Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 2 - Evidence, March 12, 2009
OTTAWA, Thursday, March 12, 2009
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to examine the present state of the domestic and international financial system (topic: access to credit for businesses).
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Honourable senators, we have a number of interesting witnesses this morning and we want to use all of our time.
[Translation]
This morning, the Standing Senate Committee on Banking, Trade and Commerce will be looking into the present state of the domestic and international financial system, and more specifically, into the extent of the problem of access to credit for businesses.
[English]
I believe the access to credit problem is an important issue and must be examined in the context of a global economic downturn. While actions have been taken by the federal government and the Bank of Canada, concerns continue to exist about business access to credit.
To tell us more about how the federal government is addressing these concerns, we are pleased to have before us in our first hour Jean-René Halde, President and Chief Executive Officer from the Business Development Bank of Canada; and from Export Development Canada, Eric Siegel, President and Chief Executive Officer. I understand that Mr. Siegel will lead off. Before I ask him to do so, I will introduce to you the senators who are here.
Senator Paul Massicotte is from Quebec and Senator Harb is from Ontario. I am Michael Meighen from Ontario, and I chair the committee. To my immediate right is Senator Goldstein from Quebec; at the far right is Senator Don Oliver from Nova Scotia; Senator Stephen Greene from Nova Scotia; Senator Gerstein from Ontario; and Senator Fox from Quebec.
Do you have a statement to provide us before we have a question period? If so, please proceed.
[Translation]
Eric Siegel, President and Chief Executive Officer, Export Development Canada: Thank you, Mr. Chairman, for the opportunity to speak to you today. Your study is important, given the challenges presented by the current economic environment.
[English]
Access to credit is vital for companies of all sizes. As a Crown corporation, Export Development Canada plays an important role in helping Canadian companies access credit and protect themselves against a variety of risks. That is our mandate; it is what the Government of Canada created us to do nearly 65 years ago.
What does Export Development Canada do? Briefly, we provide commercial financing and insurance solutions to Canadian companies, helping them to export and to invest internationally. These activities include: loans to foreign companies looking to buy goods and services from Canada; working capital loans to Canadian companies to help them fulfill their export contracts; loans and insurance to help Canadian companies invest abroad; guarantees to banks, making it easier for them to lend; insurance to protect Canadian companies against a variety of risks, particularly non- payment; bonding services to help Canadian companies guarantee their performance; and, finally, equity participation.
We provide all of these services, both directly and in partnership with Canadian and international financial institutions. We also provide them on commercial terms, without any annual appropriations from Parliament.
As you may be aware, Export Development Canada has come through a year of record performance. While our annual report will be tabled in Parliament in the Spring, let me take a moment to give you some of the highlights.
In 2008, EDC undertook more business with more customers than ever before at a time when Canadian companies needed us most. EDC served over 8,300 Canadian companies, an increase of 11 per cent over 2007. We facilitated $85.8 billion in exports and investment, a 23-per-cent increase in 2007. This figure includes $22 billion in emerging markets, which is over one quarter of our total business. It also includes over $14 billion in business in partnership with Canadian and foreign banks and with surety companies. All told, in 2008, EDC added nearly $16 billion in new commercial support for Canadian companies.
In facilitating this business, we remained focused on our public policy mandate and how our activities provide benefits to Canada. In 2008, EDC helped generate 4.4 per cent of Canada's GDP and supported 572,000 Canadian jobs.
That was in 2008. What we saw over the course of that year is that as conditions grew more challenging and risks increased, we were needed more.
However, by working closely with our customers and financial partners, we were able to respond, taking on risk, adding capacity and filling gaps across all sectors of the economy and for companies of all sizes.
These results were achieved under EDC's traditional export-focused mandate within its established limits and through its existing financial capacity. What I would like to do now is take a moment to describe how the measures introduced in Budget 2009 will help us do even more.
EDC, and its sister Crown corporation, the Business Development Bank of Canada, have each been asked to play an important role in implementing the government's Economic Action Plan. As you know, the government has proposed a two-year temporary expansion of EDC's mandate. With this additional flexibility, EDC will bring capacity to domestic transactions that are credit-worthy and, in turn, supported by a viable business model but are having a difficult time finding credit. What areas will EDC focus on?
We anticipate adding capacity to the domestic market in three broad areas: by providing reinsurance to bring additional capacity to domestic credit insurers and helping them to continue to serve their customers; by providing reinsurance and guarantees as additional capacity to the surety industry; and by providing loans and loan guarantees in the domestic market to assist companies facing challenges raising sufficient credit.
Importantly, all of these services will be provided in a manner that is complementary to the services provided by both the private sector and by the Business Development Bank of Canada, BDC.
Indeed, through the Business Credit Availability Program, BCAP, the banks, EDC and BDC, will be able to consult, collaborate and bring capacity to the market. At the same time, EDC is working with the private sector insurers to ensure its activities support and complement those already offered in the market.
To help us deploy this enhanced capacity, the government has proposed raising EDC's contingent liability limit and share capital limits and, if necessary, increasing its borrowing limits. It has also proposed increasing the limit on the amount of activity that can be conducted under the Canada Account.
These measures are in addition to the recent $350 million capital infusion that was announced in the November economic and fiscal update. EDC's recent work in the automotive sector is a good example of how this additional capital can help expand its service offering.
For instance, EDC has used this capital to add an additional $60 million in new insurance coverage in 2009 in the automotive sector, and EDC is prepared to write an additional $250 million of coverage in that sector, despite the challenges we see there. EDC has also created a $200 million financing pool for higher risk lending to auto parts suppliers and toolers with viable long-term business models, but for which adverse credit conditions are constraining operations.
All of this activity is on top of the $4.2 billion in financing and insurance we provided in 2008 in the automotive sector, in support of 595 Canadian companies.
As we move through 2009, we will continue to identify opportunities to deploy our capital and to provide companies with the credit and insurance coverage they need to survive, to compete and to succeed. That is what we are doing right now. Although EDC does not yet have the new powers proposed in the budget, we are not standing still or waiting to respond. The corporation and its employees are stepping up with a real sense of urgency in response to the needs of our customers.
Let me close by providing you with a snapshot of our activity in the first two months of this year. Already this year, EDC has undertaken $9.4 billion in new business. EDC is doing, on average, $230 million of new business every single business day. EDC has contracted business with 419 new customers so far this year in addition to its existing customer base. We have facilitated over 500 transactions in partnership with banks and surety corporations.
As I said in my introduction, our job is to provide credit and protection against risks. Parliament has given us this mandate and it is one that we are fulfilling each day.
[Translation]
Thank you. I will now take your questions.
[English]
The Chair: Perhaps if senators agree, we can now hear from Mr. Halde and then question both witnesses. There may be some overlap.
Before calling upon Mr. Halde, I will introduce the two senators who have joined us: Senator Eyton from Ontario and Senator Moore from Nova Scotia. We now have three Nova Scotians.
Senator Goldstein: We are being overpowered.
The Chair: Without further ado, Mr. Halde, we welcome your statement. We thank you for joining us this morning.
[Translation]
Jean-René Halde, President and Chief Executive Officer, Business Development Bank of Canada: Thank you for inviting me to your deliberations on the state of the domestic and international financial system, more specifically, your deliberations on the topic of the day, access to credit for businesses.
Before turning to this, let me give you a quick description of BDC. We have 1,800 people providing financing to businesses through 100 branches across Canada and three main activities: financing, consulting and venture capital.
While I believe that Canada's flailing venture capital industry poses great strain on young technology companies by limiting their access to financing, I will limit my comments to the topic of traditional term lending, where because of the complementary nature of our role, we have a higher risk appetite than traditional financial institutions. Our lending portfolio is over $11 billion. Through it we support 28,000 entrepreneurs. These clients in turn generate about $160 billion in sales, including about $22 billion of export sales.
[English]
We have about 3 per cent of the term lending market, which makes us small compared to other financial institutions. Our branch network is modest compared to the 6,600-plus branches of Canada's six big banks, but we do have 600 account managers who speak to thousands of entrepreneurs every month, which gives us a good feel for the pulse of the market.
Right now, we see two forces at work — the first one is the recession, a great many entrepreneurs hesitating to start new projects. They are delaying until they have a clearer sense of what the marketplace holds in store. As a result, we see a lower than normal number of entrepreneurs wishing to finance projects.
The second force, on the other hand, is tightened credit conditions, mainly the result of the exit from the marketplace of some foreign banks and many non-regulated financial institutions due to the sharp decline in the securitization market; a difficult bond market, as we all know; and the difficulty for financial institutions of lending in an uncertain economic environment.
What do these forces mean for Canadian entrepreneurs? If they have a long-standing business relationship with a Canadian bank or a credit union, they are at less risk. However, this risk rises if they are operating in sectors most affected by the recession, such as manufacturing and tourism. Obviously, it rises again if they have lost their financial partner and are trying to establish a relationship with a new financial institution.
