Proceedings of the Standing Senate Committee on
Banking, Trade and
Issue 39 - Evidence - Morning sitting
OTTAWA, Thursday, November 5, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at
9:00 a.m. to examine the present state of the financial system in Canada (Task
Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: This is the last day of our hearings on this matter. We will have
completed 150 hours of hearings in a little over five weeks. We have travelled
from one end of this country to the other.
To start us on our last day, we have, from the Business Development Bank of
Canada, Mr. Francois Beaudoin, President and Chief Executive Officer, and Mr.
Michel Vennat, who is the new Chairman of the Board.
Mr. Michel Vennat, Chairman of the Board, Business Development Bank of Canada:
On behalf of the Business Development Bank of Canada, which we call BDC, we
would present our views on the future of Canada's financial services sector,
particularly as it relates to small business financing.
We will also provide your committee with an update on BDC's activity since the
new legislative mandate of three years ago.
As Canada enters the 21st century, our financial services sector will play a
fundamental role in determining how prosperous we are as a nation. We have seen
in other countries, even in highly industrialized countries, that a flawed
financial services system can create obstacles in the marketplace, obstacles
that inevitably lead to economic disruption.
Fortunately, Canada has a strong and progressive financial services sector, with
a lot of credit going to the work you and your predecessors on this Senate
committee have done over the years. Times do change, and with greater
sophistication in information technology, the pace of change has accelerated.
The suppliers of Canada's financial services have no choice but to evolve
rapidly, stay ahead of their competition and continue to ensure that all
Canadians, and I stress the word "all," have access to the best, and
affordable, financial services in the world. And this includes, of course, the
nation's small businesses.
Access to financing for small business must not deteriorate. You have the
opportunity to improve the small business financing environment in Canada.
Despite being a dynamic and growing sector, too many small businesses still
feel that access to financing is less than adequate.
This sector is a vital contributor to job creation, innovation, and to the GDP.
Improving access to financing can promote economic growth in all regions of
Canada. I urge you, when assessing the financial services sector and preparing
your conclusions, to give priority to the interests of our small businesses
from coast to coast and to ensure they have access to competitive and efficient
Small business is BDC's business. BDC has delivered on the mandate you gave it
three years ago.
Since joining BDC as chairman in June of this year, I have been quite impressed
with the types and level of service the bank is providing to Canadian small
businesses. Even though it is owned by the government, it operates in a
commercial, business-like fashion, a quality that is much appreciated by its
It is also been quite innovative, especially since 1995. BDC is now recognized
as a leader in addressing long-term and growth capital requirements of small
businesses, certainly those of knowledge-based industries and exporters.
As the financial services sector evolves, the BDC is well positioned to ensure
that small businesses' financial needs are addressed, competently and
effectively. Further, I can assure you that the bank will respond quickly to
any new needs that may develop in the market, as it has in the past, through
innovative services and partnerships with others.
With your permission, Mr. Chairman, I will now ask Mr. François Beaudoin,
our president and CEO, to present his remarks on behalf of BDC.
Mr. François Beaudoin, President and Chief Executive Officer, Business
Development Bank of Canada: Mr. Chairman, as Mr. Vennat was saying, the
challenges and opportunities facing our financial institutions are many, and
complex, and I praise the MacKay task force for laying them out in a
straightforward manner for Canadians. The task force also laid out the need for
change -- change in the way our financial services sector is structured -- so
that Canadians can continue to have world class and affordable services as well
as strong, viable financial institutions.
At the Business Development Bank of Canada, BDC, we dealt with change three
years ago, when Parliament gave us a new legislative mandate. Its primary
thrust was to make the bank a more active provider of financial and management
services to Canadian small businesses.
BDC is a self-sufficient, commercially oriented institution that does not cost
taxpayers a single penny.
With the full support of the government and of the Minister of Industry, the
Honourable John Manley, I am pleased to report that BDC has delivered on its
mandate. I will show you some of the results over the past few years.
This first chart is the loans and guarantees authorized in the period from 1993
to 1998. As you can see, we have more than doubled our level of activities in
that period of time. In 1993, we authorized $641 million to small business in
Canada. Last year, it was $1.4 billion of loans and guarantees to small
businesses. This is an increase of 20 per cent over the previous year.
I also point to the area of equity and quasi-equity lending, which is probably
the most risky area as it has a strong demand from knowledge-based industries
and technology companies. We have broken down the equity, through our venture
capital division, and quasi-equity, which are the new hybrid instruments we
have introduced. In the period 1993, to 1998, our involvement increased nine
fold, from $22 million to $184 million during that period.
An important part of our mandate when we came to you three years ago was to
service the so-called knowledge-based industries and exporters.
In terms of percentages. During this period, while this represented 15 per cent
of our new lending in 1994, the bank increased this percentage in 1998, and
that's the percentage of the $1.4 billion that I showed you earlier, at 39 per
cent. In the years to come, the bank's management should strive to have this
percentage rise to 50 per cent. In fact, companies in conventional sectors,
knowledge-based companies and exporting firms should have an equal share of our
The taking of higher risk at BDC has been done to a profitable basis. It was
part of our mandate to show that supporting small business could be done on a
profitable basis. I have a chart showing the levels of profits achieved in the
years 1994 to 1998. You can see the significant increase in profitability.
Starting in 1997, we have been paying dividends to our shareholder, the
Government of Canada, to the extent of $6 million last year. We project a
continuing increase in future years.
Mr. Chairman, in addition to increasing our annual financing, BDC has become the
primary source of innovative small business services in the market.
Our quasi-equity financial products -- venture loans, patient capital, working
capital for exporters to name a few -- are market leaders. We designed them to
meet the special financing needs of knowledge-based industries, or KBIs, and
BDC was the first to fund a solution to providing capital to high technology
projects still in their early stages of development. With partners across
Canada, we have established seed capital funds. These funds finance projects to
the stage where they are attractive to conventional venture capitalists.
Mr. Chairman, BDC has extended its reach to small businesses in all regions by
entering into partnerships with all major financial institutions. We have
ongoing programs with chartered banks to support youth entrepreneurship and
We have also entered the electronic business age with BDC Connex. This service
makes us a virtual bank on the Internet. A client does not have to come to one
of our offices to deal with us. He or she can do so through electronic means.
So BDC Connex is going farther than what Wells Fargo can do for small business
in Canada and the United States.
To assist small businesses in making a smooth transition to the new millennium,
we have Year 2000 Ready, a comprehensive program that includes diagnostic
questionnaires and financing for software and hardware conversion.
Mr. Chairman, when we look at Canada's small businesses today, we see a sector
that is more dynamic and innovative than it has ever been. At BDC Connex, we
have had the opportunity and the pleasure to be associated with some of the
most dynamic Canadian companies.
We were one of the very early investors in Ballard Power in Vancouver when the
technology was just coming out of the labs. In Atlantic Canada, BDC has
financed Seagull Pewter. In Quebec, BDC was an investor in a then young company
called Cinar. In Ontario, we have financed Roots. In the prairies, BioStar is a
client of BDC.
I give these examples because at the time we were involved with them, their
financial needs were seen as risk capital. As the only institution specializing
in small business financing, BDC saw these needs as growth capital for
promising, dynamic businesses. I have also cited these BDC clients because they
represent the kinds of companies that are the future for Canada and, moreover,
the kinds of companies Canada's financial institutions must support.
The MacKay Task Force Report on the Future of Canadian Financial Services
The Task Force urges Canadian financial institutions to be prepared to make
credit available to higher risk borrowers with more innovative financing
packages and appropriate pricing.
We fully support this recommendation. I might add that the task force noted the
strong role the BDC is playing in small business financing, and its record as
an innovator of new risk-sharing instruments, particularly quasi-equity
Small businesses are major users of financial services and are quite dependent
on those services for their livelihood. I am hopeful, therefore, that you will
give specific attention and priority to how the evolution of the financial
services sector will affect small business.
One of the key concerns for small business is the potential merger of chartered
banks. Small business is quite apprehensive about how the industry will evolve,
and they have many questions. Small businesses are wondering what will happen
to their line of credit if chartered banks are allowed to merge. What will it
do to their choices for financial services? These are bread and butter issues
for them. They are waiting for responses in the months to come.
Many small businesses feel that access to financing is already restricted by the
limited number of sources in the market place. Compared to the start of this
decade, small businesses have fewer financing options today. For example, trust
companies and insurance companies used to be active lenders, but they have
since left the market. In this regard, I support the MacKay task force report
and its recommendations to attract new financial institutions into the market
from Canada and abroad. A level playing field to encourage the establishment of
institutions that would serve the small business sector is required.
New entrants into the banking industry would promote competition and innovation.
Thus, I would urge you to consider the rules of entry into the Canadian banking
sector and see how the interests of small business can be promoted.
Placing a clear focus and priority on small business will improve access to
financing for small businesses across the country. Thus, I also support the
concept of a specialized small business bank that has been proposed by two of
the chartered banks.
At BDC, small business is our only business. This has allowed us to focus on
their needs and to respond in innovative ways, while being profitable. It is
this focus that is needed in the marketplace. Specialized small business banks
could provide that focus.
The MacKay task force report has highlighted that Canada is a concentrated
market. Regardless how the bank merger issue is resolved, we need more
alternatives in the Canadian marketplace. Today, BDC is a complementary source
of term financing and equity capital for small-and medium-sized enterprises. In
a changing landscape, BDC can be called to play an even greater role in the
market. Our clients are telling us that they expect BDC to be more broad-based
and offer a wider array of financial products to meat meet their needs. We are
responding to the limit that our mandate allows.
In conclusion, BDC has served small business well. As we face the next major
restructuring of Canada's financial services sector, BDC will surpass itself.
It will utilize all its means to anticipate changing needs and to provide new
and innovative financing solutions. We are present from coast to coast, and we
are focused on the businesses that will become Canada's leaders of tomorrow.
The Chairman: Thank you very much. When I see a statement in your presentation
that you are now a self-sufficient, commercially oriented institution that does
not cost the taxpayers a single penny, I wonder why you are a Crown corporation
at all. However, that is a subject for another day. It takes this committee
back to the report we did on Crown financial institutions. We had hoped it would
be the beginning of a phasing-out of government direct involvement in this
Senator Hervieux-Payette: One very important issue is providing small businesses
with access to financing so that they can expand, and in some cases even
create, their companies. At present, you are operating 85 branch offices. Your
financial partners in the private sector have hundreds of branches. Are you
getting any complaints about the accessibility of your services?
Mr. Beaudoin: On the contrary, our clients find us to be much more accessible,
since the bank slowly, carefully increased the number of branches over the
years, in the right locations, and since we now offer virtual access to the
Approximately one decade ago, our branches were located in somewhat ho-hum
office towers, and people had a hard time finding our offices. Now the branches
we have throughout the country are located downtown, on the ground floor. They
are accessible and quite visible. Now that they are more visible and more
accessible, we are much closer to our clients. I would not say we are getting
such complaints. That comment is probably due to the growth in our activities
and our improved visibility.
Senator Hervieux-Payette: How do you serve clients who live outside of the big
cities? Eighty percent of the population lives in urban centres, but even so,
there is still 20 per cent living in rural areas. Do you have any arrangements
for delivering your services to small businesses starting up in isolated areas,
just as you deliver services in big cities such as Montreal?
Mr. Beaudoin: With 85 offices, we do have a very large network to cover Canada.
In fact, about 60 per cent of our activities are outside of urban centres. This
is an important activity for us. We cover all locations with our network of
branch offices. If we don't have any presence in one particular region, the
closest branch office will organize trips to that location on specific dates. We
use the chambers of commerce's premises so that our representative can meet
with the business community.
Senator Hervieux-Payette: So you are telling us that your institution serves all
Canadian communities that might need your services?
Mr. Beaudoin: There is that access, and in the years to come, we will always be
monitoring the amount of business, to see whether there is enough to justify a
permanent presence. The decision is based on analyses of the market and of our
volume. Actually, last week I inaugurated two new branch offices, one on North
York, in Toronto, and one in Pointe-Claire, Quebec. Activities in both these
communities had risen substantially. I also recently inaugurated our new main
office in Vancouver. These are examples of how we have been expanding our
presence in order to meet the needs of various locations.
Senator Hervieux-Payette: By the same token, if we expanded your mandate -- you
mention that in your brief -- to serve companies other than those offering
loans to businesses and to round out the range of banking services, in that
case, would you consider the suggestion that some people have made that you use
post offices throughout Canada as outlets in rural areas so as to provide people
with basic banking services? Could a company such as your own expand its
mandate and enter that sector so as to make up for certain shortcomings within
the private sector?
Mr. Beaudoin: That option warrants consideration. That solution has been used in
other countries, and we would have to look at how it could be done in the
Canadian context. Our current network of financial institutions would also have
to be used. Our country has it awfully good, because there are finance
companies, chartered banks and caisses populaires throughout the land. We would
not want to duplicate a network that already is very strong. It is more a
matter of using it correctly. Many forms of cooperation are possible if we use
the existing network to provide services to clients.
Senator Hervieux-Payette: Your brief does not specifically ask for access to the
payments system. By expanding your mandate, it might be possible for you to
have automated teller machines. The businessmen who have loans with you must
make payments. Is your company part of the payment system? Would you be
interested in having ATMs for your small business customers who have opened
accounts with you? Do you already have agreements with your partners from the
world of banking?
Mr. Beaudoin: At present, the BDC cannot take deposits from our clients. The BDC
cannot offer operating lines of credit to its clients. The whole issue of
joining the payments association is still being looked at within the overall
context of expanding the services that the bank should be offering to its
Senator Hervieux-Payette: Even so, your customers must have to pay interest and
part of the principal every month. If you are lending, you have thousands of
clients who have to use another banking institution to send you a payment.
Mr. Beaudoin: The Canadian banking system serves us very well insofar as our
clients can make a deposit at the financial institution of their choice and
these payments are forwarded to us electronically. That is how the payments on
our term loans are made. Taking deposits or joining the payments association
represent another stage, a different level of involvement in small business.
Senator Hervieux-Payette: We asked several major banks why they were not
involved with higher-risk accounts who go see you or other loan companies. We
asked them why they did not set the interest rate according to the level of
risk. They told us that would harm their reputation. I imagine setting higher
interest rates according to the level of risk has not hurt your reputation. So,
what is the BDC's philosophy regarding higher-risk loans?
