do then? How close are people coming to you in the whole banking world in terms of trying to have new ways of doing things that will help them? Could you give some kind of connection there?
Mr. Campbell: You are right; they were desperate times. I think we are still feeling the effects. We are past that, to a certain extent, but we are still feeling the effects.
I will offer general comments and then ask my colleague to respond as well.
You had Mr. Marcotte, from EDC, here the other day. I agreed with virtually everything he said. I thought it was excellent testimony. He made a comment about his perception of banks dealing with individual companies in the forest sector. He said that no one wants to do less than necessary. Each and every one of the account managers that he sees in the bank wants to go that extra step; they want to do more. ``Doing more'' means using whatever tools are available in that bag of tricks, whether it is restructuring a loan or forbearance or advice to help them restructure. They will absolutely want to do that.
As you will know, the two sectors are very different. On the cattle side, you are dealing more with individual producers. Here, we are dealing with companies. Of course, companies have employees. To say that there are structural differences does not mean that individual employees who lose their jobs are not suffering considerably during the crisis. Some structural differences exist between the two, but banks will want to do what they need to do to help their clients. Perhaps Mr. Wrobel can elaborate on that.
Mr. Wrobel: They are different, but the approach to banking is very much the same. It is neither an agricultural approach nor a forestry approach. It is as follows: If there is an issue, if there is a problem, get to it early. Do not hide from your banker; talk to your banker. If it is a temporary problem, bankers will look at ways to get through it. The basic principles of banking, such as a sound business model and the ability to repay the loans, are all important. Sometimes, as we saw with BSE and with other sectors, bankers must have tough conversations with their customers where the intent is to determine what is best for the customer and to ensure that the customer's capital is preserved. If it is just the prospect of the business failing and losing money year after year until it does fail, bankers generally try to find something that will maximize the wealth and the assets of the customer. In the agricultural sector, we have worked through BSE, hog farmers, grains, small business, avian influenza, ice storms and so on. We take a consistent approach to whatever sector and through whatever hardships they may face.
Senator Fairbairn: Thank you very much. I hope you are as well ahead in this one as you were in the past.
The Chair: Before we conclude, I have a few questions to ask the bankers, with the indulgence of senators.
I note that bank lending remains strong. When I look at the market share of business credit for the record, it is as follows: banks, 55 per cent; non-depository credit and other institutions, 28 per cent. I will now look at the 55 per cent versus the 28 per cent.
You mentioned in your comments that we had boutique financing companies out there. Would you explain and comment on that?
Mr. Campbell: A whole class of companies are out there that are not regulated. They are not deposit-takers, and they do not fall under a regulatory regime. They are typically lending companies or leasing companies. We have a variety of sources of funding. Some are big and some are small, for example, GE Capital Solutions. We have literally hundreds of smaller ones. They typically raise their money on the commercial paper market or on securitization. That is, they will make a loan and securitize it to get more money for lending. That is how they do it.
The only company that I can specifically mention in relation to the forest sector of which I am personally aware — and this is only because I have been reading the literature in preparation for my presentation today — is Forest & Marine Financial Group on the West Coast, for example. There are many other examples of those types of lending- leasing companies. They fund themselves on the commercial paper market as securitization. That is where we have seen a tremendous amount of disruption. Many are no longer writing business in Canada or have considerably slowed. I know this is on the personal side rather than on the commercial side, but GE Money Canada say on their website that they are no longer writing business in Canada. It is a reflection of some of the challenges that they are facing and where banks have had to step up to the plate.
The Chair: When you talked about boutique financing companies, that troubled me a bit. What percentage would we have of the market share, for example, in Atlantic Canada, Central Canada and Western Canada?
Mr. Campbell: Unless my colleague has some more specific figures, we do not have that data at hand. We can look into that.
The Chair: Could you, please?
Mr. Campbell: Yes. To the extent that we can get a more specific answers, we will try to get that back to you.
The Chair: Thank you.
Looking at the North American market, we also look at globalization. What is your relationship with banks in North America versus banks in Europe in relation to the forestry sector not only for the purpose of this study but also for the agricultural sector?
Mr. Campbell: First, a number of Canada's banks are headquartered in Canada but are active in the United States. While they operate on a North American platform, if we look at them globally, many of our banks are very active globally. The real focus, however, is North America.