The exit of foreign, non-deposit-taking, unregulated financial institutions means that remaining banks are straining to meet the new, significant demand. This is certainly the case at BDC as our portfolio growth is greater than anticipated. We also have a greater number of mid-size firms approaching us. Transactions over $5 million have increased 50 per cent year over year.
Our branch employees are talking to their counterparts at other banks more than ever before. In the first 10 months of this fiscal year, there were 15,000 such contacts, compared to almost 9,000 for all of last fiscal year. These conversations have produced more than 1,200 referrals to us.
You may recall that in November 2008, the government announced a $350 million capital injection for BDC. We have thus far received $250 million, which we are putting to good use in the marketplace. We expect the other $100 million in April, and will use it for a new line of credit guarantee that we are developing in consultation with financial institutions.
The budget before Parliament contains two proposals that seek to alleviate the hardship caused by the exit of foreign banks and the collapse of the securitization market that my colleague referred to earlier. The first is the Business Credit Availability Program, BCAP, a collective effort, as he said, of Canada's big banks, EDC and BDC, to ensure that at least $5 billion in loans and credit support is made available to creditworthy businesses whose access to financing would be otherwise restricted. Representatives of all organizations have already begun to meet at senior and working committee levels to determine the best ways to go.
Under BCAP, we at BDC have five initiatives. First, for large corporate clients, we will start participating in syndicates to replace departing lenders. Second, for mid-market-sized loans, some financial institutions will share with us in an increasing number of commercial mortgage deals on a pari passu basis. Third, for smaller deals, where pari passu can be inefficient or costly, we will purchase participation in commercial mortgages. Fourth, as I mentioned earlier, we are putting in place a line-of- credit guarantee program. Finally, we are also exploring with some institutions a way to handle small loans quickly that would be declined as a result of their scoring systems.
Collaboration with EDC and the banks is good, and we see constructive partnerships developing.
The budget also calls for the creation of the Canadian secured credit facility to support the financing of vehicles and equipment for businesses and consumers. We are working with Finance Canada on this facility. We are coming to the end of public consultations and are in the midst of drafting an action plan as we speak.
As with BCAP, we are striving to launch this facility as quickly as possible. However, financial facilities such as the Canadian secured credit facility, which may go up to $12 billion, are not created in a day, and we are aware of our responsibility to protect taxpayers' money.
In closing, it is crucial to remember that we are a commercial Crown corporation with a statutory obligation to make deals where there is a reasonable chance of success. This obligation means that we, unfortunately, cannot help everyone who asks. We want to help and we understand the need for speed. We give everyone who approaches us a chance to present their case, but our commitment and desire to help come with parameters and responsibility. We must seek creditworthy clients and commercially viable projects.
No one at BDC underestimates the gravity of this recession or the strain that it is placing on business owners. We want to support them quickly, professionally and well. We are doing everything in our power and means to do so.
[Translation]
We now welcome your questions.
The Chair: Thank you for your presentations. We will now go to questions.
Senator Massicotte: Thank you for joining us today. The purpose of our meeting is to ensure the flow of liquidities. That being the case, how do we resolve this dilemma? I am trying to understand the problem. Many organizations, including the Bank of Canada, have commissioned surveys showing that generally speaking, business people see the problem as a liquidity and credit crisis.
I believe the same comment was made to one of the House of Commons committees on March 4 last. According to the Bank of Canada's February 20 report on financial operations to the end of December 2008, in the area of business and consumer credit, the amount of credit issued has increased overall by 8 per cent to 9 per cent compared to 2008, which, grosso modo, is the same increase as in 2007. In some sectors, the amount of outstanding credit has decreased, while outstanding bank credit has increased quite significantly, more than offsetting the lack of credit in certain sectors.
I am trying to wrap my head around the problem. Are we experiencing liquidity problems? When I consider the Bank of Canada reports, I have to ask myself if the real problem is our perception of reality. Why are your figures so different from the Bank of Canada's statistics?
Mr. Halde: I do not think our figures are different. One has to understand that the banking system accounts for only about 40 per cent of all financial operations. Insurance companies, non-regulated financial institutions, companies like GI Capital and others that have exited the marketplace also carry out related financial operations.
Consider, for example, a client who had arranged to obtain some credit from a bank that has now exited the marketplace. A number of financial institutions that are no longer players in the marketplace must now be replaced. I think the two figures are not incompatible.
Senator Massicotte: I note that to the end of December, in the area of short-term business credit, in some sectors, including the ones you mentioned such as life insurance and special purpose corporations, available credit declined substantially from $34 billion to 30 billion. In other words, these sectors experienced a decrease in credit of $4 billion over one year.
As far as the banking sector is concerned, I note that it experienced an increase of almost $20 billion over the same year. I can understand that some sectors are facing shortfalls, but overall an additional $1.2 billion in credit has been extended. That represents an increase of 8 per cent.
It is the same for consumers. I understand that some sectors are experiencing credit problems. However, in terms of the overall number of loans, I have the impression that the numbers are up by 8 per cent, which is a fairly significant increase. The economy is growing at a nominal rate of 5 per cent or 6 per cent. Is there really a problem here? If so, how can we rectify it? What solutions are there to this problem, if in fact there is one?
[English]
Mr. Siegel: It is important to note that we are only now beginning to experience the credit crunch. Much of what we are seeing is anticipation of credit default in a much more serious credit environment than the one experienced to the end of 2008 and early into 2009. Previous experience has shown that in recessions, default rates are much higher than what we are experiencing currently. We anticipate having such default rates and we might exceed them.
That anticipation cascades back to bank lending. Banks have to adjust their lending practices in anticipation of credit default. That adjustment results in the banks either not having additional limit to provide, or having to readjust the terms and conditions of their lending. There, as well, we are seeing that the financial crisis has increased the funding cost, in particular, the liquidity premium that might not have existed before but exists now in many of those loans. Part of the crisis is that the dollars might be in place but the cost and the conditions surrounding the availability of credit have become more stringent and more expensive. That situation is hitting companies.
Another factor is that companies have capitalized tremendously on the liquidity in the market before and, in many respects, have short-term obligations that are coming due now. Thus, a growing wall of refinancing must take place without the benefit of being able to go to the capital markets because the capital markets are highly constrained at this time, which puts additional emphasis on the banks. That situation is why bank lending is turning up, not surprisingly. However, the demand eclipses that which the banks can lend. Ms. Hughes, who is here today from the Canadian Bankers Association, will be able to explain that situation to the committee in more detail. That is why it is important for the BDC and EDC to fill the gaps of foreign institutions that have had to vacate, and of non-banks that are uncomfortable with covering that space, to stabilize the bank lending that does occur.
Senator Massicotte: That argument is coherent with the result. While we are seeing growth, previous recessions have shown that there must be more significant growth to offset the impending problem with liquidity.
During the last significant recession periods, 1980 and 1991, we saw an 8 per cent growth, and we are seeing a good growth in money supply. How much does money supply need to grow to offset this impending shortfall in respect of liquidity.
Mr. Siegel: During the 1991 recession, sub-investment grade defaults rose to 11 per cent. We are seeing about 4 per cent now. Current estimates are that we will eclipse 11 per cent. We might see defaults rise to 15 per cent or 16 per cent, but that is obviously a guess. Previous experience has shown that we experienced that level of default rate, and loss- given default is a subset of that default.
It also indicates that all the way through the credit spectrum, at such a level of default, much better credits are being downgraded and access to their capital then diminishes accordingly. Through the course of 2009, we expect to see a threefold-or-greater increase in credit defaults and their related disruptions.
Senator Massicotte: In summarizing the comments in the marketplace where people are complaining about the lack of credit, you are saying that it is predominantly talk. However, in 2009 you predict that it will worsen considerably. That is why the Governor of the Bank of Canada and the Minister of Finance are pushing hard on the BDC, EDC and the banks to make up for lack of credit, given what they see ahead.
Mr. Siegel: Yes; some complaints are real and lack of credit is only now starting to hit. Banks and the financial markets are looking ahead and anticipating what will happen. Discussions on more credit or credit renewals are coming with different terms and conditions, and we are beginning to see effect that manifest itself.
Senator Oliver: My questions concern small and medium enterprises, SMEs, and access to credit. I know that EDC activities include loans, insurance, guarantees and bonding, et cetera. From what I have read in the newspapers, my impression is that the Minister of Finance wants both the BDC and EDC to become more like retail bankers. By that I mean, they will give greater access to credit to SMEs rather than to the larger corporations only that they currently service.
Will you look at the forestry and fisheries sectors, at real estate and at other areas in respect of loan considerations? Mr. Siegel, you said that you anticipate adding capacity to the domestic market in three areas. The first two were re- insurance and the third was the provision of loans and loan guarantees in the domestic market to assist companies facing challenges in raising sufficient credit. Does that increased capacity refer to small SMEs? If so, in what way?