Mr. Beaudoin: The philosophy has been to set interest rates according to the
level of risk. Small business told us that access to capital was their greatest
challenge, and that when they were successful, they did not mind sharing their
success with the financial institution that had supported them. Over the past
five years, we have followed this principle of sharing the risk and sharing the
success. It has been a way for us to earn a better return on a higher level of
risk and to earn the surpluses that we have had.
Senator Hervieux-Payette: Some clients will pay the prime rate plus two, three,
four or five percent, depending on your specialist's assessment of the file.
Mr. Beaudoin: Exactly. When I was talking about quasi-equity financing, the bank
often shares in the company's profits as part of the loan payment arrangements.
We share the success. If the business works, the entrepreneur is happy to share
part of the success with us, but we also take the risk of failure.
Senator St. Germain: Further to what the chairman said in regards to you
returning something to the shareholder, do you not think that you will start
building expectations in the shareholder that you could shift your focus from
being a high-risk lender to being a cash cow for the shareholder? Do you not
see a danger in that?
Mr. Vennat: Senator, we are quite clear at the bank as to our mandate. The
question the chairman raised earlier dealing with ownership of the bank is not
one on which we are spending a great deal of time. We have much more business
to do within our present mandate. If ever the government and Parliament wished
to give us a greater mandate, we would be prepared to meet it. At the present
time, we are not spending any time on it.
Senator St. Germain: What have you actually done to simplify access to the
funding? Historically, any government organization, regardless of what it is,
has been so cumbersome that it has discouraged small business. For those of us
who come from small business, who started with nothing 30 or 40 years ago, this
was not a viable option. Making application was so cumbersome and so onerous
that it was ridiculous. By the time you got halfway through dealing with the
bureaucrats, you ran out pulling your hair and ended up at the credit union or
somewhere signing your life away. At least there were funds available to you.
Has there been much change in that area?
Mr. Beaudoin: I can give you an example. BDC Connex, our virtual bank, is open
seven days a week, 24 hours a day. You can call BDC any time. The number is
1-888-INFO BDC. It is easy to remember. The turn-around on some of our products
is committed to be 24 hours.
I mentioned previously access to BDC branches. It used to be a challenge to find
us in any community. We have relocated our branches in the downtown core,
ground level, visible, accessible. Our hours reflect the needs of small
business. We will go to the entrepreneur's place of business. We will bring the
application form and have a computer at the site of the business to input the
data so that a turn-around can be provided in two weeks' time if it is a major
project that is being considered.
These are some of the initiatives that have been introduced to make access
Senator St. Germain: Is access equitable right across the country? Coming from
British Columbia, I must ask that question.
Mr. Beaudoin: It is good question, because British Columbia has some of the best
Senator St. Germain: What about Manitoba and Saskatchewan?
Mr. Beaudoin: They are well covered. We need to look at additional areas that
could be covered.
British Columbia, with 14 branches, is an important market for the bank,
especially now when the economy is suffering from the Asian flu. We are willing
and planning on making significant commitment in that province to ensure that
it comes out of this uncertain environment.
Senator St. Germain: Mr. Beaudoin, we need all the help we can get.
Perhaps I am reading something into this that is not correct, but you say small
business is asking, "If chartered banks are allowed to merge, what will it
do to my line of credit?" I cannot believe, having dealt with chartered
banks for several years, that banks would undermine their business. Their
business is lending money. As a small business person, I can see problems of
them possibly rationalizing their operations, but a question like this confuses
me. Why would anyone would ask, if everything is normal, whether their line of
credit would be altered because of a bank merger? I ask you why this is part of
Mr. Beaudoin: In the past two weeks, I have spoken with over 500 business
owners. This has arisen. They talked about the line of credit in the context
of, if ever they need to change banks, how many alternatives will they have. If
they need a different institution that will provide perhaps a higher level of
operating lines of credit or if their line is maintained at a certain level and
they need to have it increased, where do they go? They will have fewer
alternatives. It is the issue of alternatives and the impact on terms and
Senator Joyal: Mr. Chairman, you raised an issue which will be very important in
the future, which is when is the right moment to transform a Crown agency or
government agency -- there is no distinction in the matter in that respect --
into a private sector, profitable entity.
The Chairman: I raised it only because it was such an obvious response to the
opening statement. We have a limited amount of time. I do not want to get off
into that issue today, although I will be very happy to do so after Christmas.
I want to focus on the MacKay report today.
Senator Joyal: Would the government letting you offer lines of credit to your
clients not be the next logical part of your normal growth? Once the BDC has to
turn a profit and you no longer have access to public monies as a source of
capital, you must not be placed in a position where you are so vulnerable that
you lose your ability to turn a profit and thus survive as an independent body
that small business can turn to.
Should we not allow you to offer lines of credit? should that not be the first
fundamental change that we should make to your status, now that you are turning
Mr. Beaudoin: You must not perceive operating lines of credit in terms of
profitability, because that can be profitable for us. You have to look at them
in terms of the needs.
Is there a need within the market? Does small business need an alternative to
operating lines of credit?
As I was telling you, after we met with many business leaders and listened to
them, we saw that small business wanted us to expand our services, including
offering operating lines of credit; secondarily -- this is not an objective in
and of itself -- this would mean that we would have to be able to accept
deposits. An operating line of credit is secured with a deposit. So that is the
need that we are trying to meet. It is not part of the bank's current mandate,
and this issue will have to be considered in the months to come.
Senator Joyal: One of the fundamental recommendations of the MacKay report is to
open up or strengthen the "second tier," as it is known, a second
level of financial services that would be a great deal more vigorous and a
great deal more accessible than the level of service we currently have. Are you
not, along with the caisses populaires, one of the key institutions that can
help bring down the barriers and strengthen the second tier that the MacKay
Mr. Beaudoin: The bank has unusual expertise because we are the only institution
that specializes in small business. In the financial environment that was
studied over the past few months, people realized that small business is the
sector that will be the most affected by the concentration, whether the mergers
go ahead or not. Thus, using this tool that Canadians benefit from is an
Senator Joyal: You said that you can compete with Wells Fargo. That statement
will certainly surprise some of us. The American institutions on the market
come here to cream the market. Don't you think you've been somewhat
presumptuous in saying that you can compete with Wells Fargo?
Mr. Beaudoin: Canadians are rarely presumptuous. But they are at the forefront
in many sectors. Here is an example from a Canadian financial institution, a
virtual bank that goes farther than what Wells Fargo can do. They limit their
commercial loans to $100,000; through BDC Connex, we offer the entire range of
commercial loans available to small business, up to $5 million. Our services are
available 7 days a week, 24 hours per day. That is more than what Wells Fargo
Senator Joyal: How do your interest rates compare to Wells Fargo's since you are
mainly competing on the cost of dollars borrowed?
Mr. Beaudoin: When it comes to rate, Wells Fargo is operating in the same areas.
They are not a source of cheap capital. BDC does not have trouble matching
Wells Fargo's conditions.
Senator Kelleher: The MacKay report recommended the development of a second-tier
line of banks. They recommend and suggest that perhaps "les caisses"
in Quebec and the credit unions around the rest of Canada would be a useful
group to consider allowing to become banks. They serve small and rural areas,
and people in those areas are concerned in the event of bank mergers.
When they appeared before us, they told us that they work co-operatively with
you now. Perhaps you could briefly tell us about that relationship. As well,
perhaps you could tell us if that relationship will continue and perhaps expand
in the event that they became banks.
Mr. Beaudoin: Our relationship with the credit unions is excellent. These
institutions are present across the country in many communities where the BDC
is not represented, as Senator Hervieux-Payette mentioned. This is leveraging
our involvement in supporting small business.
Our strategic alliance with credit unions is working well. We are looking at
different ways to improve that relationship in the years to come. If they are
to be established as community banks, we would want to continue leveraging our
support to small business through community banks. We will be studying
different alternatives in the months to come to ensure that this access is
maximized, as we have done with the chartered banks through the strategic
alliances we have with them.
The one major difference with the bank's new mandate is the partnership we have
developed with the financial institutions. In recent years, of the $1.4 billion
I mentioned previously, the referrals we get from chartered banks and credit
unions per year has averaged roughly $300 million. Nowadays, commercial
financial institutions are a major source of referral to the BDC because they
realize we can provide value added. We can supplement our financial services
with consulting services. It has been a worthwhile relationship to develop with
the various financial institutions, and a new status for the credit unions
would reinforce that element.
Senator Callbeck: I wish to ask about the tourism and hospitality industry. We
had hearings last summer in Atlantic Canada involving the Small Business Loans
Act. We heard small business express the view that it was very difficult to get
capital, particularly in tourism and hospitality. In fact, many of the
witnesses claimed it was getting harder and harder. Is the percentage of loans
in that sector going up or down?
Mr. Beaudoin: Tourism for the BDC has always been a very important sector,
representing roughly 20 per cent of our portfolio. This is an area where we
have introduced new instruments to ensure that we can support these businesses,
especially as they are trying to attract a world-class clientele.
For instance, Blackcomb resort in B.C. was owned by the BDC before it was able
to attract Intrawest. We invested heavily and sold our interest in 1992 back to
Intrawest. Our work had been completed.
This is a sector where we have done extremely well. It has been a profitable
sector for the BDC and a sector in which we believe.
We have established a fund of $500 million to support the development of
world-class tourism installations in Canada. We think this area, especially
with the attractive Canadian dollar, will grow in future years. We should
support it. It is good business for the BDC, Canada, and for tourist operators.
Senator Callbeck: I am pleased to hear that. You mentioned 20 per cent. Is that
Mr. Beaudoin: No. It reflects the market demand. It reflects the specialization
and the knowledge that we have in this industry. I think it is higher than what
you would find in other financial institutions. It reflects the cyclical nature
and the perceived risk that exist in that sector. Over the years, we have
learned to work and to do good business with that sector.
Senator Callbeck: Talking about your price for risk, what is the highest
interest that you have ever charged? It is the prime rate, plus what?
Mr. Beaudoin: When we are in high-yield situations, you will have a situation
where it is not interest but either participation or options and shares that
you hold in that company which gives you the return.
In certain venture capital situations -- that is, with some of the companies
that I have mentioned -- the returns can be as high as 80 per cent through the
bank selling its holdings in the stock market. It is not a question of interest
but a question of capital gains in that situation. The participation we have in
some of the companies where we get royalties can increase the yield on the
investments that we make.
Senator Callbeck: What would be the maximum size loan that you would make?
Mr. Beaudoin: Our average loan is $250,000. Approximately 52 per cent of our
loans are below $100,000. There are also sectors such as tourism, for example,
Blackcomb. When we sold our shares to Intrawest, we had $14 million invested in
Blackcomb, because it is very capital intensive. Our involvement in some
sectors tends to reflect the capital-intensive nature of that sector.
When a company reaches levels of $10 or $15 million, we find that there are
sources that are as expert at supporting these businesses. The nature of our
operation, with an average loan of $250,000, reflects that factor.
Senator Callbeck: On the recommendations in the MacKay report for medium- and
small-sized business, I assume from your remarks that you agree with them. Is
that correct? Also, are there recommendations that are not here that you would
like to have seen in the report to help medium- and small-sized businesses?
Mr. Vennat: We are in general agreement with the MacKay report recommendations
on furthering and encouraging new entrants in this field. We do not claim to be
the only participant. We believe we can be one of those participants, and we
are willing not only to be one of them but also to do it in a cooperative
fashion, whether it be with credit unions or anyone else. We work in partnership
so that we can leverage the expertise that we have. We will never be able to do
everything. We hope that in your recommendations you will favour those measures
that you feel encourage more players in the field of lending to small- and
Senator Kroft: I should like to focus on one particular area, namely,
knowledge-based industries. It is an area in which I am interested.
We received a presentation in Saskatoon from a scientist who took us through the
process of building a research-based business. It was typical of the situation
in this kind of company where there was substantial investment represented
largely in intellectual capital and knowledge and nothing in the way of sales
or production. That is quite typical for a knowledge-based industry.
From presentations that we have received and from experience that I have learned
in my own investigations, typically, the chartered banks are having a difficult
time dealing in this area. It is a massively important one in terms of our
economy and, in particular, the small business economy. In your witness list,
Mr. Ballard is an example of that. However, there are many in the agricultural
industry, the pharmaceutical industry, and so on. The difficulty with the banks
is that there is none of the typical security that they would look to in terms
of inventory or receivables, and often there are not guarantees that would be
Can you tell us what special expertise or approach your bank brings to this
Mr. Beaudoin: Basically, we have been in the venture capital business since
1984, with the establishment of a separate unit within the BDC that now has, on
the equity side, a group of 22 people across the country. A subordinated debt
group has also been established, which is present in most of our large
branches. Today, that totals about 50. It is a group of 75 specialists who are
experienced not only in finance but also in technology.
Increasingly, we hire people with science and business degrees, and people who
have worked in technology and biotechnology. This is the only way we found to
make investments on a profitable basis, namely, to have people who are as
knowledgeable as the industries we are supporting. The formula has been to have
the ability to evaluate the prospect of the product that is being planned and
to do it on the potential of the business, not so much on the basis of the
balance sheet that exists because the balance sheet is probably limited. It is
the potential of the people and the technology behind it. Looking at the
scientific and technology areas, and also at the people behind the project, has
permitted us to make good investments.
Senator Kroft: Given that on a risk-to-loan basis there is almost no number on
the loan itself with which you can work, you deal with equity or near equity or
convertible debt or some sort of formulation at an early stage. Would you
typically do this earlier than the chartered banks, or are you more ready to do
that than the chartered banks?
Mr. Beaudoin: We created the first pan-Canadian seed capital fund 18 months ago.
This is available across the country. We do it with different partners, such as
ventures in the West and in Ontario. In Quebec, it is with T2C2.
Seed capital is money that is available before venture capital is available.
This is the money that we make available between the "R" and the "D"
of research and development. There is a concept, but the development has yet to
The amount of money that we extend in these projects is sometimes as low as
$100,000 to get a research project completed so that we know if there is
potential. From that point, we complete a second round and make it reach the
development stage where venture capital money and other partners can support
the development of the corporation.