As to the extent to which there is involvement in the forestry sector and in the agriculture sector in the United States and Europe, perhaps Mr. Wrobel can comment on that.
Mr. Wrobel: I do not know. Let us take the reverse of that, for example, foreign banks coming into Canada. In the latest Bank Act round, the federal government made it easier for foreign banks to come into the Canadian market, and we have seen some substantial entry in the last five years. We have seen some entry and some exit, but that is the nature of a competitive marketplace; they come and go.
If banks that have particular expertise see a market in Canada, the federal government has now made it easier for them to come here to try to serve that market. Frankly, we think that is good.
The Chair: Could you provide the committee with what percentage of those banks are doing business with respect to market sharing?
Mr. Campbell: We will look into that, and if we can get back to you, we will certainly do that.
The Chair: Did you say that you would if you can get the information, or do you have the information?
Mr. Campbell: We will have to go back and sort it out.
However, we understand what you are looking for, and we will do our best.
The Chair: Sometimes, when we talk about forestry, we have a tendency to suggest the forestry sector is the softwood lumber industry. We have another major industry creating viable jobs in the sector currently, namely, the hardwood industry.
In dealing with your clients in Canada, do you encourage them to look at value-added products, biofuels and the emerging sector of products using nanotechnology?
Mr. Campbell: We commented about this earlier. You are absolutely right. The word I used earlier was ``diversification.''
I do not consider myself an expert in the forestry sector. We canvass and talk to our members and look at research, but I would say that the area of focus for the future is a need to diversify and to focus on value-added areas. It is an overused expression, but is the future simply to be hewers of wood and drawers of water, or do we want the benefits that come from more intense manufacturing and applications of technology? I would say the answer is yes to the latter.
As they do with everything, banks will approach that by looking at the plans of the individual companies that want to move into the green area of biomass or new technologies. They will work with businesses to try to make that happen.
The Chair: You probably saw me coming with the next question. What are your comments about U.S. protectionism versus our industry presently?
Mr. Campbell: My personal view is that we are a trading nation, and, quite frankly, we are a trading world. One of lessons of the 1930s and the Great Depression was that you can make things much worse when you start to erect tariff barriers — protectionism. This is not a good thing. Keeping trade open will help us get through all of this.
We look with dismay upon not only the United States but other countries where there is a political drive to erect barriers. Various levels of government in Canada have been speaking out on this, and we encourage them to do more of that. We have read about the Buy American program and black liquor subsidies. The announcement yesterday is trying to avoid protectionist aspects and still support our industry.
All of us — this committee, governments and business leaders — have to be vigilant in speaking out, reacting to and pushing back whenever we see protectionism arise.
The Chair: It was mentioned in this committee that interest rates of 20 per cent were levied by bankers. For the benefit of the Canadian Bankers Association, I want to assure you that I and some other senators have verified information with industry spokespersons in various regions of Canada. I have also called entrepreneurs and industrialists, small and large. No clear example of banks — you people — charging 20 per cent can be found.
If you do, would you please let us know?
Mr. Campbell: We appreciate the diligence with which you are approaching that particular issue. You heard our comments earlier. Thank you for saying that. It is much appreciated.
The Chair: On behalf of the committee, Mr. Campbell and Mr. Wrobel, thank you very much. It was very informative. If we have a need to request your presence later, we will. Thank you for your cooperation and collaboration.
Senator Rivard wishes another round of questions since you are here.
[Translation]
Senator Rivard: It is not often at this committee that we have the opportunity to meet bankers. We have to remember that the financial crisis started with the chaos in the American banks; it became a crisis in the economy afterwards. Today, the world recognizes that the Canadian banking system is one of the best. The World Bank, the International Monetary Fund and the countries of the G8 recognize that. And that is thanks to successive governments over the last 40 years who have effectively managed the banking sector.
As a politician and a proud Canadian, my hat is off to you! I wish you every success. I sense that you and your partners are going to get us out of this crisis quickly.
[English]
Mr. Campbell: Thank you. We appreciate that.
The Chair: Knowing that we have the best financial institutions in the world, there is no doubt you will continue to maintain it. Thank you for your cooperation.
Mr. Campbell: Thank you, senators. Good luck in your deliberations.
The Chair: Senators, we will now continue in camera to discuss the committee's business for next week.
(The committee continued in camera.)