In preparing for this budget to pass, which might be on March 26, will you hire additional people in your companies to help with this new demand that I anticipate from SMEs looking for more credit because they will not obtain it from the banks. How have you set up for that new demand? How can you ensure that it will be done in a timely way?
Mr. Siegel: Senator, I will respond to the latter question first. Yes, we have been gearing up with additional staff since we saw our business grow tremendously in the third and fourth quarters of 2008, despite the fact that exports were decreasing. The private market was not there and so more demand was shifting toward us. We also anticipated higher defaults rates and restructuring. We are adding between 30 and 40 people to the organization to deal with both our core business and the new domestic powers.
Small and medium-sized enterprises are a big part of our business. SMEs are 82 per cent of our customer base; they amount to almost 7,000 of our 8,300 customers. Last year, total support in that area was $17.8 billion, which was a sizeable jump from 2007.
A large part of that support is in the area of credits insurance. I do not want to dismiss that support, because the first point at which we are able to create credit for SMEs is with their bank. They do have a bank, in many cases.
The bank is prepared to lend against the receivables. They need to have the assurance that those receivables are good. EDC's credits insurance is pledged to the bank as security. About 40 per cent of all the receivables insurance that we provide is pledged to the bank. If you take 70 per cent of that insurance being lent against, you have roughly $28 billion worth of credit being provided by the banks, based in part on EDC's insurance. That is important.
We also provide bonding. Basically, we guarantee the bank to relieve the bank's draw on the company's line of credit so they can issue a bid bond or performance bond on a particular contract.
Finally, we provide financing. Last year, we provided about $1.5 billion of financing to SMEs.
Senator Oliver: Can you tell me what type of financing?
Mr. Siegel: A large part of it was provided through the banks by way of a guarantee from EDC. We guarantee up to 90 per cent of the loan. The bank is the lender of record. The loan could be up to $2 million in size, of a two-year duration. Last year, that lending represented $323 million to 314 different SMEs. We anticipate that lending continuing to grow this year.
Senator Oliver: Will you become a lender of first resort when the budget passes?
Mr. Siegel: Our first preference is to provide loans through the banks if we can, but we are prepared to lend directly. We want to respect the fact that BDC is the core player in this space. First and foremost, we will work collaboratively with BDC to ensure we are not providing services they would already provide. That is through our own bilateral relationship at the working and executive levels, but also through the BCAP, working with the banks.
We anticipate we will provide a guarantee capacity, and in some cases funded participation capacity to the banks as they lend to those players. However, if we have to lend directly, we will.
Senator Oliver: If the banks say no to an SME, can that SME come to you?
Mr. Siegel: Yes, they can.
Senator Oliver: What is your pricing like compared to the commercial banks?
Mr. Siegel: The way I would put it is that we are not trying to distort the market. We are not trying to provide some kind of subsidy. We want to be priced to reflect our cost of funds and the risk of the loan.
Senator Oliver: Are you looking at prime plus 3 plus?
Mr. Siegel: The rate varies with the quality of the borrower. We use a rating system. Because we would work with the banks, we would see how our rating compares with their rating.
We are aware that right now pricing is a bit volatile. That is part of the reason why we have the BCAP. We are hoping, through that facility, to be able to identify where inordinate pricing is happening to try to ensure that we have a more consistent pricing for the risk, which is reflective of all the costs of that lending.
Mr. Halde: Maybe I can add to that answer. BDC is mainly focused on SMEs — 76 per cent of the businesses that we deal with have fewer than 20 employees. We are talking small more than medium. The number of mediums and large mediums coming to us is rapidly growing, but we are focused on SMEs.
We are focused ideally where the risk appetite of the traditional financial institution stops. We price for risk, exactly as Mr. Siegel said; we have a rating system, but we try to go where other banks do not care to go.
I have some statistics. For example, the automobile sector — auto parts and so on — was up 11.5 per cent this year against last year. The forestry sector was up 20 per cent versus the previous year. Tourism was up 6 per cent.
We are trying to go where other banks might want to retrench. We have to price for risk, because obviously those loans are riskier.
Senator Oliver: Can you give me an example of some of your prices for risk —prime plus? What are you looking at on average?
Mr. Halde: The whole portfolio an average is at prime plus 2.3.
Senator Oliver: What is your highest — prime plus 6?
Mr. Halde: It is prime plus 4, for secured term lending — not totally secured, but partially secured. Another type of lending is subordinated financing; that is, cash flow lending, totally unsecured, quasi-equity — we are obviously lending there as well. However, the whole structure of the deal is different, with a warrant and so on.
The Chair: Given your new drastic mandate, Mr. Siegel, you said you would be working collaboratively with BDC, whether under the umbrella of BCAP or directly. What scenario would there be where you would say, ``After you, Alphonse. You take this one''? What sort of activity would fall to you under the new rules of engagement and what would fall to Mr. Halde?
Mr. Siegel: There is no hard and fast rule. It will never be perfect so that there is no potential for a modest amount of overlap; but to this point, there has not been much overlap.
For instance, take a company with sales of $50 million or $60 million. Probably the first point of call for that company should be BDC. Sales could be higher than that; but we feel confident telling our account managers in the field that before they start putting that loan through, pick up the phone and call BDC.
Another example of collaboration is we provide credits insurance. We insure the receivable. That insurance can be valuable security for the banks or for BDC. They make the loan but we take the credits insurance. That is our competence; lending is their competence.
Another example is our bonding guarantees. They do not provide that service; we do. We both can participate. They are a lender and we provide bonding guarantees, which opens up additional credit.
We also collaborate on the equity side. Both our organizations have equity powers. Historically, BDC has been longer in the market and has a bigger participation. We are finding that the equity market, the venture capital market, has dried up in the country. We are in danger of losing technologies that are valuable but do not have the capacity the credit to keep moving.
Therefore, we are collaborating; often we find ourselves investing jointly in an entity. BDC may have been there at an early stage and we come in at a later stage, but we are trying to provide the financing needed.
We are looking jointly at a fund that BDC has been the originator of, which is designed to catalyze a large pool of late-stage equity funding for high-tech companies. That is the kind of collaboration we are talking about, and it involves a lot of dialogue.
Mr. Halde: I have nothing really to add. We will lend up to $50 million or $75 million. Anything above that level is more in Mr. Siegel's EDC league, because we are an SME lender. The sheer size of the loan is one way of cutting it; the size of the firm is another way of cutting it. There is probably a small area of overlap where we need to talk to each other, but overlap is relatively small.
Senator Goldstein: Gentlemen, thank you very much for an enlightening presentation. We appreciate that you were not given a great deal of lead time to come here, but it does not show because you are obviously well prepared.
I have a number of small and perhaps lateral questions. To what extent are you involved in real estate financing?
I ask the question because the statistics I have seen appear to reflect the real probability that a lot of mortgages on commercial property are coming due, and some of the mortgage creditors do not appear ready to refinance, as a result of which there may be, aside from the housing problems, commercial real estate problems. Are either of your organizations involved, or propose to become involved, in commercial real estate?
The second question is more directed to Mr. Siegel. Export Development Canada has traditionally been, from my perspective, a guarantor of foreign credit, in large measure. In another life, many years ago, I represented EDC and was busy trying to find lawyers in Algeria and Nigeria to go after people who were not paying their suppliers, and that is the traditional field. I hear from you today, Mr. Siegel, that independently of what the budget proposes, you have already been significantly involved in domestic loans or, perhaps more important, domestic guarantees so that people and businesses can use their receivables to finance, and you can give comfort to more traditional ``lenders,'' particularly banks.
There are others in that field — and I refer to factoring companies, some large and some small. They are predominantly local people, but they are involved, effectively, in the same activity. They guarantee receivables, and traditional banks rely in large measure on those guarantees to grant credit with respect to the receivables. Sometimes they grant the credit themselves.
Can you comment, therefore, on these two issues: first, commercial real estate; and second, the extent to which other entrepreneurs, including but not limited to factoring companies, can step in to fill the breach to be able to guarantee liquidity on an ongoing basis?
Mr. Halde: I can try to answer your first question on commercial mortgages.
In our case, a lot of our term lending is done for commercial mortgages because we are talking about an entrepreneur wishing to put up a plant and so on. That lending is a large part of our activity, obviously.
There is certainly a capacity problem in the system. This is why under BCAP, as I mentioned in my remarks, we will be involved with, at least the financial institutions that wish to do so, pari passu on large commercial mortgages and bundling the smaller commercial mortgages. That is an effort to provide them with the capital so that together we can do a lot more.
This is the way to address at least some of the issues. We are staying away, obviously, from residential mortgages, because that is not our mandate; and we are staying away from situations where Canada Mortgage and Housing Corporation, CMHC, has the required powers. On the other commercial type of mortgages, we will play, hopefully, a large role.