The issue is the banks and their involvement. Increasingly, the banks are moving
into that sector. However, we must understand. I come from the banking sector.
I spent 17 years there. The fiduciary responsibility of banks to depositors is
different than what we have in terms of a mandate. The approach you can take
into investment is different.
Senator Kolber: We are trying to get at the current obstacles to helping small
businesses. On page 6 of your submission, you suggest the need to promote
competition and innovation in banking. Before you answer, I should like to have
a few remarks on your balance sheet so that I can understand if we have a level
You have total borrowing of $3.89 billion, which is guaranteed by the Government
of Canada. That type of financing is not available to any competitor -- that
is, not to my knowledge. You then have total shareholders' equity of $500
million -- which I assume is the government's money -- on which you pay a
dividend of about 1 per cent, perhaps 1.5 per cent.
You are in a unique position. You are doing a great job. However, there is an
implied criticism that other people are not doing as good a job. One of the
reasons for that is they do not have access to the cheap capital that you do.
It would be interesting to know what rates you charge for your loans.
Mr. Beaudoin: That is a good question. First of all, I would trade the
government-guaranteed funds that we have with the depositors' funds that the
banks have available and the interest that they provide to depositors. This is
cheaper than what we pay on world markets, in spite of the
government-guaranteed status that we have.
Senator Kolber: That remark traditionally was true. It is becoming less and less
true each year as depositors become more sophisticated. Bank deposits are going
down. There is hardly any more zero-bank deposit, as you know.
Mr. Beaudoin: When you look at any chartered bank's balance sheet, that is the
primary resource of capital to fund their loans. That is the point I would
You mentioned dividends and the cost of funds for BDC. We are paying dividends.
The coupon is a commercial coupon. We are paying the market cost of funds for
these funds on the preferred shares we have obtained from the government. There
is no gift from the government on the preferred shares.
Senator Kolber: Perhaps you misunderstood. The dividend you are paying the
government is what per cent?
Mr. Beaudoin: It has a coupon of 7 per cent.
Senator Kolber: On equity of $500 million, if you pay a dividend of $6 million,
it does not sound like 7 per cent.
Mr. Beaudoin: We provide a dividend on the preferred shares. What we provide to
the government on the common equity is the return on equity which last year was
10 per cent.
Senator Kolber: Basically they see 1 per cent of it.
Mr. Beaudoin: They see the fact they do not have to put in additional money to
support our growth. Instead of paying a dividend, they say, "Use that
equity to support your growth."
Senator Kolber: Like a negative dividend.
Mr. Beaudoin: This is a 10 per cent return on equity. This is not a bad
Senator Kolber: Do you pay taxes?
Mr. Beaudoin: We are not paying taxes.
Senator Kolber: The average return to the Canadian banking industry, net after
tax last year, was somewhere in the 15 range.
Mr. Beaudoin: Yes. The tax is an advantage that we have at this stage.
Senator Kolber: I am not being critical; I am saying that for other people to do
what you do is probably impossible.
Mr. Vennat: If you read in our comments a criticism of the other institutions,
that was not our thinking. The fact is, there are limited sources of financing,
and these financings have been going down. That is a fact that we were
mentioning. It is not a criticism.
Our job is not to find a regime where institutions can prosper and make money in
the field that is of interest to us. We are recognized as a different breed.
Senator Kolber: Tell us the present obstacles in small businesses getting access
to financing. The numbers we have heard from the banks is that they say "yes"
to 95 per cent of the applications. Perhaps people are afraid to make
applications. I do not know. There seems to be available money for small
business in Canada.
Mr. Beaudoin: The number one issue is having more alternatives. It is too
concentrated a market. Specific needs of sectors need to be addressed, such as
knowledge-based industries and technology. Overall, if there is a challenge we
face as a nation, it is having more alternatives.
Senator Kolber: If you had more alternatives, as they have in the United States
with 9,000 community banks, they do not say the community banks will charge
prime plus 5, 6 or 7. We do not do that in Canada, nor do we want to. It seems
to be a fear of usuriousness.
Mr. Beaudoin: That is valid. The margins and rates businesses obtain from
Canadian chartered banks are very attractive. On average, if you look at the
spread in the U.S., they are often higher than they are in Canada.
Senator Kolber: They are often double the amount.
Mr. Beaudoin: I have not seen the data recently, but they were higher.
Senator Kolber: The average bank spread for their profit portion is double.
Mr. Beaudoin: The data I have even was not that, but it was higher. This
reflects the fact that there are more alternatives in the U.S. willing to
charge appropriate levels of interest to compensate for the risk involved.
The Chairman: Thank you very much, gentlemen. We appreciate you taking the time
to be with us.
Senators, our next witness is Mr. Kuhlmann, president and chief executive
officer of ING Bank of Canada.
Thank you very much for taking the time to be with us today and welcome. This is
the first appearance not only by you, but also by a member of your institution
before this committee. We trust it will not be the last.
Mr. Arkadi Kuhlmann, President and Chief Executive Officer, ING Bank of Canada:
Honourable senators, on behalf of ING Bank of Canada, I am delighted to be
here. In the interests of time and realizing that this is your last day of
deliberations on this subject, I will be extremely brief. Perhaps I will give
you a different kind of focus than what you normally would be discussing.
I should like to give you a sense of the consumer retail market in Canada and
what is going on in that market. Perhaps I will be able to speak about ING
Direct and how it is operating in the market and what problems it has
encountered. I will also address what we see as the future vision for Canada.
Since ING Direct started in the marketplace about 15 months ago, it has become
evident to us that the Canadian consumer, when it comes to retail banking, is
faced with a tremendous number of problems: service charges, difficulties
moving money, and access to loans. Basically, consumers are left with fewer
choices on convenience of alternatives. There is a tremendous amount of
dissatisfaction when you speak to Canadian consumers day in and day out. When
you lift the cover of the normal stereotype comments, real stress is found.
Consumers are finding access a problem. They are finding high interest rates a
problem. Consumers are having difficulty getting higher interest rates on
In many ways, there is a different story going on Main Street than on Bay
Street. While there is competition on Bay Street, there is not that much on
Main Street. On Main Street, you will see storefronts were Canadians must go to
get cheques cashed. I remember not so long ago where that was not the case.
There are many kinds of regulated and non-regulated entities providing high
interest rates on loans. These are basically a detriment to Canadian consumers.
Not only do we need to increase competition in the retail marketplace, but we
must also address how we can transform the industry. There is a vision about
the future as we look at alternative channels being not only branches and
stores, but also the telephone, PC banking, computers, cable, mail, and any
other ways consumers can buy, shop, and access financial services.
There are tremendous problems. Suppliers are trying to grapple with some of
these problems as we go forward through the transition of the industry. Some of
these problems could be as simple as the ability to deal with an electronic
signature, for which we still have no legal precedent. This makes the
electronic world difficult. Without the verification of individuals in that
electronic world, the ability to move money between institutions is still not
If one looks at some of these issues, we need to look at the structural problems
in the industry, which is the regulatory aspect, the insurance aspect for
depositors, and the Canadian Payments System. In all of these areas, it is
tough for the banks to not only be the suppliers and operators of those
institutions, but also compete. As we go forward, we wish to increase
competition and allow people to compete. We need to free them up from some of
these industry infrastructures which need to be enlarged, beefed up, and
supported so that we can have a more level playing field.
ING Direct has committed $500 million to building a retail bank in Canada. It
seems to me that in the last 30 years I cannot recollect that we have had a
successful retail bank, domestic or foreign, enter the market and have a
sustained success. It would seem to me that it is foreign investors, such as
ING, who are willing to make a major commitment to Canada and see a much more
promising future than some of us do here at home. ING Direct is run by
Canadians, using Canadian technology, providing Canadian jobs, doing its share
as a corporation in Canada. It is an interesting model to provide a very
simplified discount retail delivery system to the consumer, which in the last
year has paid Canadians an extra $40 million in interest that, if we were not
in the marketplace, Canadians would not have earned.
We offer simple products. We make them accessible to all parts of Canada. We
support the ever-growing financial planning community in this country with the
same kind of commodity products because they are serving Canadians in all walks
To look specifically at ING Direct's problems, the most poignant of which is not
much the normal obstacles of what you would need to enter as a regulated
financial institution into the marketplace, but rather the lack of transparency
in the rules and the guidelines. It would seem to me that if we are asking
people to invest hundreds of millions of dollars, there should be clear
guidelines about what you need to do to accomplish certain tasks and tests that
would ascertain the security, safety and integrity of the institution.
As we go forward and develop new kinds of models for the regulatory environment,
the payment environment, and certainly CDIC, we should keep those factors in
mind so that more institutions like ING can come into the market and enhance
competition to Canadian consumers' benefit.
The Chairman: Having read your brief, let me comment on two areas.
In regard to the Canadian Payments Association, or what you call the clearing
system, I understand your frustration with the system as it is. Given the
recommendations in the MacKay report, which affect both the governance of the
CPA and opening it up so other financial institutions like yourself would have
direct access to the payments system, do those changes solve the problems about
which you have been concerned?
I will read to you two sentences as an example out of your paper. You say:
It is imperative that the regulation of the CPA be taken out of the hands of the
The governance changes would do that.
Then there is a statement which puzzles me. You say the current rules of the CPA
are non-competitive and require dramatic revision. We agree with that, but your
sentence actually is:
The current and proposed structure and rules of the CPA are non-competitive...
Do you mean the structure as proposed by MacKay, or the structure as proposed by
the CPA itself?
Mr. Kuhlmann: I am referring to that proposed by the CPA.
The Chairman: If everything that MacKay recommended on the CPA was done, which
this committee has argued for in the past, would that solve your problem?
Mr. Kuhlmann:It would in part, but it would not go far enough.
The Chairman: What is missing?
Mr. Kuhlmann: Some of the guidelines we are doing now about electronic transfers
are missing. The CPA has a proposal about debit pulls and credit pushes, and it
looks like we will go to a system of debit pulls.We will look at electronic
pulls for under 13,500, and we will talk about electronic movement over 50,000,
and with anything in between we are talking about paper. I do not believe you
need to go very far to figure out that that will create a bit of havoc for
The Chairman: Progress is made, and your worry is not the governance at that
point, but the actual details of the rule?
Mr. Kuhlmann: There are phase-ins to all these systems to assure security and
safety of the system. It must be done on a logical basis. It must be rolled
out. It is an institution which needs to work on evolution. The real issue is
whether it has the resources, the funding, and the independence it needs to
move that ahead, especially if there are more players at the table.
Senator Kelleher: I was unaware that ING was a federally chartered Schedule II
bank, and I should have known that. For that reason, I wish to declare a
conflict of interest, and I would ask the clerk to note that on the record. I
will not take part in the questioning.
Senator Oliver: One of the key things that the MacKay task force and all its
volumes talk about is competition. One of the wonderful things you have done
today is give us a living example of a foreign company that wants to come to
Canada and provide some competition, particularly at the retail level.
I have quickly skimmed through some of your paper and read the things you did
not mention. It seems to me that you have encountered a number of problems in
trying to provide a good tier two banking network for Canadians as an
alternative to the major five or six big banks. On page 4 of your paper, for
example, you say:
With the increased success of ING Direct we have observed many incidences of the
major banks using "anti-competitive" tactics to secure and maintain
Could you explain what it is you have learned and what problems you have
Mr. Kuhlmann: Yes, it would be my pleasure.
It is probably a healthy sign that we see good marketplace competition. However,
in the financial service sector, there are ground rules that are very important
in order to provide confidence in the system. Part of that confidence is
jeopardized when institutions in the marketplace put out misinformation about
other competitors. Consumers already face a huge problem in trying to sort out
services, products, prices, fees, and so on. You can add to that comments to the
effect we are either not CDIC insured or we are not in this country and there
are no Canadians working there.
Senator Oliver: You are CDIC insured. If someone invests $60,000 with you, and
you have a financial problem, their money is guaranteed.
Mr. Kuhlmann: Absolutely. The problem is that under the rules, because we are
basically not a branch bank, we have very limited ways of advertising. This is
one of the problems and the limitations of transition in this marketplace. We
must get our name out there and tell people we are CDIC insured.
Some banks are telling people, when they indicate that they wish to make out a
cheque to ING Direct because they pay a great rate, that we are not a bank,
that we are not CDIC insured, and that we are not even Canadian.
This situation is of concern. As a Canadian, I worry about our ongoing problem
about the corporate responsibility of our financial institutions versus their
consumer activism. We need to be able to draw a line and look at issues like
tied selling. I must admit I am a little discouraged as a Canadian to see the
degree of the guerrilla tactics that go on.
Senator Oliver: What do you mean by "guerrilla tactics?"
Mr. Kuhlmann: For example, a branch manager in a financial institution deciding
on his own that he will not transfer money to us over $3,000.
Senator Oliver: Do you have evidence of that?
Mr. Kuhlmann: Yes. We have to go back on that and fight those battles. We have
tapes that get lost. We are in a clearing process; we basically issue tapes. We
have to sell our services, and we have to buy them from one of the direct
clearers. The direct clearer decides what gets paid, how it gets paid, and when
it gets paid. If that person is on holidays, there are what we call
administrative tactics. If someone is on holidays, tapes are late and payments
do not get done.
We must deal with that. It is hard if you are trying to compete against Mother
Bell and Mother Bell sets the rules. These are the things that consumers face
every day when they call and identify their location and ask for a transfer of
money to their account. We could say we would love to do it and send the
verification through, but it does not get there. It gets "administratively
You have to live with some of that. It may not be an issue here, but the
committee needs to realize that there is a different thing going on on Main
Street. It is difficult for consumers to deal with some of these frustrations.
Senator Oliver: I should like to ask about moving funds from one institution to
another. You have alluded to this in your original presentation. Would it help
at all if we had full functionality of electronic networks?
If I wanted to go to a bank machine that was owned by one of the big five and
transfer some money to you so I could get into one of your higher interest rate
certificates, how would I do that? Are there any obstacles to it? What does "full
functionality" mean to you?
Mr. Kuhlmann: There are invisible pillars. We keep talking about breaking down
the four pillars of the financial services industry. The invisible pillars are
that you cannot move money between institutions.