Mr. Siegel: Quickly, on the issue of real estate, we are not active in that area. We have a limited amount of real estate lending, which is bridge financing in respect of foreign projects. We are not a term lender in the real estate market.
With respect to your question about other players and the area of receivables and factoring, et cetera, historically the origin of the corporation is as a receivable insurer before we ever acquired our lending power. Receivables insurance continues to be the dominant part of our business. Of that $85 billion, $61 billion was receivables that we insured, and this insurance is not only banks but factors are also beneficiaries. Factors often factor the receivable because it is insured by EDC. We have factoring agreements with them.
That scenario also applies to securitizations, because many companies will securitize their receivables and then use the secondary market to sell them. We will put an umbrella, a receivable insurance policy, on all those receivables. Obviously, the secondary market has become weaker, if not nonexistent, so that is harder to achieve today.
The way to think of EDC and the domestic market, I think, is to see exports as a long supply chain. Indeed, in today's world, the globalized supply chain has become lengthy and it extends right back into Canada. Often, the best way or maybe even the only way, for EDC to assist a Canadian company that wants to export is by assisting them here in the domestic market. They may be an exporter by virtue of being part of a major export supply chain.
An example is the automotive sector. We have been providing financing to tier 2 companies — toolers and parts makers, et cetera. They do not leave Canada, but everything they produce goes into a car that does. We have become active in that space working with the banks and working collaboratively with BDC.
Senator Harb: This question applies to both of you. In terms of the overall capital that you lend out, are you at capacity? Do you have enough funds to lend?
Second, did the financial crisis impact you? We can see bank balance sheets; we can look at their websites and know how they were impacted. How did the financial crisis impact both of you?
Mr. Halde: In terms of capital, we were becoming capital constrained, but thankfully, in the last budget the ceiling on paid-in capital was lifted and so was our borrowing authority. Assuming we receive the capital that now could flow to the bank, we will be fine.
Mind you, that depends on the size of the Canadian secured credit facility, which is a $12 billion program. It will be interesting to see if it will be $12-billion or, like other programs, it will grow over time. If that is the case, obviously capital would become an issue at some point.
On the financial crisis impact, our provisions for loan losses are rising rapidly. The level of what we call downgrading to impaired, where we now see the loan as impaired, has gone up dramatically. We have been profitable since 1995 when BDC was created, but the fiscal year starting April 1 coming up will be a challenge.
Senator Harb: Do you have any figures?
Mr. Halde: No, not yet.
Senator Harb: When you do, would you share them with us?
Mr. Halde: Absolutely.
Mr. Siegel: As to EDC, we are not capital constrained at this point. We ended the year with $9.4 billion in capital and then the government, early in January, added another $350 million. We are a little shy of $10 billion in capital. All of that capital was retained earnings and reinvested profits.
That capital supports about $30 billion of gross loans receivable and about $28 billion worth of contingent liabilities. The issue goes back to what our outlook is going forward. We have been modelling forward what we think will be default rates and credit deterioration and then, loss given to fault, which would be a write-off of capital.
We have a capital adequacy model for the corporation. It is much like the banks. It allocates capital on the basis of credit risk, market risk or operational risk. We seek to operate within what we call a solvency range of anywhere from AA down to BBB. We do not want to drop below investment grade, but we are prepared to operate with capital absorption that might take us down to that level.
Currently, we are comfortable that we are in the A+ to AA range, but we modelled forward and, based on our outlook, we think we may test the investment grade limit, the BBB limit. Of course, the government has indicated that they are prepared to put up to another $1.5 billion into EDC and BDC. That would be the way in which we would monitor and determine whether we have to go back to the government and ask them to call more capital.
We also have the Canada Account that we can rely on, which the government has increased, and that could be another source of capital.
Regarding your comment on how we are affected, we ended the year with a profit of $206 million. That profit was roughly 40 per cent of our projection at the beginning of the year. It was lower mainly because we took more provisions in anticipation of loan loss and higher claims.
The claims submitted rose 13 per cent last year to almost 2,400, with a 45 per cent increase in claims coming to us in the fourth quarter alone. Our claims paid out doubled last year and our claims pending are up fourfold this year from the same time last year.
All of that situation is within our modelling. We fully anticipate using capital extensively, which does not mean losing capital but rather that we will absorb it in our overall operation.
Senator Harb: You mentioned venture capital and the lack thereof. Witnesses that we heard from yesterday mentioned the fact that the market has dried up for venture capital, which is not to say a great deal of it was available before. Frankly, for a country such as Canada that depends so much on innovation, trade and business transactions, the lack of venture capital is pathetic. We do not have an actual market for venture capital and few people here are in the business of venture capital. Is that something you might be interested in?
Mr. Halde: We have a large portfolio of venture capital. We have committed in excess of $700 million to venture capital. We are an investor in 140 technology companies in Canada, and we know the area well. We are probably one of the largest, if not the largest, venture capitalists in the country.
We held a series of round tables across Canada in the fall and found that the returns on the venture capital funds, for various reasons, have been not good. The money used to come from two places. First, it came from the institutional investors — pension funds and others. Obviously, pension funds today have a number of places to put money and the asset class — venture capital — is not interesting, based on recent returns. Second, money came from the retail market with labour-sponsored funds. We know that provinces like Ontario are highly discouraging labour-sponsored funds.
The two sources of capital that would come to a fund have basically dried up. We invest in 16 different funds. EDC also invests in funds. We are asked for many investments but, unfortunately, we have limited capital, as we spoke about before. Many of those funds are at the end of their money and they will not be able to raise a new fund.
Worse than that, if you want the whole picture, in the traditional model, investors would invest and then, three or four years later, they would sell it to another venture capitalist who was a specialist at a different stage. Perhaps later on, they would put the company out for initial public offering, IPO, or sell it through a mergers and acquisitions, M&A, transaction to a strategic buyer.
No IPOs are taking place in technology and there are few strategic buyers around. Instead of investing for three to five years, we have had investments for 10 years. Investors have to stay literally until the company is cash-flow positive, at which point it can fly on its own. That situation adds to the pressure because not only do we have fewer funds but also the funds must continue to fund their companies longer.
Currently, we are seeing an industry in great difficulty, and many technology companies are facing tough situations.
[Translation]
Senator Fox: Mr. Chair, I have a question for Mr. Halde. Recessions and economic crises come and go, but do not always look the same. I recall that in 1981-1982, in the Basses-Laurentides region, demand for your corporation's services was high. Credit was available at the time, but interest rates were high — anywhere from 18 per cent to 21 per cent. Today, credit is not available and interest rates are much lower. How ironic that when credit was available, interest rates were high while today, the opposite is true.
I am concerned about venture capital. Regarding the liquidity problems that you and SMEs are currently facing, is the situation the same everywhere in Canada? Have some regions been harder hit than others? Are you in a position to mitigate some of the bigger problems faced by the regions, or is this not something that you can do?
[English]
My second question is to Mr. Siegel. I apologize for speaking so quickly but the chair indicated that we are in a hurry. You indicated that things will worsen before they improve. The gap that seems to exist at the moment will worsen, and it is yet to be seen whether the measures taken today will meet that growing gap. If not, what is in store for us?
At the moment, we are concerned more about the slow-down, the recession and maybe deflation. Further down the road, we will be concerned with inflation when the U.S. dollar comes under attack. Perhaps I am looking too far ahead but we might be back to 21 per cent interest rates like we had in 1981 and 1982.
Mr. Halde: I will try to respond quickly to your first question. BDC's presence is roughly equivalent to where economic activity takes place in Canada. We are well spread to where the economic activity happens. From a liquidity standpoint, the problem is relatively the same everywhere. From a credit standpoint, some provinces are in more difficulty than others. Clearly, southern Ontario with its auto parts sector is a tough credit area. Alberta, which had been historically strong, is beginning the experience. I hope that answers the question.
Senator Fox: Yes, thank you.
Mr. Siegel: On the question of whether the situation will worsen before it improves, the visibility is poor. We are preparing for even more credit gaps to occur in the next three to six months as a full adjustment of businesses to a reduced revenue line takes place. Revenue lines have been cut by 20 per cent to 25 per cent or more, and they are not likely to come back from that level. It then becomes a matter of how to stabilize a business at that point.
If I could put my finger on one thing that could further contribute to the problem, something that requires more attention is the lack of availability of debtor-in-possession financing. We will have companies seeking protection and attempting to restructure. In the past, debtor-in-possession financing was almost a business that banks went into. It was a fairly lucrative business and one in which the lenders were super-secured, super-priority lenders.
Today, because of funding costs for banks and constraints in terms of how much they can lend, there is less available debtor-in-possession financing. That could mean then that companies will go directly into liquidation as opposed to restructuring. Both of our organizations are looking at that area, and we will discuss the matter with the banks and others to determine whether there are ways to try at least to create more capacity.