Senator Oliver: Why?
Mr. Kuhlmann: You cannot transfer because someone will not turn on the switch.
There are many reasons, but they all tend to be rationalizing.
Our financial service industry serves this country very well. What are we doing
about moving forward into the next century? We have gone through some of these
issues, and the world did not end. We got to using ATMs between one institution
and another, and the world did not end.I am sure we can say the same for
deposits. The MacKay task force made some recommendations on that.
We should be able to transfer money back and forth between linked accounts in
this country. It is a convenience and service to consumers. The transfer can be
done with security and control in a prudent manner.
The issue is how to define competition. We can open up these attitudes and
approaches in retail and consumer banking by not putting two responsibilities
on some of the financial players. These players are not only maintaining the
infrastructure, which they have done quite well for the last 30 or 40 years,
but are also becoming more competitive and independent. We must make that
Senator Oliver: In your paper, you use the phrase "anti-competitive."
When I hear that kind of language, it sounds like an abuse of power. If you are
making an allegation of abuse of power, have you taken this to the competition
bureau? Have you filed a complaint?
Mr. Kuhlmann: No, we have not filed a complaint.
Senator Oliver: Have any of the other institutions filed a complaint?
Mr. Kuhlmann: I am not aware of any.
Senator Oliver: Why?
Mr. Kuhlmann: Up to now, our corporate attitude is that it is part of the
difficulty of operating in the marketplace. You would be interested in the
nature of the consumer landscape.
Senator Oliver: We are policy makers here. One of the useful things you are
noting is those pubic policy things that should be done to improve
accessibility for all Canadians. What barriers should be specifically broken
Mr. Kuhlmann: Electronically, I recommend that we increase the resources and
independence of the Canadian Payment Association. That step would move things
in the direction you desire.
There is a question about what institutions should compete over -- quality of
service, convenience and price, or the ability to get the money or move the
funds. An objective look would tell us that the ability to move and access the
money is necessary in the system.
Senator Oliver: You told us you committed $500 million to build a retail network
in Canada. You are kind of a "niche" bank now.
When we were in British Columbia, I saw one of your branches. It looked to me
like it consisted of about 400 square feet where people can go in and buy some
of your certificates at half a point over what we can get from the banks. What
kind of a network are you talking about?
Mr. Kuhlmann: Actually, it is a cafe. We actually sell cappuccino to people who
would like to come in and carry on a dialogue much like we are having this
morning about banking. Canadians are interested in what is happening in
banking, and they want to talk. They want to see what is new.
The cafe we have in Toronto is another meeting point. People come in and read
the newspaper, get on the web, pick up materials, and sometimes talk about
Senator Oliver: However, they do not buy certificates.
Mr. Kuhlmann: No, we do not transact any business in those locations. If you
want to do something there, we make a phone available for you.
Senator Oliver: Tell me about the $500 million you have allocated for a retail
Mr. Kuhlmann: This is the investment that ING Group is making in terms of
building the retail bank in Canada -- the increasing equity which we will need
to invest over the next five years to build the bank.
As a direct bank, we offer commodity products at attractive prices with low
spreads. The spreads are about 180 basis points compared to the general average
basis point of 250. We have no fees or service charges.
The services are being delivered through telephone, mail and computer. It is
interesting to note the number of rural Canadians who are quite happy to pick
up the phone and be able to do a secured transaction with us. We are pleasantly
surprised that our senior Canadians are quite capable of learning how to use a
telephone. That was a surprising and positive development for us.
The proof is in the pudding. While we may not have a model which could be
emulated by others as a worthwhile long-term model for Canada, we have had
100,000 customers sign up on the program. They have put over $1.2 billion in
deposits with us over the last 15 months.
The Chairman: You are doing a little less than $100 million in business during a
month. That is impressive.
Senator Joyal: You have been in the business of taking on the major banks,
having come from abroad, and creaming the market, while the Canadian banks are
striving to maintain their activities within Canada.
You mentioned that you have distributed more than $40 million in dividends.
Could you tell us how your agreement works with your headquarters and the
Canadian branch and how the profit that you make in Canada stays in Canada and
which proportion is shifted abroad? It is important that you answer that
question because you are a recurring target on it by the Canadian banks.
Mr. Kuhlmann: First of all, ING Direct is losing money and will lose money over
five years as we invest this capital to become profitable. We are a stand-alone
subsidiary as required by federal regulation.
In our case, the capital is funnelled into the Canadian entity. There are no
proscribed guidelines for dividend payment. We pay Canadian taxes. As a matter
of fact, 50 per cent of our account costs, which are $6.75 -- and, I mentioned
this at a previous meeting -- go towards capital taxes, CDIC insurance, and
payment charges. Employing Canadians, paying Canadian taxes, and paying our
freight in the retail market speaks for itself. In that sense, from a corporate
perspective, we do nothing more than operate as any other legal entity in
Senator Joyal: The argument that you are moving money out of Canada is not true,
Mr. Kuhlmann: No. As a matter of fact, all the money that we have raised here
from savings accounts from Canadians is basically here in Canada. None of our
assets are outside of Canada.
Senator Joyal: What will be your policy when you are profitable and have
accumulated some profits on the margin of capital that you have in mind? You
cannot lose money all the time. There will be a break-even day and then
Mr. Kuhlmann: I hope to survive to that day.
Senator Joyal: What is the policy of the ING group, for instance? Canada is not
the only country where ING is active.
Mr. Kuhlmann: This falls within typical corporate rules. Looking at what I know
from other countries where ING has invested, they remit dividends on the same
sort of basis as other international banks. They reinvest, as we have done. The
ING group is also represented here in Canada, and in many other businesses, and
has been for over 40 years.
It is interesting to see some investment in Canada from the Netherlands trying
this banking model that has some spin-off value for Canada. If this is
successful, it will be used in other parts of the world. I can only see benefit
for Canadians and our involvement in the U.S. market, in Europe, and in other
places. ING is actually investing it here, which is a compliment to Canadians.
Senator Joyal: How do you answer to the nationalist argument that Canadians seem
to be more open to making way for foreign capital but not to protecting
Mr. Kuhlmann: As a Canadian, I have a much broader concept about Canada. We are
a G-7 member. We are a trading country. I have a positive and broad vision for
Canada. I believe Canada's strength and future relies on our ability to become
globally competitive and to become the strong trading country that we can
become. That has been our hallmark. It has been like that in other industries,
and I do not see why this could not be the case here.
If anything, we have made it quite difficult for retail banks to open in Canada.
It is tough for them. As a Canadian, I represent to my shareholders why there
are still great opportunities in Canada. Although the rules are not that
transparent and they must bear additional capital taxes, capital charges, and
other rules, that is the price for entry into our country. I would argue that it
has been more difficult for us than easier. We are not easy on new players.
Senator Joyal: When you say that it is difficult to establish a new retail
network of branches throughout Canada, is the amount of money that you have
committed to that objective, namely $500 million, a small amount of what you
would like to have in terms of capacity to ensure that you are able to compete?
Mr. Kuhlmann: I would like to be able to answer that question, but I cannot.
This has been sort of the plan concerning what we think is doable and possible.
On the other aspects of our businesses within the ING group, we would look at
other opportunities in Canada. That has been the case with insurance, asset
management, and corporate activities.
Senator Di Nino: In how many countries does ING operate outside of its home
country in the Netherlands?
Mr. Kuhlmann: Do you mean in terms of retail banking?
Senator Di Nino: I am referring to any type of banking services.
Mr. Kuhlmann: We operate in 73 countries.
Senator Di Nino: In how many of those would you offer retail services?
Mr. Kuhlmann: We offer those services in three of them.
Senator Di Nino: Do most of your operations outside of the Netherlands involve
wholesale banking as opposed to retail banking?
Mr. Kuhlmann: No. If you look at our group statistics, about 65 per cent of our
worldwide activities are actually insurance. Asset management, corporate
banking and commercial banking represent about 20 to 25 per cent of the group.
Senator Di Nino: I am trying to determine how other countries treat foreign
banks -- at least from your own experience -- as a comparison to the Canadian
operation. How do you find it in comparison to the other countries in which you
operate such as the United States or New Zealand or Germany?
Mr. Kuhlmann: Recently, we were in the formation of a plan to start an operation
in Spain much like we are doing here in Canada. It was a three-month process.
It was pretty easy compared to the year that it took us here to get through the
paperwork. The other problem is that the capital requirements are a lot lower
in Spain, for example, than they are here. As Canadians, we are competing in a
global market, and we are competing for capital and for resources.
Senator Di Nino: You are saying that the Canadian market is much tougher to
break into, are you?
Mr. Kuhlmann: Yes.
Senator Di Nino: Is that because of the monopolistic -- that is my word, not
yours -- position that the major banks have taken in this country?
Mr. Kuhlmann: It is structural issues more than the banks. The banks are doing
what they need to do. It is more about the infrastructure: the way we do the
regulation, the way we set the taxes, and the way we set up the payment system
and the clearing system.
There is a trickle-down affect. The better we do the infrastructure, the more it
would trickle down into other areas. Fortunately for you, ING Direct is sort of
at the heart of one of the last holy places in the financial landscape, namely,
the average savings account for Main-Street Canadians. You cannot get any
better spreads than the ones down there.
Senator Di Nino: I should like to ask about your proposed retail operation. What
exactly are you trying to accomplish? You said that you have available $500
million to create a retail operation in this country. Other Schedule B banks
have what appear to be successful operations in Canada on the retail sector.
What is the difference between your proposed operation and that of BCI or some
of the others?
Mr. Kuhlmann: Many of them have tried and gone to what we call niches. We are
referred to as a niche. We tend to think of ourselves as more Main Street,
however, since we have a commodity product like savings accounts and straight
consumer loans. We do not specialize. For instance, you cannot negotiate
pricing with us. We have one price for all. It does not matter whether you have
a small or a large amount of money. We think we are very much into the average
Canadian household. We do not specialize on a geographic area, on a certain
kind of product, on a certain demographic, or on an income level. We are very
much a commodity with a vanilla-type approach to what I call the broad retail
market. Some people specialize in credit cards and certain other types of
businesses. However, we do not do that.
Senator Di Nino: Your wish would be to create a network of branches where a
variety of competitive services to the major banks would be offered in the same
manner. If you do not have any competitive secrets to divulge, are you
suggesting something different?
Mr. Kuhlmann: We are definitely walking to and beating on a different drum. That
is part of the reason why we have such controversy, which probably makes for a
I can tell you, for instance, that the world in the future is a little
different. It is quite exciting. For example, there is our strategic
relationship with Canadian Tire. Canadian Tire is a retailer coast to coast. It
has one of the strongest brands in Canada. We are very proud of them. We forged
a relationship with them and will be not only offering services through them
but also building an ATM network with them. You will be able to see our
high-interest-rate savings accounts and our very low, every-day priced loans --
not the introductory type, but the every-day priced loans available through
I think that is an interesting sort of paradigm for the future.
Senator Di Nino: This is part of your retail strategy that you are putting into
Mr. Kuhlmann: Yes.
Senator Di Nino: That is going forth?
Mr. Kuhlmann: Absolutely.
Senator Di Nino: Is it your opinion that the MacKay report recommendations will
help you complete that strategy? What changes do you think should be made to
the MacKay report recommendations to help you accomplish that?
Mr. Kuhlmann: We certainly applaud many of the things in the MacKay report.
Everyone in this country talks about more and better competition. The real
question is how it should be shaped as we go forward.
The only shortcomings that we see are the ones upon which I tried to focus, the
infrastructure ones. To me, it is a blueprint. Without the blueprint, the
MacKay report does not sit on any real foundation.
Senator Di Nino: I am not sure I understand what you mean by "the
infrastructure" or "the blueprint." We need more specifics.
Unfortunately, we do not have the time to explore that area this morning. I
would like to get my own mind straight and put your thoughts together with the
thoughts of so many others who have appeared before us.We hope to make some
recommendations that will be useful to you and to Canadian consumers.
I believe you said you are at about $1.2 billion?
Mr. Kuhlmann: Yes.
Senator Di Nino: What kinds of assets does that amount represent? Where do you
put your money?
Mr. Kuhlmann: Canadian securities, corporate, government, and consumer loans.
Much of it is going out to consumer loans.
Senator Di Nino: How much would be in consumer loans, small business, and
securities? Can you give me some statistics?
Mr. Kuhlmann: I cannot give you a breakdown.
Senator Di Nino: Would you say you have attempted to serve that small business
sector that everyone claims is underserved?
Mr. Kuhlmann: We are not in the corporate or small business market. That is not
The definition is interesting, senator. There was a time when I was in the
banking business, and small business meant $1 million and up. We now have
something that I call micro-business. It is interesting to note the demand we
get from what I call self-employed people or husband-and-wife teams starting
small businesses. They get loans from us, and they are using them to run their
businesses. We do loans up to $250,000. Our average loan on an automated
one-hour approval is $50,000. We will go beyond that within a one-day
turnaround for $100,000. We only do unsecured loans; we will not do secured
Senator Di Nino: You do not know what percentage of your portfolio that would
Mr. Kuhlmann: No, but we do know there is a huge need and appetite for those
kinds of loans, and the rate is an important issue.
Senator Di Nino: Some of the Schedule B banks have suggested that the charge of
withholding tax is somewhat discriminatory. I would like a comment from you on
that. As well, would you like to be able to sell insurance and do leasing of
small vehicles if the rules were changed?
Mr. Kuhlmann: On the withholding tax, since we are not really in that business,
it is not an issue. As a banker, I do not see it as a big issue. I know there
are some financial needs for that. The more we harmonize some of our
tax-related issues, especially to the U.S., the more helpful it would be. That
is a trend of where the capital flows go.
On the other side, in terms of access, we do a lot of insurance. We do not do it
through this entity but through another entity. It is not a requirement for us.
It is nothing we have on the boards. It is on the plans.
However, one of the problems that we have, and this is why this difficult task
that you have at hand is not to be underestimated, is that there seems to be a
lot of talk about opening access and merging things, and I think there is a
better focus on transition. Go back to the mortgage market in the early 1970s.
Once you allow access, the market is kind of taken up, and nothing really
changes. What we need in this country are the changes underneath.
We need to be able to give Canadians a legal right to a bank account. Banking
may be a privilege, but if you talk to Canadian consumers, banks tell consumers
that banking with them is a privilege. They need a right. We need to sort out
an electronic signature. Basically we need to provide Canadians with the
ability to get at the kind of services that would be at least competitive. If
you see the heartaches that I see every day, you would say that we could do
something about this problem. We could create more competition in the retail
Senator Callbeck: I have several brief questions, and the first is on the
concept of the holding company that was discussed in the MacKay report. ING is
certainly involved with many companies in Canada that are involved in the
financial area. I am wondering if that concept of a holding company interests
you at all.
Mr. Kuhlmann: Yes, it has some ease to it. It does create one question, though,
and that is the issue of regulation. I worry about OSFI attempting to struggle
with the insurance arm and the banking arm. We are now proposing, through the
Ministry of Finance, to become an international leader in conglomerates around
the world. I worry that there will not be enough resources for continuity and
supervision on the holding company concept. I think that is a tool that works
well in other countries, and it could work well here.
Senator Callbeck: In your brief, you mentioned that your presence in Canada has
benefited many Canadians who do not bank with you. You went on to talk about
financial institutions increasing their rates and waiving service fees. What
particular service fees are you talking about?
Mr. Kuhlmann: You mean from the banks or from us? We have no service charges or
fees, as you know.
Senator Callbeck: What service fees have been dropped to compete with you?
Mr. Kuhlmann: The typical story I would hear in the call centre in the morning
is someone calls up and says, "Well, I just went to my bank and made out a
cheque for you. When they found out it was made out to ING Direct, they asked,
`What rate were you offering?'" Everyone knows what our rate is because
even the employees get the same rate. I have the same rate. There is no
difference in rate. So then the bank matches the rate and increases the rate on
the deposit. Then they say, "We might as well keep it here." We have
become an interesting little bargaining chip.
I would love to be able to quantify that for the committee. I would probably get
an Order of Canada for it. That is what happens in the marketplace, and that is
what happens in retail businesses. Someone matches the price, and the consumer
negotiates and gets the better deal. Of course, we would have liked them to
have brought the amount over.
The anecdotal story you would like most is that of a retired widow who went to a
rural branch in Ontario and did the very same thing. She made out a cheque to
ING and wanted to make sure she could send this over. The counter person said,
"Well, you shouldn't really move that money. Why not keep it with us. Let
me bring the branch manager over." The manager came over and looked at the
cheque and said, "We would like to match the rate you would get over at
ING, but it is only for $14,000. If your amount was $50,000, we could give you
a much better rate." That woman actually came to us, drove in her car,
landed at my doorstep, and said, "I am moving this over out of a point of
principle, and I am telling everyone at my social club that they are all moving
their money over."
When you work in this battlefield, sometimes you win and sometimes you lose, but
it is good, healthy competition.
The Chairman: Thank you, Mr. Kuhlmann, for a very helpful and most interesting
Senators, our next witness is Mr. Ian Gillespie, President and Chief Executive
Officer of the Export Development Corporation.
Senator Donald H. Oliver (Acting Chairman) in the Chair.
The Acting Chairman: Welcome to the Senate Banking Committee. We have circulated
a copy of the notes you will be using for your presentation today. Please
Mr. Ian Gillespie, President and Chief Executive Officer, Export Development
Corporation: Honourable senators, I am delighted to have the opportunity to
present our views on the Report of the Task Force on the Future of the Canadian
Financial Services sector vis-à-vis some of the issues we believe will
be germane to helping build sustainable wealth and prosperity in Canada.
I have circulated a set of prepared remarks which, with your permission, I would
ask be considered part of the record. I will not speak directly to those
particular remarks. However, what I should like to do is summarize, over the
course of the next few minutes, some of the key messages that we think are
Very briefly, let me just say that EDC's role and mandate is dedicated to
enhancing Canada's trade competitiveness by providing the essential
trade-related financial services which every company needs to pursue business
beyond our borders.
What differentiates EDC from other financial institutions in this country is
that we have the largest pool of trade financing talent under one roof. We have
the capacity to take risk in 200 countries around the globe. Last year we did
business in 145 of those markets on behalf of our Canadian customers. We have
supported in excess of $100 billion in Canadian exports and foreign investments
in the past five years. We have done all that with a paid-in capital base of
less than $1 billion. We are expecting to do as much again in the next three
EDC operates as a commercial financial institution, but as an export maximizer,
not as a profit maximizer. This year we expect to achieve a business volume
target of approximately $32 billion in support of our more than 4,000
customers, more than 85 per cent of which are small and medium-sized
enterprises. In that sense, small business is big business for EDC.
In very simple terms, the corporate plan for EDC for this year is to do more
business with more customers and to generate an adequate rate of return to
sustain our capital and support future growth. This is important because Canada
is a trading nation. Exports represent about 43 per cent of GDP, the highest in
the G-7 and close to four times the U.S. level.
Growth through exports will play a very essential role in Canada's future
prosperity. Therefore, it is important to create a competitive advantage for
Canada in trade. However, as evidenced by the Conference Board of Canada's
recent publication, Performance and Potential, 1998, Canada is also vulnerable
in the long term to the forces of globalization unless we continue to enhance
Canada's trade competitiveness.
Canadian companies are small on the world stage. Canada has relatively few
transnational corporations. We are slipping somewhat in terms of our growth of
per capita income and productivity relative to our major trading partners. R&D
in Canada as a percentage is lower than the level you would find in the U.S.,
Germany and Japan. Both incoming foreign direct investment and outgoing will
need to be enhanced in the future.
The debate around the future of Canadian financial services sector must fully
address how best to strengthen the ability of Canadian companies to compete
globally and how best to create competitive advantages for Canada which in turn
will produce the necessary employment and wealth-generating opportunities and
the proper social infrastructure for Canadians now and into the future.
Our experience is that few financial institutions are dedicated to supporting
the globalization of Canadian business as a priority focus. Therefore, they may
be falling short of the strategic expectations of their customers. The recent
turmoil in Asia and elsewhere in the world may only exacerbate this problem. I
do not have to tell you that that turmoil is creating some fairly serious
liquidity problems internationally.
There is much to praise in the recommendations of the task force and the desire
to see more competition introduced. I will not take your time by going into
those areas any further. However, from our perspective, the MacKay report makes
virtually no mention of export and investment financing or of the critical
roles played by the federal financial intermediaries, EDC, FCC, BDC and CCC.
This absence means that the MacKay report did not address many of the trade and
investment issues critical to Canadian wealth creation and germane to EDC's
mandate. That omission is an important oversight, given that trade is one of
the most dynamic parts of the Canadian economy. Canada's capacity to grow will
require mobilizing the financial resources to support the international
initiatives of Canadian companies.
The principal strategies of the banks in Canada presently are not focused on
helping Canadian companies to go global. Their strategies seem more focused on
attaining a stronger, competitive, North American position for the banks
through the use of technology in commodity-driven businesses such as
fixed-income trading, currency trading, underwriting or perhaps even some
consumer banking services.
The proposed mergers do not appear to be about strategic issues affecting
Canadian wealth creation, except perhaps in the narrower sense, or supporting
the growing needs of small business or being able to serve more effectively
Canadian companies operating globally.
The merger debate has quite rightly focused on SME financing as a central issue.
The issue of SME vulnerability is a real one. SMEs are major wealth and job
creators. They embody the entrepreneurial spirit of this country. Many are in
the knowledge-based industry sector which is key to addressing our R&D
vulnerability and to fostering the climate which keeps the
most-heavily-invested-in and subsidized brains in this country.
It is not clear that greater concentration of banks in Canada will create more
financing capacity for Canadian exporters. Indeed, the intra-Canada mergers
could even exacerbate the problems of adequate support to exporters, especially
to SMEs, the most vulnerable group as confirmed by a recent survey conducted by
the Alliance of Manufacturers and Exporters of Canada and by the Canadian
Federation of Independence Business. SMEs will aim to reduce their overhead
costs by rationalizing some of their service delivery and by focusing their
attention on global, transnational corporations and the international global
It therefore appears that trade and investment finance is, and will remain, a
niche market for Canadian financial institutions, not a core business. We need
to make trade in investment finance in Canada part of Canada's competitive
advantage and one of our key success factors.
It is important to note for the committee that EDC and Canadian financial
institutions are working more closely and extensively than I have ever seen in
my 20 years with EDC.
EDC's risk-management capability is critical to strengthening the capacity of
financial institutions in Canada to provide working capital. This underpins
short-term trade and medium- and long-term financing for capital goods and
We estimate that we support banks directly and indirectly to the tune of about
$10 billion annually, not counting our extensive treasury relationships for
funding for foreign exchange and so on. We are now working very closely with
the banks with regard to some of our generic products, such as accounts
receivable insurance, where we provide direction to pay to the banks, and
documentary credit insurance, where we insure the letters of credit of
international banks on behalf of Canadian banks.
We provide political-risk insurance to Canadian banks in order to cover them
against the risks of inconvertibility, war expropriation, et cetera. We also
provide bid and performance security guarantees.
We work with the banks to provide solutions specifically dedicated to small and
medium-sized enterprises, such as our important partnership with Northstar
Trade Finance Capital Inc., which is, in part, jointly owned by the Royal Bank
and the Bank of Montreal. It provides finance for smaller transactions in the
We provide something called the Master Accounts Guarantee Program -- MARG, for
short -- to the banks. It was designed to increase the margining of foreign
receivables in order to allow the banks to provide more working capital to
SMEs. For a variety of reasons, we have been disappointed that the banks have
not taken up that product to a greater extent.
A legislative review is now underway. It was announced in the last few days by
Minister Marchi. It is going on in parallel with the MacKay report. I think it
will be timely in that it will provide an opportunity to review the issues
related to trade finance and to confirm the importance of EDC's mandate within
Canada's export and finance system. I will not go into those particular issues,
although I would be happy to address them in answer to any of your questions.
In conclusion, the EDC cannot meet the needs of Canadian businesses alone in the
global marketplace. We need a dynamic, competitive and focused financial
services sector, which is truly part of Team Canada in all its dimensions, and
which will dedicate the necessary resources to fund the entrepreneurial spirit,
to create the opportunities, jobs and wealth which underpin the social
infrastructure and which ultimately define the quality of life in this country
like no other. We need to ensure that Canadian consumers and companies have all
the necessary ingredients to grow and prosper domestically and internationally.
The financial services sector is vital and unique in that regard, and obviously
credit capacity is our lifeblood.
The Acting Chairman: Did you make a presentation or file a brief to the MacKay
Mr. Gillespie: No.
The Acting Chairman: You and others have told us that you, the FCC and other
Crown institutions have not really been referred to at all in the MacKay task
force report, and that this is an oversight. If you were writing the report
today, what would you have put in it with regard to harmonizing your activities
with those of other financial institutions in Canada, such as banks, insurance
companies and trust companies?
Mr. Gillespie: The important issue is that the capacity will be made available
to Canadian companies.
In my mind, the issue around the question of mergers is very much the issue of
concentration within Canada. It is perhaps interesting and indeed ironic that
if Canadian banks had chosen foreign dance partners, we may not be having the
same debate in Canada. The issue is one of creating capacity for Canadian
companies, and I am just concerned that the eye may not be focused on the ball
as they get into becoming a wholesale global bank. Therefore, Canadian small
and medium-sized enterprises will be left vulnerable to a lack of capacity as
this rationalization goes ahead. It is important that the banks demonstrate
that they will not only provide but enhance the capacity to this important
sector and to the larger businesses.
We had an interesting conference not long ago on public-private infrastructure
globally and the need to mobilize total finance solutions for Canadian
companies, even the marquee names, which are small on the Canadian stage.
The Acting Chairman: My question was a little different. I will restate it.
Since you were not referred to in the MacKay task force report in a major way,
and because you are doing major export financing for Canadian companies, if you
were writing the report today, what things would you like to see in that
report, from a public policy point of view, to help you in doing your job in
the new millennium and in conjunction with banks and other financial
institutions? How would you like to see those activities harmonized?
Mr. Gillespie: It would be important for the task force to recognize the vital
roles played by the federal financial institutions, and the need to continue to
strengthen those institutions. They are part of the capacity I talked about.
Banks, by themselves, will not operate in 200 markets of the world. There are
some issues of skill sets; there are some issues of capacity. Therefore, the
issue is how to strengthen the federal financial institutions to provide the
necessary capacity, not in any self-serving way but in a stronger leadership
role, that will allow them to act as a catalyst, in part, to mobilize those
necessary resources from the private sector so that we have a good partnership
to mobilize capacity.
Senator Kelleher: When I was associated with the EDC about 10 years ago, we had
the same problem. There was an apparent lack of cooperation between the major
banks and the EDC. As a matter of fact, there was a certain amount of hostility
by the large banks towards the activities of the EDC. The EDC was accused of
plucking off the cream and not leaving too much for the banks in certain areas.
This has been recognized by both sides, and I understand that both the EDC and
the large banks have worked on this problem in an attempt to correct it. What
actions have been taken by both sides to correct this problem?
Since the MacKay report did not comment on this -- and I agree that it is a very
important area -- it would be helpful if the EDC could detail for us in a
letter any suggestions on obtaining more cooperation from the large banks in
this particular area, or specific things they are not doing or could do a lot
better than they are doing now.
The Acting Chairman: Would you be able to write such a letter? Could we have it
within a week?
Mr. Gillespie: We could certainly outline a number of areas where we are working
with the banks and areas where we would like to see a greater take-up on the
part of the banks. I would be pleased to do that.
With respect to Senator Kelleher's first question, the relationship with the
Canadian banks is far better than it has ever been, even though the EDC has
grown quite considerably since the time you were responsible for it. The banks
have also recognized that the relationship is no longer EDC versus the trade
finance departments of the Canadian banks but, rather, is a much broader one
involving their corporate banking and the project finance sides, as well as the
small and medium-sized business activities of the banks. Beyond that, it also
involves treasury relationships, such as, for example, securing the necessary
foreign exchange or derivatives and so on. The extent of our relationships with
the banks is far bigger. We have both come to realize that it is not about who
gets the crumbs on the plate and who gets the pie but, rather, that if we work
together, there are enormous opportunities for Canadian businesses globally.