Senator Moore: I have a couple of questions. Mr. Halde, you mentioned in your brief the exit of foreign, non- deposit-taking, unregulated financial institutions, in particular Glitnir Bank. What are the other institutions? Are we talking about a number of them?
Mr. Halde: A number of them have substantially reduced their activity but I would not be able to quote a number given that it would be a guess only. A number of financial institutions have substantially reduced activity. When I say they left, they have left the market.
Senator Moore: What portion of the market did they represent?
Mr. Halde: It would be a guess. However, if I had to guess, I would say 10 per cent, 12 per cent or 15 per cent. Mr. Siegel may be able to help me here. A large chunk of the market is not as active as it used to be.
Mr. Siegel: Even before the crisis, bank lending was declining.
Senator Moore: From traditional banks?
Mr. Siegel: Yes, traditional bank lending was declining. Instead, much of the market was securitization credit. Non- banks were providing that type of credit. There are two effects: As Mr. Halde has indicated, the securitization market is now not there. Some would estimate that the securitization market was as much as 40 per cent of the actual credit availability and banks were about 50 per cent. Within that market, foreign banks were providing some liquidity. I agree with Mr. Halde that we cannot but a dollar amount on it but we can give an order of size.
Senator Moore: Mr. Siegel, you mentioned that EDC has put $4.2 billion into the auto sector. Is that correct?
Mr. Siegel: Yes; It is a combination of receivables insurance; we have been insuring sales by parts makers and toolers to the original equipment manufacturers, OEMs — Chrysler, Ford, Toyota, Honda et cetera — and we have been lending to those players, also.
Senator Moore: Does that lending cover the rental car aspect of those businesses?
Mr. Siegel: No, it is for the production of vehicles, not rental cars. However, we have one insurance obligation that supported the privatization or the sale of Hertz, which was and continues to be a big consumer of cars. We were involved in that transaction about three years ago. Generally, it is more in the production of the cars, as opposed to the sales side.
Senator Moore: I think the auto industry has asked for a new program whereby people would receive $3,500 if they traded in their vehicle. Are you the agency to look after that and, if not, who would? How do you protect against me buying a junker for $500, and then coming in for the money?
Mr. Halde: I missed that question.
Senator Moore: It has been reported that the industry has suggested a new program whereby consumers can turn in their old cars and receive a $3,500 credit toward the purchase of a new car.
Mr. Halde: I honestly cannot comment on that item. Let me talk about the car business for a second because we are heavily involved with the $12 billion that was announced for the Canadian Secured Credit Facility, CSCF, program.
Up to August 2007, the captives, the General Motors Acceptance Corporations, GMACs, of the world, were able to lease a car and then, every couple of months, bundle all those leases in the market with securitization and be paid immediately.
That market dried up, which means that, for the last year and a half, there has been an enormous strain on their capital because they have to wait for the cash flow of all those leases to come in. We are trying to address with the CSCF an attempt to restart the auto loans and auto leasing securitization market by recreating the asset-based securities that used to be there. We will be the initial purchaser in an attempt to restart the purchase of cars.
As soon as the captives know that we will buy the paper, then they will be able to push more on the lending and leasing end. Right now, it would be difficult to try to lease or ask for a loan for a car, unless an individual's credit is exceptional.
The Chair: What is that acronym you are using?
Mr. Halde: CSCF is the Canadian Secured Credit Facility. It is part of the budget; part of the extraordinary framework.
Senator Moore: I recently read in the financial papers about the concern that manufacturers built a lot of cars, leased them and entered this securitization you are talking about. The cars are now coming back and their value is reduced by 20 per cent or 30 per cent. There will be a huge deficit. Has that deficit been taken into account?
Mr. Halde: Yes, it is called the ``residual risk.'' It is a large issue.
Senator Moore: There are probably hundreds of thousands of vehicles on lease.
Mr. Halde: Yes; the lease is structured for a relatively low monthly payment based on the assumption that the car will be worth X at the end of the lease and, if it is not, then they must absorb that difference.
Senator Moore: Who is filling in gap?
Mr. Halde: That is part of the challenge of restarting the asset-based security, ABS, market. I have a meeting in 25 minutes to address that exact issue; namely, how we will restart the asset-based security market with safer assumptions than in the past and reduce the residual risk.
The Chair: Will you be prepared to come back and tell us the answer?
Mr. Halde: Yes, I would be happy to do so.
Senator Moore: I have one more question.
The Chair: I know that some of our members will be called away shortly. Make it quick.
Senator Moore: Yesterday, we heard from our witnesses that the banks — and I will put these two gentlemen under the umbrella — have not adjusted their profiling to take into account the current business and economic situations.
Have you heard that comment or have you taken that issue into consideration? Have you done anything about it?
The Chair: You are talking about risk.
Senator Moore: Yes.
Mr. Halde: We have kept our risk standards, in the sense that we are willing to go up to this level of risk, and we know what that risk level will generate in terms of forecast in loss rates and, ultimately, in losses. The credit-worthiness of what we are seeing has deteriorated. Therefore, there are situations where, unfortunately, we have to say, you have to get a bit of equity if we are to help.
Senator Moore: You are sticking to your original profile requirements, tempered a bit. However, you are saying that you cannot just loosen the floodgate; you must act responsibly, of course.
Mr. Halde: In good times, we strive to make a small return on equity. We take a lot of risks — much higher risks than the traditional financial institution — for a small return. We price for risk appropriately.
As we will find out in the coming year, that risk will probably come and hit us. We have not tightened our standards, which is a different situation than most others. We are staying where we were.
The Chair: Senator Gerstein says his question has been asked by Senator Moore, so we will have to wait for his maiden question on this committee.
Senator Eyton: There are many things I want to inquire about but I will ask about a few. EDC has $350 million in new capital. In what form does that come?
Mr. Halde: The government buys shares of Business Development Bank of Canada, BDC.
Senator Eyton: Therefore it is permanent capital.
In various ways you have alluded to leverage. What does that $350 million add in terms of additional capacity for you to make credit available?
Mr. Halde: The Treasury Board guidelines state we can lend $10 for every dollar of capital, if it is term lending; $4 to $1 if the lending is subordinate investing, which is quasi-equity; and we can only invest $1 in equity per $1 capital.
Mr. Siegel: In our case, it varies. It depends on the product because insurance is capital non-intensive, and lending is capital intensive. We currently operate on a three-to-one ratio on our lending. We can extend that a bit further but, obviously, the insurance operates on a huge multiple to that. If we take the $350 million and apply it to writing receivables and insurance, we could write $6 billion or $8 billion worth of additional insurance.
From a lending perspective it would equate more to $1 billion or $1.5 billion, depending on the credit rating of the entities we are underwriting.
Senator Eyton: I understood you to talk about $10 billion in capital and another $58 billion.
Mr. Siegel: Yes, the $10 billion is supporting $30 billion in loans and $28 billion in contingent liabilities. That gives you an idea of the leverage.
Senator Eyton: You talked about your $350 million and you proudly stated that $200 million of that was already gone. First, that spending seems to be quick. Second, how did it go out that quickly?
Mr. Halde: We made the request. We issued the shares. The board approved the issuance of the shares and the Bank of Canada bought the shares through, I guess, the Ministry of Industry.
Mr. Siegel: He was thinking that you have used it up.
Senator Eyton: You have used $200 million of $350 million.
Mr. Halde: I said we put it to good use. We are in the midst of lending it as we speak.
Senator Eyton: Is that lending in the three categories you talked about?
Mr. Halde: That is right.
Senator Eyton: It was the dollar-for-dollar ratio as well?
Mr. Halde: That is right.
Senator Eyton: I am always curious about process. I am thinking about the pipeline. Who comes in to see you? Who takes the lead in initiating the loan? For example, does the SME walk through the door with their bank and say they need additional financing, and then you work in a partnership? Is it more that someone comes to you originally? I think that was your old standard and may not be the case now. Can you describe the process and how long it takes you to process a loan?
Mr. Halde: We acquire loans in three ways. First, we have 600 account managers that call on companies to tell them what we do so that they are aware of BDC.
Second, people call because they have heard of BDC in some fashion.
Third, under the Business Credit Availability Program, we hope we will see a lot more referrals from financial institutions. One thing we ask financial institutions is, if they decline the client but they think the business is good but a bit beyond their risk appetite, please tell that client to contact BDC because we will try to look after that client.
Senator Eyton: Do you have a history in that area?
Mr. Halde: Yes; I mentioned in my remarks that year-to-date this year we have had 15,000 contacts with people from financial institutions. One of our VPs in Calgary talked to one of their VPs in Calgary, which we put on record, and that talk resulted in 1,200 referrals. I hope that in this coming year, those referrals it will be expanded upon considerably.