How do we put together our combined resources to leverage the capacity that is
available? In that regard, EDC is taking a much stronger leadership role in
trying to mobilize those resources.
On the small and medium-sized end of the market, that role is difficult and
challenging as we try to bring some of that necessary capacity to bear. We
certainly do not have the distribution capability across the country to be able
to reach into the smaller towns. However, as you well know, you can lead a
horse to water but you cannot make it drink.
Those are some of the difficulties. The banks have so many different products
for the various account managers to offer that those programs tend to get lost.
In terms of programs listed from A to Z, there is some slippage.
Senator Kelleher: One of the many things that EDC has to offer, and which the
banks cannot offer, is their expertise in country risk assessments. The EDC is
found around the world whereas our Canadian banks are not. They have the
expertise there that the banks do not possess. The banks are often reluctant to
get involved in countries where they are not located, understandably. They
appear to have a certain reluctance to work closely with EDC to combine their
money with the expertise of the EDC in country risk assessment. It is not
because EDC has faulty country risk assessments. They have an exemplary record
in that area. This is one area where I feel that both sides could work more
closely together. However, it takes two to tango.
The Acting Chairman: Do you agree with that assessment?
Mr. Gillespie: Yes, very much so. The way to create a competitive advantage in
this area is by having the knowledge to which Senator Kelleher referred. I
think we have that. We are also trying to improve our knowledge quite
considerably. We now have a representative in Beijing. We have talked to the
minister and our board about expanding the number of EDC representatives abroad
because that is part of what will help to create opportunities for Canadian
The other dimensions of the competitive advantage to which I referred are such
things as having the skills and the largest pool of trade finance talent under
one roof, our coverage, our capacity to take risk, and, ultimately, the service
that EDC provides. You have been provided with some information regarding the
kind of customer satisfaction that EDC has enjoyed over the last number of
Senator Di Nino: For the purposes of those who are watching or those who must
prepare a report, I would like you to be more specific about the kinds of
relationships you are talking about. Obviously, the one that Senator Kelleher
mentioned is important. How else, specifically, are you looking for cooperation
and participation with the major banks and other entities? Also, who are those
Mr. Gillespie: There are two areas that I should like to mention briefly. First,
we have created an important partnership with Northstar Trade Finance, which
was based on the entrepreneurial spirit of an individual named Scott Shepherd,
who previously worked at EDC and then went off on his own. With his creativity
and ability, he was able to put together a small company. This was accomplished
despite the "doubting Thomases" -- some of the financial institutions
in this country. He was also able to attract the interest of the Bank of
Montreal at the outset and, more recently, the Royal Bank, to create this
institution. He has been able to provide something in excess of $100 million a
year in finance for smaller transactions in the medium-term area that are
ultimately supported and insured by EDC.
Senator Di Nino: This is always related to trade.
Mr. Gillespie: This is related to trade. That is one dimension. There are some
additional similar opportunities to create partnerships with the private sector
and use EDC's risk capacity to leverage private-sector resources to help
smaller Canadian companies.
At the other end of the spectrum, we are looking to create some partnerships
with Canadian financial institutions, ideally to provide total finance
solutions for bigger projects around the world. One of the difficulties is that
Canadian companies, whether they are involved in engineering or in telecom or in
other sectors, tend to be small on the world stage. They must mobilize various
goods and services from around the world. EDC, because of its obviously
Canadian focus and interest in benefits to Canada, may not be able to support
or underwrite the entire project. It may be a refinery project somewhere in the
world, but only part of it may be actually coming from Canada. Therefore, EDC
may only have part of the financing solution. In many cases, Canadian financial
institutions will not provide the balance of the financing, and that has put
the burden back on the Canadian companies to seek that balance from around the
world. It is a big burden when they do not have a sufficiently large balance
sheet to be able to provide the vendor finance themselves. We have been
discussing with various financial institutions the idea of forming some kind of
alliance, whose actual structure or form is somewhat unclear, in order to
provide the total financial solutions right up front. That would then relieve
the Canadian companies of having to put the financing together themselves, and
allow them to concentrate on the commercial elements. This will be increasingly
important as Canadian companies become involved in the larger public-private
Senator Di Nino: Would EDC possibly be providing some sort of insurance as well,
as some sort of guarantee? What could your role be in that area?
Mr. Gillespie: Our role might be to provide loans or to provide equity in order
to be able to underwrite a larger project. We are not talking about
guaranteeing financial institutions. We want them to come to the table with
their risk capacity. We do not want the EDC taking all the risk and the banks
getting a free ride. We want to work with people who understand this business,
because it is higher risk. They will bring the capacity and we will put the
combined capacity together to provide that total finance solution. That could
involve insurance products, political risk insurance, loans, or equity. The goal
would be to create an alliance or an institution that would achieve this
Senator Di Nino: Would you also have a role as some sort of early warning system
if problems seem to be on the horizon?
Mr. Gillespie: I am not quite sure what you mean by that.
Senator Di Nino: The Asian flu is a great example. We all know that the EDC has
had involvement in that part of the world over a number of years.
Do you see a role for the EDC, because of your wider presence in many countries,
in providing Canadian investors and Canadian financial institutions early
warnings about potential financial earthquakes in the future?
Mr. Gillespie: I might express it a little differently. Canadian financial
institutions take great comfort in the facts that we are in these markets and
that we do have the knowledge to which Senator Kelleher referred. Therefore,
our presence is an important demonstration of our commitment to the market.
That will, in many cases, encourage them to try to stay in for the longer term
as opposed to being somewhat more fickle as economic circumstances change. EDC
is able to take a longer-term perspective and ride out some of the inevitable
cycles that occur. The strength, backing, knowledge, and expertise of the
shareholder provide a great value.
The Acting Chairman: Thank you for coming today and making a succinct and
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Our next witnesses will be from the Canadian Federation of
Independent Business. Please proceed.
Ms Catherine S. Swift, President and Chief Executive Officer, Canadian
Federation of Independent Business: Honourable senators, the CFIB represents
the small business community in Canada. Currently, we have over 90,000 members,
in every sector and region of the country. Financing issues are enormously
important to our members. We have been very pleased with the process surrounding
the MacKay task force and its report. It has shed a great deal of light on some
of those issues, the most light that we have ever seen in our 28-year history
of dealing with them. Some very interesting information has been brought out.
The recommendations in the report were focused on such areas as job creation,
economic growth and innovation. Our sector is increasingly recognized as
something of a job creation machine. We do not see this trend abating. We
expect that, within the labour force, the self-employed and small business
segments will continue to grow at an ever-faster pace. Capital issues, on both
the debt and equity sides, are enormously important to this trend.
One of the things we agreed with most strongly in the MacKay report, and which
was a theme running through it, was the recognition of insufficient competition
in the provision of financing services to the small-business sector. That is a
problem we have focused on for a number of years, and we were happy to see it
documented and affirmed within the MacKay report.
We know it is part of your mandate to consider visions of the future of the
financial services sector, but what we want to touch on briefly today is what
we believe to be the present context of financial services and banking services
for small business.
Access to financing generally is an ongoing challenge for small businesses. We
have documented this time and time again. We feel as if we are repeating
ourselves all the time. However, if we saw some concerted action on this
problem, we would not feel as compelled to repeat ourselves.
The last recession was pretty instructive. We saw a severe restriction of
financing to the small-business sector. Indeed, we believe that the recession
was worsened by excessive restriction of financing to small businesses. We have
found subsequently that it has taken an awfully long time for lending levels to
the small-firm sector to get back to where they were before the recession. The
banks tended to increase their lending to larger businesses, even during the
recession. When we studied the data, we saw that it was only in 1998 that loan
levels to the small-firm sector actually reached their pre-recession peaks.
That restriction cannot be justified on the basis of difficult economic
Over the decades, we have been disturbed by the number of business owners who
have told us: "I never want to need a bank again since I had such
unpleasant experiences, so I am not going to expand my business. I am not going
to make that investment because it would mean becoming beholden to some other
lender again, and I do not want to get into that situation." As people
forego what could be positive additions to the economy because they do not want
to link up with a financial institution, the result is lost-opportunity costs
for the Canadian economy.
We would certainly be the first to acknowledge that the small-firm sector is not
an easy one to lend to. It is quite challenging. It takes special expertise.
The major banks have taken quite a while to understand the needs of the market,
and they are facing new challenges with the knowledge-based sector and some
other sub-segments of the market.
There is a problem with placing too much reliance on new competition in the
financial services or banking sector. Given that the institutions that have
been around for a long time have taken quite a while to come up the learning
curve, we cannot really expect new players to be coming up that learning curve
in a short period of time.
We do a comprehensive banking survey roughly once every three years to gauge
what is happening on an ongoing basis. In our last survey in 1997,
approximately 9 per cent of our members told us that they had a "choice"
of one bank in their community, and another 13 per cent had one additional
alternative. In other words, a fairly significant chunk of the small-business
market out there had only one or two options.
We also found that where there are only one or two options for small firms, they
consistently face higher costs of financing, more difficulty accessing credit,
higher service charges, higher collateral demands, and so on. It is not simply
that they do not have choice; without competition, they pay more. That is a
rudimentary concept. Naturally, for this key reason, we find the notion of
mergers problematic. It would restrict competition and reduce choice even
further for the small-business community.
The situation varies across the country. We find there are some options to the
big five banks in some regional markets. Ontario is probably the worst off.
There really is not a developed second tier in commercial banking in Ontario.
In other provinces, the situation is by no means rosy, but Ontario has the
greatest problem in this area. If the proposed mergers are permitted to go
through, we simply do not see alternate forms of competition springing up very
We should like to refer back to your mandate and tell you how we see the future
of the financial services industry in Canada. We find some of the Australian
experience rather interesting. Their approach was that mergers were not
permitted to go forward until they actually saw proof of functioning
competition. The industry will change no matter what happens, as every industry
is changing quite dramatically right now, but we want to see proof of
competition before further consolidation is allowed to take place.
Probably within five to ten years, we will start to see some other viable
players arise to serve the small-business market. At this time, we would put
most confidence in the expectation that they will come from the credit union
movement, if we can get some kind of national evolution of that part of the
lending community. Many credit unions currently lend to the small-business
sector in a very limited way. Some are notably more penetrated and more
successful in that sector. Because of the community orientation of that group,
there is considerable potential for them to evolve into a true competitor to
the banks. They are certainly not at that level now, and it will not happen
Much emphasis has been put on foreign banks. They are already here and their
services in some fairly narrow niches of the small-business market will
probably grow. However, we do not see wholesale entry of foreign banks, or
community banks, for that matter, into the small-firm market, certainly not
quickly nor on a full-service basis.
Even if some of the elements in the MacKay report that would encourage greater
competition were permitted, and if mergers were disallowed, we would still see
domination by the five major Canadian chartered banks in the Canadian market.
The main reason for that is that they are so well established at present that
they would be very difficult to knock out of any market should they decide to
concentrate on it.
Generally speaking, the majority of our members deal with one institution for
most of their financial services. As a result, providing those services to them
ends up being quite a profitable business for the chartered banks. Therefore,
we certainly do not see a major reduction of the big five's small-business
market share in the short term.
We should like to give you some feedback on some of the recommendations within
the MacKay report. We certainly agree with the task force's emphasis on the
vital role of small- and medium-sized enterprises in the Canadian economy. We
agree there is a need for more competition and a greater responsiveness in the
financial services industry to small-business issues and consumer issues
generally. We disagree that alternative forms of competition can be as easily
achieved as MacKay sometimes seems to imply.
One must always keep in mind that small businesses need access to full-service
banking outlets. Some of the alternatives we have heard presented, such as
electronic banking or some kind of travelling banker alternative, are
inadequate, in our view, at least at present. Although those alternatives may
well serve certain portions of the market, our members still need the physical
presence of the branch.
We agree with the MacKay finding that Canadian banks are held to a higher
standard, and they have indeed had a lot of protection and concessions over
time. As a result, we do not really have a true private-sector type of
market-driven entity operating here, but there are certain obligations that are
expected in return on the part of the major chartered banks.
One aspect of the MacKay report with which we strongly disagree is that of
allowing banks further entry into the insurance and leasing businesses. Our
members have consistently been opposed to this, and much of that opposition has
been based on the fear of extending bank power. The banks already have
considerable ability to enter into the insurance market, for example, and the
notion of extending that further creates some concern from the small-business
Although some have argued that mergers should go ahead immediately so that
smaller players can come in and pick up branch outlets or staff that are
divested by the merging banks, we wonder about how that would work in practice.
We imagine that any large bank trying to consolidate will want to hold on to
its best locations and its best human and physical assets. As a result, we
wonder how efficient and effective these potential competitors or smaller
institutions may be, using the cast-offs of the major banks.
Despite our concerns over how quickly or effectively real competitive
alternatives to the big five may set up, we are certainly pro competition. We
think that true competition is the only way to go and the only way that we will
ever see a well-served small-business market, not to mention other segments of
the market. We are therefore very supportive of the recommendations in the
MacKay report that would permit new and more effective competition.
We oppose further concentration and mergers until we see actual competition
Some of the specific MacKay recommendations that we support include: the need
for greater competition; controlling the incidence of account manager turnover,
a constant bane of the small-business owners' existence that has not become any
better in 20 years since we have been tracking it; reinstituting some credit
decision-making authority at local levels instead of the increased
centralization we have seen; pricing for risk where it is merited; and better
value-for-price relationships on the complete range of banking services.
We are very supportive of the collection of further information on the
small-business lending area. Over the last few years, the banks have been, by
request, providing that information. It has been useful to everyone in
understanding the market better.
We are also in favour of accountability measures for communities and greater
access for small business to equity financing in addition to the traditional
Unfortunately, much of the review, which has been very comprehensive of the
financial services sector, has been overtaken by the merger issue because of
the two proposed mergers that have been announced to date. We wonder how much
the merger proposals have accelerated the pace of the discussion and perhaps
detracted from many of the other important considerations that should be
brought to bear on the entire issue of financing services.