Senator Eyton: Those referrals would translate into how many loans?
Mr. Halde: There is probably a 30 per cent to 40 per cent conversion rate from a referral to making the loan.
Senator Eyton: The key question is, in these trying times, how quickly do you take to process? I will tell you candidly that in the past, BDC has been known to be slow in processing a loan and extending credit.
Mr. Halde: That might have been the past. We have now put on standards depending on the complexity of the loan. If it is a small loan, we are talking days. If it is a large loan we are talking three weeks. We are not talking months, as we were.
Senator Eyton: That is excellent. What about EDC?
Mr. Siegel: I will talk about the process issue. As to the origination, EDC runs an account management model so it can come through our account managers in the field, both domestically and internationally, because we also underwrite international loans and we are in foreign countries as well. Clients come in through financial institutions or through somebody such as BDC.
As to the speed, it depends upon the type of transaction. When we make small business loans in guarantee with the banks, we use a decision-support model; we use a Moody's risk calculation model, and the bank can qualify it themselves by obtaining the credit rating; we only run it through the model. That calculation takes a matter of a day. The documentation is already agreed upon.
At the larger end, we have gone through an expense in the last year applying lien methodology to our loans process. We have standards as well. For large loan syndications now, if it is straightforward, we have a standard that within 14 business days we fund. We go straight from origination to fund. It cascades down if it is more complicated. We have had an 82 per cent increase in productivity in issuing term sheets and a 61 per cent productivity increase in issuing offers. Industry standard times are faster.
The Chair: I am sorry to interrupt the witness, but we are 15 minutes over our time and some of our senators must leave.
I want to thank you, Mr. Halde and Mr. Siegel, for crisp, interesting and helpful presentations. I am sure we will be talking in similar forums in the future. We wish you the best of luck in accomplishing what you hope to.
By way of introduction, let me say the following.
[Translation]
In part two of this morning's meeting, we will examine access to business credit, this time, from the perspective of credit suppliers.
[English]
Survey and anecdotal evidence indicate that at least some businesses find it increasingly difficult to access credit. The available statistical evidence suggests Canada's banking system and its relevant government agencies have increased the total supply of credit in the Canadian economy.
With that context in mind, we are now pleased to have before us from the Canadian Bankers Association, Nancy Hughes Anthony, President and Chief Executive Officer; Terry Campbell, Vice-President of Policy; and Darren Hannah, Director of Banking Operations.
Welcome. Thank you for coming. Please do not take it personally that half the committee has suddenly vanished. Apparently the Liberal Party needs to meet to decide certain questions of importance, but we are relieved that Senator Goldstein has elected to stay, because if he went we would not be able to continue with the meeting. Senator Fox is still here as well.
Senator Fox: Yes, but, unfortunately, I will be leaving.
Senator Goldstein: Senator Massicotte is staying, too.
The Chair: Senator Massicotte is here, too. Thank you, gentlemen, for staying.
With that apology, I will turn it over to you, Ms. Anthony. If you have a statement, please give it to us. We will have many questions.
Nancy Hughes Anthony, President and Chief Executive Officer, Canadian Bankers Association: We have also provided to the clerk some documentation.
[Translation]
I trust that you have already received an information package.
[English]
It includes a set of opening remarks but, in view of the time, I will be brief and hit the highlights.
[Translation]
First of all, I would like to quote some figures on the banks' contribution to the Canadian economy. In terms of jobs, banks and their subsidiaries employ 250,000 Canadians, up 16 per cent from a decade ago.
Furthermore, most Canadians own shares in Canadian banks, either directly or indirectly through the Canada Pension Plan or a common investment fund. In terms of taxes, banks paid nearly $9 billion in taxes to various levels of governments in Canada last year.
[English]
Banks make an important contribution to our economy and I am sure that this committee understands that contribution. However, the real message today is that Canadians need to continue to have confidence in their banking sector. When we reflect on the turmoil in the global financial system, it is important to note that the turmoil did not originate in Canada. Banks in Canada have largely avoided the difficulties that banks around the world now face but Canadian banks are not immune. They have had no need for direct government intervention which, obviously, has been needed in many countries in the world.
Why is that? I think most observers will point to four particular factors. I will summarize them briefly. First, we have a national system of banking with well-diversified banks. Second, our banks are among the best capitalized in the world. Strengthening capital levels with new capital being raised from investors in the marketplace is remarkable. You do not see that in any other place but Canada these days.
Third, Canada's banks are prudent and well-managed. We have a strong regulatory system. We are regulated by the Office of the Superintendent of Financial Institutions and also by the Financial Consumer Agency of Canada.
The fourth factor is that Canada's mortgage market is different from the United States. By far, the majority of mortgage loans in Canada are prime rate mortgages. We did not enter the subprime problem experienced in the United States. The good news is that our mortgage arrears remain very, very low in Canada.
Each of these attributes of the Canadian banking system has served us well through difficult times. A strong and stable banking system is essential to helping Canada come through these tough economic times.
[Translation]
What does this all mean for Canada and Canadians? It means that contrary to many other countries, Canadian taxpayers have not had to prop up or inject capital into their financial institutions and have not had to set up public entities to buy up toxic assets.
[English]
One program that the banks, and many financial institutions, not only banks, are taking advantage of is the Insured Mortgage Purchase Program. Under this program, banks, on an auction basis, provide CMHC-guaranteed mortgages through CMHC, and the government subsequently purchases those mortgages and, by the way, charges for them on commercial terms and makes a bit of money for the Canadian taxpayer. That program has proved to be extremely useful from a liquidity point of view. It allows the banks then to make sure they have sufficient liquidity to lend in the mortgage market.
I now turn to the issue of credit, since I know credit is something this committee is concerned about. Let me assure you that our banks are continuing to lend to creditworthy customers. On the consumer side, the facts show, and these are Bank of Canada figures from January, consumer credit continues to grow. There is a 14-per-cent increase year over year. Bank financing of business is up almost 11 per cent year over year. That growth is well in excess of the rather moribund 4.2 per cent growth in financing by all providers.
I believe you discussed this issue with your previous witnesses: Banks are only about half of the business credit marketplace. In fact, they represent only about a quarter of the total financing marketplace. In your information kit is a backgrounder called Business Credit Available. There is a little pie chart with respect to business lending and it shows banks at about 56 per cent of the marketplace.
There has been a serious slowdown of business credit from non-bank sources of credit. Banks have been trying to fill this gap. Sometimes the gap has been caused by international banks leaving the marketplace; and sometimes it has been caused by situations like auto-leasing firms which, clearly, are not functioning the way they were in the past. However, banks cannot do it all.
For that reason, we were pleased to see the measures in the budget announced in Budget 2009 that provide more funding for BDC and for EDC. The measures also extend EDC's mandate temporarily into the domestic market. This lending is complementary bank-to-bank lending and I am encouraged by the discussions that we are having to try to martial all those resources to make credit available to creditworthy businesses.
There is a new reality in the international credit marketplace. Certain types of credit, like commercial paper and the securitization market, are no longer functioning properly around the world. Others that are available are available at higher cost than has been in the past. That situation affects the bank's overall cost of borrowing and obviously has an impact as well on consumers.
Risk is another factor that affects the rate of interest on loans. We are in a recession. It has an impact on the creditworthiness of customers. Obviously, if the banks are prudent lenders they need to adjust their pricing to reflect this new risk reality. However, it is important to remember banks are open for business, and credit remains available for creditworthy customers.
In conclusion, I will go back to where I started. Canada's banks are strong and secure. Canadians remain confident in their banking system. Canada has a huge advantage right now that many countries do not have. Keeping that advantage will be crucial to the recovery of Canada's economy and to the long-term prosperity of Canadians.
Thank you, Mr. Chair. I would be happy, with my colleagues, to take any of your questions now.
[Translation]
Senator Massicotte: Thank you for joining us here today. The fundamental issue confronting us is whether or not credit is tight for businesses and for consumers. We are hearing about this situation from the people we know and much is being written in the newspapers. We learned yesterday of the surveys conducted by various organizations. Even the Bank of Canada is reporting that credit is tight.
You stated in your presentation that your association has seen an 11 per cent increase in lending by banks. You mentioned the Bank of Canada report. I have here the Bank of Canada's Weekly Financial Statistics for February 20, 2009 and I see that business bank loans increased by 4 per cent between January 2007 and January 2008. On a seasonally adjusted basis, the increase was 3 per cent.
However, I see here that in the column ``Chartered bank foreign currency loans to residents'', the reported increase is 80 per cent. That is an increase of $21 billion, more or less. Exactly what kind of loans would these be?
Ms. Anthony: I do not have the report in front of me, Senator Massicotte. Therefore, I will ask my colleague Mr. Campbell to answer your question.
[English]
Terry Campbell, Vice-President, Policy, Canadian Bankers Association: The Bank of Canada data — and I have seen the same report that you have, senator — is a compendium of all sorts of credit available. It includes direct bank lending; bankers' acceptances; equities and so on; foreign dollar currency, which is lending to foreign clients and then translated into Canadian dollars; and so on. We have been tracking that data over the last several months: taking together all forms of credit and setting aside securities and equities, and so on. Over the last several months, for the bank side itself, taking together credit, foreign credits, bankers' acceptances, other forms of debt, it is up double digits.
What is happening, as I believe you have heard from your previous witnesses, is that in the non-bank side of the marketplace we are seeing a considerable pullback. Commercial paper is down, in terms of dollar volumes, a full 11 per cent. Some parts of the securitization market are not working at all. The general volume is down 17 per cent. Whether it is leasing companies or finance companies, venture capital companies or life insurance companies, we are seeing a pullback. In the IPO market, which is an area where there are funds, there were no IPOs in the last six months of 2008. In a whole bunch of funds we are seeing a pullback. As a result, clients will turn to us. We are trying to step up to the plate and fill gaps where we can. When we are only really a quarter of the marketplace for all financing, there is only so far we can go. That is why we are pleased to see some of the programs that the government has created through the budget.
Senator Massicotte: I am trying to understand. We all know the Bank of Canada as well as the Minister of Finance has pushed you hard to be more expansionary. I am trying to assess what issues are prominent. Take away what you call ``chartered bank foreign currency loans to non-residents`` — basically loans to Canadians in foreign currency — and look at only business loans, we have an increase of about $6 billion or 3 per cent. Remove the significant reduction of securitization, which is down $5 billion, and commercial papers, which are down $2 billion or $3 billion, and I suspect they are saying it is nearly kif-kif; in other words, the expansion credit you provided is approximately equal to the shortfall in the other two major categories.
Therefore, they come to the conclusion that there is a lack of liquidity. I presume that is what they are doing. They are saying to the chartered banks: There is a public interest in your institutions; get on with the job; provide more capital out there; and obviously we are suffering a recession. They are trying to incite you to lend. However, you do not want to take too much risk because investors invest in your company for the sake of improving returns.
How do you balance both public and shareholder interests at the same time?
Ms. Hughes Anthony: You have put your finger on the issue. We have to look around the world and see that Canada's banks are still standing. As I said, they are not immune. In first quarter reports, they are showing significant loan losses. However, they are standing, the doors are open and they are lending.
The best thing they can do is to continue to maintain principles of strong capital. Those principles allow them to exist when others have not been able to keep their heads above water. Prudent lending principles are also important. I know they want to stay their customers and come through this period of time. There have been other difficult and recessionary periods. This one is intense, sudden and deep.
They feel the best thing they can do is to continue to lend, but without changing prudent lending standards. Other measures will be helpful, including the cooperative programs with BDC and EDC. The figures speak for themselves. They are trying to fill a gap, but the gap is simply too big for the banks to fill on their own.
Senator Massicotte: The increase is 3 per cent. Is that increase adequate?
Ms. Hughes Anthony: I do not agree with your 3 per cent.
Senator Massicotte: I am looking at business loans only. Exclude the category of chartered bank foreign currency loans to residents, which is up by $20 billion. Look at only the business loans for the Bank of Canada, which is up about $6 billion. Seasonally-adjusted, that is about 3 per cent; non-seasonally adjusted, it is 4 per cent.
Ms. Hughes Anthony: I am not sure we can play with statistics and exclude foreign currency loans.
Mr. Campbell: When clients come to the bank looking for credit, it can be in a variety of forms. It can be to provide a commercial mortgage; a banker's acceptance guarantee; a straightforward loan; a foreign currency loan for a branch in the United States; funding for receivables on a leasing basis; et cetera.
When we looked at the Bank of Canada report — and I think the Bank of Canada does it this way as well — we have taken all those types of credit together as evidence of the array of credit we are providing. I think you are correct strictly on term lending. However, for all forms of credit, which our customers rely upon, the last report from the Bank of Canada in January shows an increase of about 11.3 per cent.
Senator Massicotte: I am looking at the February 20 report. That is why I asked what this category of chartered bank foreign currency loans is. If it is appropriate to remove that category —
Mr. Campbell: It is an important part.
Senator Massicotte: That is $20 billion. The inclusion of that category is how they arrive at 10 per cent or 11 per cent. Otherwise they are stuck at 3 per cent or 4 per cent. If that is not Canadian loans, but loans to companies operating outside of Canada, public policy interests would say that is all good for the interests of those countries and those companies, but maybe it is not good for the interests of the Canadian public.
Ms. Hughes Anthony: If someone comes to a bank and says, I have an enterprise in China, Venezuela or the United States, and they want to conduct business in that currency, that is what banks do. I question the theory that we can take that category out of the equation.
Senator Massicotte: Maybe that is why it is in there.
Ms. Hughes Anthony: It also says to me, frankly, that maybe other institutions that are not in those countries are not offering those kinds of loans in that particular currency.
Mr. Campbell: The other thing to bear in mind, looking globally at a bank's business and the contribution it makes to the economy, is that banks make loans to make revenue. They make money on the spread. On the foreign side, a percentage of our net income is from offshore. I think it is in the high 20 per cent range. Bear in mind that taxes are paid here in Canada. Well over 85 per cent of the taxes are paid here, and the bulk of our employment is here. It is an important part of making the banks the successful, strong industries they are, but the benefits are largely resident in Canada.
It is hard to separate this form of revenue and say that it does not benefit Canada, but other forms of revenue do. I think all revenue benefits in large measure.
Senator Goldstein: I have two brief questions.
First, when you determine your statistics on increase of bank lending, is that physical dollars lent, line of credit increases or both?
Mr. Campbell: The statistics we tend to cite that are publicly available through the Bank of Canada are actual dollars. Authorizations typically are higher than that amount. As you know, certain amounts are authorized to a business or a consumer. The business or consumer will draw that amount down as needed. We do not have those statistics, but I think authorizations would be higher than quoted by the Bank of Canada.
Senator Goldstein: That situation is probably true, but my concern relates to a question I am about to ask, which I think you have already answered. To what extent statistically are authorizations used at a higher level than in the past? What usage — to use your terminology — is being made of the availability within the line of credit?
That usage would be an indicator to us of the extent to which businesses must rely, and may rely more in the future, on borrowed funds.
Ms. Hughes Anthony: I do not believe that we have access to that kind of information, senator. I understand your point. We do not have the information.
Mr. Campbell: Authorizations can be an increased authorization for an existing customer or a new authorization for a customer who walks in the door. It would be challenging for us to separate that information.
I have one item anecdotally and also a fact. Factually, we have been tracking this situation now for several months, and month after month, lending is up. Some of that lending may be drawing down existing lines of credit, but in the nature of the market, much of that lending is new credit as well. Anecdotally, we talk to our lenders regularly. They tell us that they have new customers coming in the door. We look at those lenders case by case. They are open for business and I think a percentage of that lending is new business.
Senator Goldstein: On a totally different subject, what has been the evolution of your members' cost of funds over this period of time?
That is the name of the game. Similarly, with respect to EDC having more resources and having a domestic mandate now, in certain kinds of areas, particularly insurance, it will be extremely useful.
I heard about ten minutes of the testimony of the previous panel. I heard you encouraging them to move quickly and put this kind of measure in place. The cooperation has always been there. We will be able to marshal more resources to make it happen quicker.
I point out that changes in the Small Business Loans Act were proposed as well in the budget. Let us try to move on that change as well. There are changes to the maximum amount that can be claimed. There will be a cutback, I hope, in the amount of red tape and the amount of time it takes to process those kinds of situations.
All of this together, I hope, will move quickly enough so that we can have more credit flowing to credit-worthy businesses.
Senator Goldstein: I am intrigued by your last comment. You may regret having made it. What has been your experience with respect to the provision by our civil servants of the paperwork with respect to small business loans?
Ms. Hughes Anthony: I will ask Mr. Campbell to control himself and answer that question because it has been frustrating.
Senator Goldstein: It is important for us to know that.
Mr. Campbell: We hear probably three or four complaints. One complaint is the dollar band was too low, and it does not help enough people.
The other complaint is that the percentage of their portfolio that they can claim back was too low because it acts as an inhibitor and the government has increased that percentage. We hear again and again that the process is a cumbersome, slow, paperwork-heavy kind of process. Banks go through the process because it is a good thing to do and it helps clients, but it is a cumbersome and costly thing to do.
We have encouraged the government to streamline things. We are in the Internet age now. We are beyond the paperwork age. This process is a paperwork-heavy kind of thing.
We are pleased to see the changes, but more can be done.
Senator Goldstein: Do you have any statistics or anecdotal information that you can provide to us about this process so that we might try to help make it faster?
Ms. Hughes Anthony: We can take that inquiry back and see if we can compile information for the committee.