As a result, bank mergers have, of necessity, become the most important issue
for our members, and we have certainly been hearing from them on it for the
last few months. In our most recent poll on this issue, over 68 per cent of our
members were opposed to the mergers, and that was up from approximately 64 per
cent a while earlier. The very smallest of firms, those with less than five
employees, which comprise about half our members and proportionately even more
of the Canadian small-business sector, are about 75 per cent opposed. These
smallest firms are the ones that typically have the most difficulty getting
financing and they are the most strongly opposed to the mergers.
In conclusion, we do not believe the mergers are necessary. We do not think they
will help with economic development and jobs, nor have we bought the banks'
argument that they are needed because of efficiency and competitiveness
considerations. In fact, the evidence is very spotty on those issues, as many
have concluded, including the MacKay task force.
We also believe the timing is very unfortunate right now. We have, of course, a
number of uncertain economic factors on the horizon. We have the year 2000
millennium bug problem looming, and we feel that adding bank mergers to this
mix over the next few years would really be asking for trouble.
Finally, we believe that the Canadian government should have the courage to
protect consumers and small business, and take an approach similar to that
which Australia took, which is to say we wish to see the competition first
before we permit further industry consolidation. We also add that any merger
decision, once it is made, will be irreversible.
We are happy to be here today to be part of this process because it is extremely
important to take the time to get this right.
The Chairman: My question is related to your last two or three minutes, and it
refers to page 5 of your report, which in turn touches on recommendations 102,
103 and 104 of the MacKay report. Let me deal first with the issues of account
manager turnover and reinstituting credit decision-making authority at the
I understand absolutely why you argue for those. Am I right in saying -- and
MacKay would appear to take the same position I am about to take -- that those
two issues cannot be dealt with by public policy? One issue is essentially a
human resource issue within the institutions; namely, they should not turn
account managers over as frequently as they do. Where credit decisions are made
is obviously a management decision, not a public policy decision. I suppose
that is why MacKay in both cases urges banks to do something as opposed to
having governments do something. Would you agree with that?
Ms Swift: I would agree. There is no question about it. We have had many
discussions along those lines over the years with the various financial
The Chairman: You have also had discussions on that subject with this committee
in the past.
Ms Swift: Yes. Everyone agrees it is a problem but we wonder why we have we not
seen any movement on this issue. Rather, on the issue of centralization of
decision-making, we have seen the reverse. Much of the problem is as a result
of the automation of financing decisions, the trend toward more credit scoring,
and the like, which enhance centralization. There are other developments which
might not even have been conscious policy decisions but which just happened by
The account manager issue is one we find particularly vexing. All of the major
banks we have met with have agreed that something should be done about it, but
clearly it is not a priority for them because nothing has been done about it in
a very long time. It would be very difficult to deal with the problem in a
public policy context.
The Chairman: My second question deals with pricing for risk. I noticed you were
quite careful to say there should be pricing for risk "where merited."
We have asked the banks about this, and here is the dilemma. It is quite clear
that loans in Canada are essentially constrained by the price rather than by
risk, whereas in the U.S., if a loan is extremely risky, the borrower can pay an
extremely high interest rate.
In Canada, all financial institutions that lend money seem not to want to go
above a particular interest rate because they are afraid of the bad public
relations and the political flak that would ensue. When we see the reactions to
interest rates on other products, one can understand why they are gun shy.
What would be the reaction of your group if financial institutions started to
price loans by risk? When I see the words "where merited," I find it
difficult to imagine a situation where your members would conclude that prime
plus seven was merited. I wonder if "where merited" is not exactly the
sort of language that makes everyone gun shy. I would love to be able to deal
with the problem; I just do not know how.
Mr. Brien G. Gray, Senior Vice-President, Policy and Provincial Affairs,
Canadian Federation of Independent Business: We have discussed this issue for a
long time. Our discussions with the banking community began in the middle of
the recession when we really had a serious problem in this country.
The Chairman: A serious problem of access?
Mr. Gray: Access to any kind of debt capital. The issue of pricing for risk was
thrown out for discussion, and I was asked the very same questions you are
asking now: What do the markets say? What would be the reality? Frankly, many
small-business owners cannot get any form of financing right now at any cost.
The reason we use "where merited" here is that we have seen too many
examples, in other areas of the banking relationship with the small-business
entrepreneur, where the banks will apply a policy across the board, regardless
of need. Service charges are a very good example. There is often an
arbitrariness to the application of a given service charge rate. If I happen to
be in a more vulnerable state vis-à-vis the bank, I must sit there and
take it, whereas if I have a little more advantageous position vis-à-vis
the bank, I may be able to question it and get it cut back.
There is always an intimidation factor between the very small entrepreneur and
the banker across that desk. It is by definition a tension-riddled and
intimidating relationship. We are saying "where merited" is because
we agree there are situations where pricing for risk is merited.I am sure the
bankers would be able to identify them for you. For example, restaurants are
inherently more risky than businesses that have many attachable assets, such as
manufacturing operations. We understand that there would be a price premium for
giving some debt to that restaurant. However, we do not feel the banks should
just lift the rates across the board for small firms generally just because, by
definition, small business is inherently more risky, more poorly managed, and so
on -- all those so-called truths that we hear too often from the banking
community. That is why we say "where merited."
In terms of worrying about what the public will think, it certainly has not
stopped the banks from having high credit card interest rates. There is a big
difference between prime plus two and prime plus eight, which is what Wells
Fargo is offering. Instead of saying that the sky is falling with Wells Fargo
coming into the market, we think the banks should start to do business with
entrepreneurs who would like to do business and get on with things.
Mr. Garth White, Vice-President, National Affairs, Canadian Federation of
Independent Business: Mr. Chairman, we have appeared before your committee
several times, once when you were evaluating financial institutions. There is a
public policy context with regard to the two issues that you identify, and that
is a more rigorous measurement of the issues.
Recently, we have been appearing in front of committees with regard to the
Canadian Small Business Financing Act, and we still do not have proper
measurement of the loans over the last five years under the Small Business Act.
There are knowledge gaps regarding particular sectors. When we advocate pricing
for risk, we need to have a better handle on the situations in those sectors for
our own research. I believe the government also needs a better idea of what
sectors are under-financed or are having difficulty getting any financing
before we get into the issue of pricing for risk.
The Chairman: We agree there is a lack of a database, but I was just curious as
to what you think would be the likely reaction from your members and in the
Do you have any information as to the percentage or the number of your members
who are taking up the Wells Fargo product, in particular at the higher end of
their rate scale?
Mr. Gray: We are gathering information on that right now. As you can understand,
the issues at stake in this merger proposal are pretty serious from the point
of view of our constituency. Thus, we are trying to get gather as much
information as we can.
We have some preliminary data that I would be glad to share with the committee
as soon as we make it public. I cannot tell you, Senator Kirby, that we know
the take-up by size of loan or anything like that. We have a sense of the
take-up, but we do not have it by size of loan.
The Chairman: I was more curious about interest rates.
Mr. Gray: We did not ask with respect to specific interest rates, I am sorry.
What I can tell you is that the take-up rates are exceedingly low.
The Chairman: Let us suppose for the moment that the chartered banks decided
that the unofficial cap of prime plus three, for example, will disappear. I am
curious as to whether there would be a market out there.
Ms Swift: There is definitely a market. In fact, we asked that precise question
a number of times in some of our surveys. There definitely is a constituency
that would be willing to pay what we could consider quite high rates for access
The Chairman: As there is in the U.S.?
Ms Swift: Yes.
Senator Kolber: Representatives of the Business Development Bank of Canada
testified before us this morning. I chatted with them afterward. I asked one of
them the precise question of how high they go with their rates. He told me that
they have a lot of loans at prime plus seven and eight.
The Chairman: I did not know that. That is a helpful piece of information.
Senator Kolber: On top of that, they also referred to royalties they receive.
Frankly, I did not know what that meant although I assume that is a piece of
the action. Despite all that, their return on equity, which can be considered
pre-tax because they do not pay tax, is only 10 per cent. It does not sound
like a great business.
It seems to me that while we are trying to get more competition in lending to
small business, it is not a very lucrative business. You probably have 100
arguments against that. I know a famous developer who used to say that he would
rather be alive at 15 per cent than dead at 5 per cent. Perhaps that is what
your members say.
Can you give me your comments on that? Pricing to risk does go on in our
country, and it goes on with this development bank.
Ms Swift: First, I do not think we should consider BDBC as the paragon of
small-business lending. They do some useful things for small businesses in
certain niches. However, as many senior bankers have told us over the years,
the lending products themselves are not where they make their money. They make
their money as an institution on all the ancillary business, even personal
business such as RRSPs, payroll services, mortgages and so on. Many senior
bankers have told us that they view the small-business market as very
profitable indeed. That is because your typical small-business owner has a
greater net worth than your typical employee, across the whole range of the
economy. In fact, all the banks are getting into the high end of the so-called
asset management game in a big way these days, or at least they would like to.
Senator Kolber: You are speaking of wealth management.
Ms Swift: Yes.
Senator Kolber: That is a completely different subject.
Ms Swift: It is a related subject because many of those people you are talking
about are small-business owners.
Senator Kolber: They must be good credit risks, if they are looking for wealth
Ms Swift: Ultimately, small-business owners do have a greater net worth. We
think that is a positive thing for the economy generally.
Getting back to the profitability issue, we see a very profitable overall
picture for the small-business market across the whole range of services that
the BDBC does not provide.
Senator Callbeck: Senator Kirby asked you about the recommendations in the
report regarding more access to funding for small business from the banks. If
you had written the report, would you have included recommendations that are
not in the report?
Ms Swift: Many of our key recommendations were included in the MacKay report. I
suppose the question is a matter of cherry-picking among the recommendations.
In fact, many of them arose from our meetings with the task force. Therefore,
we certainly do not want to be critical of them. Naturally, as we have
mentioned, there are some that we find quite negative.
Mr. Gray: In our submission to Mr. MacKay, we discussed issues of access and how
they are due to many different factors. Access is partly a function of
information. It is partly a function of choice. It is partly a function of
account manager turnover, because the faster the account managers turned over,
the less of a relationship there can be built up between the business owner and
the banks. One of the five Cs is character, as I am told, and it is pretty hard
to get an assessment of character when there is rapid turnover.
The final factor has to do with size and age of the firm, which puts you in a
really difficult position. A further factor is how many choices there are in
the locality. In some parts of your province, as an example, Senator Callbeck,
there may only be one bank, and there is a little bit more latitude for the
account manager in that bank to make access more difficult or on tougher terms
and conditions. Our research, which has never been refuted, has shown that the
faster the account manager turnover, the higher the cost to business, in terms
of interest rates, collateral coverage, service charges, and lack of access to
What we are saying is that the government and the industry have to address all
four of those things in order for the small-business owner-operator to have a
better ability to get access to capital.
Finally, there is a huge issue of equity capital requirements for small firms in
this country, which we discussed when we last appeared before this committee on
the SBLA legislation. We have had a lot of debate in this country on the
provision of debt capital and not enough on equity capital requirements, but
the two are necessarily interrelated. We have given far too little attention to
that issue. It has been too often associated with rich people who have lots of
money and who do not need any more equity or any more incentives to place and
invest equity safely. For those reasons, I would say the equity issue is as
important as the debt issue.
Senator Callbeck: I have a question about an area you did not refer to in your
comments this morning but which I know you have addressed in the past. I refer
to the ombudsman service. I think I have read that you feel that it is not well
known. However, when the ombudsman appeared before us, he indicated that 40 per
cent of Canadians know about the service. You said that the service is not well
known, that there seems to be an intimidation factor about using it, and that it
is not necessarily very good at resolving credit disputes.
Certainly, there does seem to be a problem. We had a lot of people come before
us who had concerns about tied selling. In fact, the MacKay report cites the
results of a poll indicating that 16 per cent of people feel that they had been
subjected to tied selling at some point in time, but there are few complaints.
MacKay recommends that the ombudsman service continue. However, the report also
recommends that it apply to every financial institution and that membership be
Obviously, you are not happy with the system. Do you agree with the MacKay
recommendations? Do you have any other recommendations to add?
Ms Swift: One of our major problems with the mandate of the current ombudsman is
that there is no reversing of credit decisions. Thus, the key issue on the
table cannot be dealt with by him. There is definitely an intimidation factor.
In addition, from some surveys we have done, we know that there is a good
proportion of our members who feel that it will do any good to complain in any
event. Perhaps it is not so much a question of intimidation but disbelief that
there is a point in going through the process, which is a pretty tedious one.
You have to go through a number of levels within the institution before you get
to the ombudsman for the entire industry. We feel there are many things that
could be done to fix the existing system.
There is also the issue of broadening it to cover the whole financial services
Mr. Gray: When the working committee report was tabled in 1994, there was a lot
of pressure for a national bank ombudsman -- that is, a government agency. We
said that we thought it was preferable to allow the private sector to try to
regulate itself on this issue and come up with some proposals. That is when you
began to see the development of bank ombudsmen in the various banks.
I would not say that we are totally negative on it. We have concerns as to
whether it can be completely effective, for the kinds of reasons that Ms Swift
mentioned. Credit decisions and service charges, which represent the
overwhelming majority of the complaints that we receive from our members,
cannot be reversed.
This situation is similar to the one we face when dealing with Revenue Canada.
You must be careful about complaining about your account manager. Although you
are given assurances that it will not hurt you down the line, it may well
jeopardize your relationship with that account manager or the next one down the
line. From a business point of view, it is not worth taking that chance.
In our 1997 survey, we asked our members: How do you use the system right now?
We wanted to try to add to the literature and to our knowledge about what was
working, what was not, why it is was, and why it was not. We asked them how
they went about appealing things in that system. We found out, first, that not
many used it. However, the survey was instructive because most of them were
using the established system. For example, in a survey done by the banks, 31 per
cent said they would appeal to their account managers, which is what the banks
say you should do first, 29 per cent would appeal to the branch manager, and 11
per cent would appeal to the regional VP. However, 9 per cent said they would
take no action because they were afraid to jeopardize their relationship, and 18
per cent felt it was not worth the time, so close to 30 per cent said, in
essence, that they would not use the system.
A system must have some credibility and show some meaningful reversals of
decisions before members of the small-business community will feel they have a
chance. There is not much credibility in the system right now, although I must
say that one of our members did manage to receive a decision in his favour, and
we are trying to promote that among our membership as an example of how the
system can work if they choose to use it.