Senator Goldstein: We would appreciate that.
Senator Gerstein: Are you able to explain to the committee the process whereby the federal government purchased the mortgages from the banks and the rate of return you might expect them to receive on those mortgages?
Mr. Campbell: It is an auction process.
Ms. Hughes Anthony: It is a reverse auction.
Mr. Campbell: It is a reverse auction process. The prices go down to the point where you are prepared to bid into it. Because it is an auction process, the prices and terms vary with every auction. I cannot give you a specific figure.
The government has made it clear, and this, in fact, has been the case, that they intend to purchase them on commercial terms. They will not lose money. I think they have said that, over the course of the program, they have locked in or booked in $2 billion to $3 billion by way of return.
There are $125 billion in mortgages here. About $75 billion have flowed. We see the volumes going up and down, based on the liquidity needs at the moment. Some are high and some are low. That is the process as I understand it. It is not my particular window, but that is how I understand it.
Senator Gerstein: You are confirming that government is not bailing out the banks.
Mr. Campbell: That is exactly right.
Ms. Hughes Anthony: Absolutely.
Senator Gerstein: They are not buying out distressed mortgages; rather, they are looking for a return for the taxpayer.
Mr. Campbell: Yes.
Ms. Hughes Anthony: This program puts liquidity into the hands of the banks so they can move the credit out the door to consumers. To a certain extent, we could say it is for the banks, but it is mostly for the consumer. That is the whole point of the program.
So far, it works well. Of course, we cast our eyes around the rest of the world and see the types of interventions and programs, and I must say, we are proud of the situation in Canada.
Senator Eyton: I want to pick up on Senator Massicotte's observations about foreign currency loans and their impact on your statement and boast that the banks are extending credit at a good rate. The number used was around 10 per cent or 11 per cent over the last year. The point was made that if we subtract that foreign currency credit from it, then, in effect, the number is much more modest. I thought we should keep your boast in perspective.
The fact is that a foreign currency loan, in general, will not have the same double effect that a domestic loan will have if that loan is made in Canada. If the loan is in foreign currency, it will benefit the lender, its shareholders and the employees in that particular institution. A similar loan in the same quantity to a Canadian company would have other benefits for the borrower.
Ms. Hughes Anthony: We can take another look at that issue. It is not a question that we have looked at in terms of our analysis of exactly where that funding goes and how it benefits customers.
Obviously, Canadian banks must be prepared to deal in the currency that they are asked to deal in. I have, perhaps, questions that I do not have answers to. Is it largely American currency, largely into the American market? Perhaps we can take a look at this matter and see if we can derive further information.
Mr. Campbell: The only gloss I would add is, first, even when we take those loans out, and I think it still makes sense to include them, the numbers are still up month after month. It is still a positive story. Second, I do not think we will ever know the breakdown, because these statistics are broad and our banks, quite properly, wish to keep their business strategy in lending. I think many businesses are Canadian businesses that are exporting or making deals abroad and need to fund those dollars in the currency of the jurisdiction they are operating in. These companies are Canadian companies in many cases.
We will try to look into the matter and see what we can come back with, but I still think the story is positive, going forward.
Senator Eyton: I was not attacking. I was trying to understand.
We have heard testimony. We have only convened on the subject in the last week or so, so we are learning a lot of information. Even now, we are gaining a better understanding of credit and the challenges that are out there.
Perhaps it would help this committee if you could comment on what government can do in addition to what it has already done. What is left to do?
I will give you three situations. First, how can we replace the credit granters who have fled the scene or have reduced their lending, taking into account your point that the bank should not be expected to do it all? The number you have in your material is 57 per cent of the credit granters. What can government do to rejuvenate the missing part of the business? We recognize the EDC and the CDC are a small part, and only a small part of replacing that business. What can government do to replace that credit sector that has disappeared?
Second, we have not talked about this item yet. How can the government encourage interbank lending, which is an aspect to the overall credit picture? Interbank lending is one aspect to the revolving credit picture because it gives liquidity and a mechanism whereby banks can do more. As I understand it, interbank lending has largely disappeared or is much reduced, thereby reducing the pool and liquidity so that credit granters need to be more conservative in granting credit.
What can the government do to fill the gaps that occur? I unhappily recall the early 1990s, in particular 1991, when I was partly involved in the real estate business. It became a sector that no one wanted, in financial terms. It did not matter that there was cash flow in leases because people could not afford to keep such assets on their balance sheets. There was nothing sinister about it but it became a class of asset that no one wanted on their books. I suspect that automobile dealerships, in particular, the leasing side, are similarly affected today. How can we address the fact that a decent business with a decent balance sheet cannot tap into appropriate credit because it is in a specific sector. What can the government do about those three situations?
Ms. Hughes Anthony: I will begin, and I will ask my colleague to respond as well.
On the question of replacing parties that have left the market and are linked to the interbank funding, you are putting your finger on the fact that this problem is worldwide, and that some situations must be resolved quickly. I would say that the U.S. banking system is one such situation, as are some European banks. Consumers need to have confidence in the U.S. banking system so confidence needs to be restored. That question is a huge and thorny one. Obviously, the new administration in Washington is dealing with that question, and there are many worldwide views about how that should happen.
On interbank lending, investors simply do not have confidence in some institutions around the world. It is great that they have confidence in Canadians; that is terrific. Definitely, some institutions in some countries are experiencing a lack of confidence. I do not know if the Government of Canada can do anything other than what is being done. Minister Flaherty will attend the G7, G8 and G20 summits to work hard among the international community to deal with some of these issues quickly.
Some international observers look at the Japanese banking situation, which left Japanese banks moribund for an entire decade, and say, this cannot be; they must move quickly on this problem; they must move quickly on restructuring and regulating their industry.
Other than the good efforts being made by many, including Julie Dixon, Superintendent of OSFI, and Mark Carney, Governor of the Bank of Canada, this problem is a global one.
In terms of replacing those who left the market, we mentioned EDC and the BDC, which have good initiatives, and — I am not good on acronyms today — the leasing initiative for $12 billion under a Canada secured lending facility.
Mr. Campbell: It is called the Canadian Lenders Assurance Facility.
Ms. Hughes Anthony: The objective is to revive that moribund leasing sector and those who participate in it, which is absolutely essential. It is great that the government has put that facility in place but we must make it happen.
We testified earlier today before the House of Commons Standing Committee on Finance where there was also testimony by representatives of the auto industry. Clearly, the industry is in serious financial straits and everyone is working on solutions. However, the problem is a North American and international one. Banks might be a part of the solution but certainly not the total solution. We see that our members are trying to work with their customers in forestry, mining and other sectors to help them through this period. That must be our contribution to the dialogue.
I do not have any silver bullets to suggest, senator, in terms of the issues you raised.
Mr. Campbell: Interbank lending comes down to a question of trust: If you lend, will you get it back? Canadian banks are seen as highly trustworthy on the international market. The government has considered some lender assurance facility program, which is a kind of insurance for both the banks and insurers. Other governments have tried that type of system.
Largely, it is a measure of hammering through the programs in place and ensuring that they work as well as possible because of the multiplier effect and the building of capacity. We can use the BDC extra resources to lever that capacity, and the hope is that the leverage will be as great as possible. We then hope that the United States comes out of recession as quickly as possible.
Senator Moore: Ms. Hughes Anthony said that the U.S. banking system must be cleaned up. Are we talking about banks as we understand them or about private banks, unregulated investment houses and hedge funds? Ms. Hughes Anthony, are you talking about the whole U.S. financing sector when you say that?
Ms. Hughes Anthony: To repeat a bit, there is a lack of confidence in the U.S. financial system, writ large, and the ability to have that regulated in many sectors.
Senator Moore: It is more than only the banks as we know them.
Ms. Hughes Anthony: That is correct. I was in Washington about 10 days ago for a day and half. I came home thinking that Canada is a paradise because we understand who regulates what. I submit that the regulatory scheme on the prudential side is extremely clear and good. On the securities side, I am a promoter, and my organization is a promoter, of the idea of a single securities regulator and would like to see that happen; it is important. In the United States, however, a wide variety of regulators are regulating some things and not other things.
Senator Moore: They do not have many national programs because each state is its own fiefdom.
Ms. Hughes Anthony: That is correct. There are over 8,500 banks in the United States. Some are regulated on a state basis and some are regulated federally in component bits and pieces. Regulation is an extremely big challenge for the Americans. Great efforts are being made to try to sketch out a regulatory environment that will give confidence in that system not only to Americans but also to the rest of the world.
The Chair: This discussion has been a most helpful, and I thank you, Ms. Hughes Anthony and your colleagues, for appearing this morning. You have had a full morning of testimony but we have enjoyed and profited by it. Given your experience, we will call upon you again as we pursue other aspects of this study.
Ms. Hughes Anthony: I am happy to have appeared.
(The committee adjourned)