Senator Callbeck: On page 5 of your presentation, you list a number of
recommendations. One of them is with respect to accountability measures for
communities. The MacKay report discussed a community accountability statement.
What information do you feel should be included on that statement? Should it be
a standardized form that every financial institution must complete? One of the
witnesses said that it would be very costly for small institutions to do that.
What will this statement accomplish?
Mr. Gray: We believe there must be adequate knowledge and information through
the system generally. Prior to the early 1990s, it was extremely difficult for
most of us, as entrepreneurs or as policymakers, to understand what was
happening with regard to small-business lending. You could not get reliable
information about loans below the $200,000 level, but it was difficult even
there. Our members were constantly saying, "I do not know how to choose a
banking institution. I do not know who is lending and who is not lending, or
who is performing well and who is not performing well." One of our
functions is to put out report cards on financial institutions on a regular
basis so that our members can be better informed about how the banking
institutions are conducting themselves.
From a policy point of view, as well as from an entrepreneurial point of view,
it is important to get more micro data into the hands of consumers and
policymakers. That is happening through Industry Canada now and as part of this
whole process of reviewing financial institutions. It is exceedingly helpful.
In terms of how detailed the micro data must be, we have not subscribed to the
theory that you must know which trucking firm in which part of a province
actually got a loan and for how much. We do not think that is appropriate, but
we do think there is a need for more information.
Mr. White: We had this debate three years ago at the national level. We argued
at that time that we should have more aggregate information on lending across
the country. At first, the banks said there was no way they could do it to a
level lower than $5 million. By the end of that week, after a couple of the
banks broke ranks, they then said they could break the data down to smaller-size
loans. Some of the banks actually said it would be beneficial because they
could monitor their own records and see where they were lending. Rather than
ignoring our sector, they were suddenly saying that it was a positive measure.
There is a balance that must be struck between making it difficult for banks to
collect information and having some public accountability and information about
where they are lending as well as the size of loans, to see if they are helping
with local economic development.
I wish to return to the opening statement given by Senator Kirby on how this
relates to public policy. We need information to be involved in public policy.
Banks may find it useful themselves. They certainly do in the United States.
Senator Callbeck: Are you referring to their Reinvestment Act?
Mr. White: Yes.
Senator Callbeck: Someone told us that statistics regarding small businesses and
financial institutions are worthless because if you are a small-business owner
who goes into a bank to get a loan, you will not be asked to fill out an
application unless the bank is sure that you will qualify to get the money. All
the businesses that want loans but who are not asked to fill out an application
do not become part of the statistics.
Ms Swift: That is certainly an issue. When you look at loan turn-down rates,
which is one of the statistics often bandied about, they are compromised by the
fact that there are a lot of people who never get to the application stage and
are not counted in those statistics.
We will never have perfect statistics in anything. What the House of Commons
Industry Committee has been doing over the last few years has shed a good deal
of light on what is happening in the area of small-business lending. It has
disaggregated the information down to a lower level of loans, in different
sectors, and so on. We have seen some interesting sectoral statistics through
the course of this whole review of financial institutions. We have been able to
see where, for example, the big five have their sectoral emphases.
If you consider that in the context of the proposed mergers, you will see that
in one of the merger proposals, over 70 per cent of some sectors are dominated
by one institution. Those are data we did not see previously. That should
probably have some bearing on whether they should be permitted to merge.
You are correct, the statistics are by no means perfect. However, they are
better than they used to be. Everyone, including the MacKay task force, has
said that the data are not good enough and we need better data. We could not
Senator Di Nino: This debate has been going on for how many centuries? It seems
that these reviews always end up with similar recommendations, and they all
involve the word "competition." I do not think we can argue with
that, but let us focus on it for a couple of minutes.
The last time there was any real attempt to deal with this issue was a couple of
decades ago, when institutions such as the CCB, the Bank of Western Canada and
the Continental Bank were all waving the banner of small business and
questioning whether or not we would be there for them. What happened? Why did
we not succeed? Why are we trying to reinvent the same wheel? Do you have any
thoughts or opinions on that?
Ms Swift: Yes. I would argue that one reason that some of those typically
regionally based financial institutions ran into such trouble was that they
were not too big to fail. There has been much discussion, since some of the
more notable financial debacles, such as the Reichmann downfall, for example,
of the likelihood that one of the big five would have failed if it had not been
A part of the argument is that those institutions that did fail were more
narrowly based. They were regionally based, and that necessitated a certain
sectoral focus. Therefore, when there was a terrible time in a certain sector,
such as the oil patch or agriculture, they were hit much harder than more
broadly based institutions. However, this notion that even our big five banks
would have been teetering on the brink if they had not been bailed out is a
factor to consider.
I agree that it is a tough nut to crack. In the U.S., there are a great many
institutions of various sizes, and their regulatory history has been almost the
exact opposite of ours. It is a mixed experience. From our standpoint, we
prefer the choice that is found in the U.S. market. We think there is much more
creative activity. The entrance of an institution such as Wells Fargo, for
example, prompts our existing institutions to think about offering a Wells
Fargo kind of product, even if Wells Fargo's slice of the market is minuscule.
If nothing else, it motivates others to do something different and to be a
little more creative.
We believe that having more players is better. What is important is how you
regulate to ensure that we do not have the fiascoes like the savings and loans
debacle in the U.S.
Mr. Gray: This is a refrain that we have repeated for a long time. In the
Canadian market that has the most competition, our members are the most
satisfied with all financial institutions, and that is Quebec. There we have
the Caisses populaires Desjardins, which has more outlets than any of the big
five. We also have Banque Nationale, mainly a regional bank, which is extremely
active in that market. Those two institutions are rated one and two in terms of
satisfaction by our members. The level of satisfaction with the others is also
much higher than elsewhere in Canada. We have to surmise that that is because
the competition has forced better service, better delivery and better terms and
Senator Di Nino: So we agree that competition is probably the answer to this.
Mr. Gray: That is right, but it is extremely important to remember, as we said
in our statement, that you do not develop the ability to start up a viable and
sustainable bank overnight. Too often in this debate on mergers we hear that
with the flip of a switch we can have community banks, foreign banks in
numbers, and credit unions. We must remember that Ontario, the biggest province
in this country, has no second tier.
Senator Di Nino: The lack of qualified, knowledgeable people to manage a
financial institution will play a role. Obviously, that, in your opinion, would
be one of the reasons some of these institutions have not been successful.
Ms Swift: In part, yes. We also believe that, if things are regulated properly,
failure is not something to be avoided at all costs. Granted, you want to
minimize the downside, and there are a lot of ways to do that with regulation.
In this country, we protect consumers a lot. I have sympathy with the banks'
argument that they pay into the deposit insurance pot in the largest proportion
and that caveat emptor is not pursued too vigorously in certain parts of the
Senator Di Nino: If the "too big to fail" issue had been addressed at
the time, perhaps the CDIC losses would have been a little different.
Ms Swift: I agree.
Senator Di Nino: One of your recommendations is that we should look to our
credit unions. It was not too many years ago that there were some serious
difficulties, principally in Ontario, but also to a lesser extent with the
Caisse in Quebec and VanCity in Vancouver. Do you believe that there is the
knowledge base necessary in the credit union movement to be true competitors
with the banks?
Ms Swift: Not yet. I do not believe that we have homogeneity within the credit
union movement. It is a mixed bag. There are some groups within the credit
union movement that are up the learning curve and very active in small-business
services. There are others that are nowhere. We believe that it could be
developed, but it will not happen quickly, certainly not in a year or two.
Senator Di Nino: A number of the witnesses have indicated that when they try to
enter this field, the major banks are allowed to get away with murder in
putting road blocks in the way of their success. Have you heard anything like
that in your deliberations?
Mr. Gray: I did not hear the examples given, but I have talked to a number of
foreign bank representatives over the years who said essentially that there is
no point in coming into Canada. Quite apart from the regulatory matters, the
costs of entry are overwhelming. Citibank tried to set up a retail outlet at
Yonge and Eglington in Toronto. It was there for two and a half years and then
it was gone.
Not only are the costs of entry prohibitive, but you can be assured that the
branches of the big five in that locality will underprice everything until the
new institution cannot make it.
I do not think many bankers would argue there was some glee when some of the
smaller banks in western Canada failed. They could say, "See, it can't
Senator Di Nino: Are you suggesting that we should be addressing that problem in
Mr. Gray: We are pro-competition, but we must be mindful of how easy it will be
to set up competition to the big five.
Senator Di Nino: With regard to the provision of capital, and equity in
particular, to small businesses, attempts were made a number of years ago to do
just that, through labour-sponsored venture-capital corporations and other
venture-capital types of entities. Is that a solution?
Ms Swift: Not for our market. In our view, labour-sponsored venture capital has
been a big tax rip-off. It has been an absolute fiasco for the taxpayer and has
done nothing for the so-called target markets.
Senator Di Nino: I understand that the only major company, which has well over
$1 billion, annually pays penalties for not meeting its objectives.
Ms Swift: Yes. Venture capital, in its usual form, is in chunks that are far too
big for our market. The small-business market requires chunks of $60,000 to
$80,000 on average. The $5 million that is typical for venture-capital
companies is way out of line.
Senator Di Nino: Is this an area we should consider in trying to solve the
problems of some of your members?
Ms Swift: Again, considering the way venture capital is generally available
today, I do not see it modifying itself to serve the true small-business
Mr. White: This is something we are pursuing. We surveyed our members on
important sources of equity financing for their businesses. Only 1 per cent
identified labour-sponsored venture-capital programs as a source of equity
financing. High on the list was the $500,000 capital gains exemption.
It may be interesting for this committee to consider whether there are ways to
expand RRSP investment in small firms. We can invest in Bre-X or Asia, but it
is very difficult to invest your RRSP in your neighbour's business.
Ms Swift: One of the Ianno recommendations was specifically meant to try to
implement such a program.
Senator Di Nino: Should the credit unions and so forth be given some protection
-- although I hate to use that word -- from the predatory competitive practices
that we have seen in the past?
Ms Swift: It is a good question and a tough one to answer. We are not in the
business of interventionism. Indeed, our philosophical orientation is the
reverse. Some of the credit unions are doing very well in this area now,
British Columbia being a good example of a province where a few, very active
credit unions are in the small-business market. I should like to think that if
they are doing the job properly, they will get the business.
Senator Di Nino: The MacKay report recommends that we should give new entrants a
break for 10 years on the capital tax. Do you agree with that?
Ms Swift: I agree with the MacKay report generally that the financial sector is
overtaxed, and it is political opportunism that has allowed that to happen.
Mr. White: If I could add something, the fear of predatory practices is why we
are very nervous about the banks getting into the insurance and leasing
businesses. We are concerned not only about the predatory practices but also
about what they may do during good times and how they might tighten things down
during bad times and destroy a network that already exists.
Senator Oliver: I wanted to ask a couple of questions about small business and
banking. One of the things the MacKay task force has told us is that banking
has changed a lot in the last five years, and in the next five it will likely
change an awful lot more, for individuals and for small business. One of the
bankers who was here told us that, 15 years ago, most individual banking was
done in branches and now it is only about 15 per cent. Most of us today, for
instance, do not pick up our cheques and then walk down to the branch of the
bank and deposit it to pay our phone bill. Instead, they are directly
deposited. With electronic commerce, there are a lot of things that can now be
done by small business without a branch.
I was a little surprised, then, that you said on page 4 of your report that you
disagree that alternative forms of competition are easily or quickly put in
place. It seems to me that some of the new non-bank companies have come up with
a very simplified form of credit scoring. You fill in the form, and if this
form and the formula say you can pay the money back, they will lend you $5,000,
$50,000, $100,000, whatever the amount happens to be. It seems to me this can
be done over a telephone or through your fax.
Are you insisting that you still need these branches for small business? What
else does small business have to do to catch up to technology?
Mr. Gray: There is no doubt that technology is changing and it in turn is
changing everyone's life. To cast small business as being antichange is just
nonsense. There is no other sector in the whole economy that has to react to
change as quickly. Technological change is coming, and it will change the way
people do things, but our surveys of our own membership indicate that now about
40 per cent of our members, rising to 50 per cent, are using the Internet
somehow. In terms of actually using it for business transactions on a regular
basis, that number would be quite significantly less, under 10 per cent.As for
the number who use it for banking purposes, we do not have an accurate
percentage, but when we have talked to some of the major five, they have said
it is in the single digits. We are still not there. When they say 85 per cent
of transactions are made outside of the branch, that is true, but if you were
then to ask them about business banking, they probably would not say 85 per cent
of those transactions are made out of the branch. Business banking is quite
I will give you an example. During the ice storm here in Ottawa, we had members
phoning us up and complaining that because they happened to have the debit card
facility in their premises, they became the supplier not only of the candles
and other things people needed but of cash as well. The bank closed down at the
first flake of snow or drop of freezing rain. They were closed for days and
these poor people in the local corner stores were not only having to hand out
supplies but also cash. Ultimately, they ran out of cash themselves. They felt
that this was a pressure that was undue and unfair.
They need coinage services. They need services well beyond just being able to do
the transactions that I as a consumer can do through my bank.
When we ask our members if they need full core-banking services to operate their
business, they say, overwhelmingly, yes. We agree that times are changing, and
small businesses are adapting, but they need full-service banking.
Senator Oliver: The Retail Council of Canada appeared before us and told us
about the need to be able to deposit coins and rent cheques and so on. You
certainly need a branch for that but my real question is the following. Since
the big banks want to get rid of the heavy overhead of branches and get into
other things, what things should small business be telling us, from a public
policy point of view, that we should be considering to accommodate
small-business needs in the future?
Mr. Gray: My answer to you is that the real world out there is not just the way
the banks envision it. I could envision the real world out there for the banks
in a different way. Yes, they have a distribution network out there and, yes,
it is getting more costly than they would like, but maybe if they worried about
the entire relationship with all of their small-business clients that seem to be
so difficult and costly to service, and not just about that business account,
then some of those local branches might be a lot more viable than they are
currently. Instead of focusing on that opportunity, they look only at the cost
and do not tend to care much about the opportunity.
Senator Oliver: Thank you.
The Chairman: Thank you all for coming.
The committee adjourned.