THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, April 30, 2026
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 10:33 a.m. [ET] to examine and report on access to credit and capital markets for small- and medium-sized enterprises as the basis for growth and improved productivity in the Canadian economy.
Senator Clément Gignac (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I would like to welcome you and those listening to us today on the Senate website. I am Clément Gignac, a senator from Quebec and chair of the Standing Senate Committee on Banking, Commerce and the Economy. I will ask my colleagues to introduce themselves.
[English]
Senator Varone: Senator Toni Varone, Toronto.
Senator Fridhandler: Senator Daryl Fridhandler, Alberta.
Senator Loffreda: Welcome. Senator Tony Loffreda, Montreal, Quebec.
[Translation]
Senator Henkel: Danièle Henkel from Quebec.
Senator Ringuette: Pierrette Ringuette from New Brunswick.
Senator Saint-Germain: Raymonde Saint-Germain from Quebec.
[English]
Senator C. Deacon: Colin Deacon, Nova Scotia.
[Translation]
The Chair: Honourable senators, this is our 13th meeting on our special study on access to credit and capital markets for small- and medium-sized enterprises as the basis for growth and improved productivity in the country.
[English]
I want to welcome our witnesses with us today. We have the privilege to have Jim Balsillie, Co-Founder and Chair, Council of Canadian Innovators; and Claudio Rojas, Chief Executive Officer, National Angel Capital Organization.
I understand you have some opening remarks. Following your remarks, we will have questions from the senators. The floor is yours.
Jim Balsillie, Co-Founder and Chair, Council of Canadian Innovators: Chairman Gignac, honourable senators, thank you for the opportunity to speak as part of your timely study on access to credit and capital markets for small- and medium-sized enterprises as the basis for growth and improved productivity in the Canadian economy.
Today, I will speak about Canada’s business composition, the financing conditions Canadian SMEs face and conclude with one obvious policy and institutional approach to improve productivity outcomes and growth.
SMEs are the backbone of Canada’s economy and operate across every sector, industry and region. According to the Competition Bureau of Canada, SMEs account for 99.7% of employer businesses in Canada, as shown in figure 1. As shown in figure 2, homegrown Canadian start-ups are disappearing at an increasing rate year over year, far too often choosing to locate or scale elsewhere.
When this happens, Canada’s economic growth, productivity and prosperity suffer, and the statistics are alarming. As shown in figure 3, the OECD projects that Canada will rank last among advanced economies in per capita GDP growth from 2020 to 2030 and over the decades that follow. Since 2020, Canada’s per capita GDP has been declining by approximately 0.4% per year, the worst among the world’s 50 developed economies.
This underperformance has caused a substantial gap compared to the U.S. over the past 15 years, with Canada’s GDP growth trailing in this time by US$1 trillion annually. This is equal to an extra US$100,000 per Canadian family of four per year.
As shown in figure 4, in a recent survey of current and prospective entrepreneurs, approximately 54% identified limited access to financing as a top barrier to starting, growing or buying a business. When financing is constrained, firms delay investment, scale more slowly or do not proceed at all.
The architecture of the SME financing system in Canada is a significant contributing factor to these barriers. As shown in figure 5, Canada has a remarkably small number of banking institutions compared to peer jurisdictions. With 4,700 FDIC-insured institutions in the U.S. and over 5,000 across the EU, Canada only has 83. Simply put, Canadian SMEs are underbanked, which is a consequence of federal policy decisions.
As shown in figures 6 and 7, Canadian SMEs are not just underbanked but also overcharged. You see it correctly: In Canada, the percentage of SME bank loans is roughly one quarter of the OECD average, and the average interest rates they are charged are much higher than in peer countries. Yet it’s excellent business for our banks with very low loan-loss rates and by far the strongest returns on equity of our G7 peers.
When 99.7% of Canadian businesses face structural headwinds, so too will our productivity and prosperity. We need healthy firms that can drive employment, fuel investment and contribute to national growth.
The current financing apparatus will not achieve the desired economic outcomes. As shown in figure 8, Canada’s large banks are each other’s largest shareholders, creating a structure akin to that of one bank with five sub-brands.
This is not a criticism of our large banks nor their management. They are acting rationally and professionally within the federal banking policy framework.
In closing, the challenges Canadian businesses face reflect the structure of the existing system and the political policy choices that underpin it. Attempts in the past to hector our big banks to meaningfully close these gaps have unsurprisingly failed because they are being asked to do something they are not designed to.
I have one recommendation for your consideration. Canada should enable the creation of at least five or six new SME-focused banks designed to serve our business community with appropriate risk models and financing tools. Canadian SMEs need fit-for-purpose banks to address their needs and begin closing this gap. When Canadian SMEs thrive, so does our economy.
Thank you again for the opportunity to appear today. I look forward to your questions.
The Chair: Thank you. Mr. Rojas, please go ahead.
Claudio Rojas, Chief Executive Officer, National Angel Capital Organization: Mr. Chair, honourable senators, thank you for the invitation to appear before this committee and for undertaking this important study on access to credit and capital markets for small- and medium-sized enterprises. This is an issue that is fundamental to whether Canadian entrepreneurs can build, grow and stay in Canada.
I am Claudio Rojas, Chief Executive Officer of the National Angel Capital Organization, or NACO. NACO represents more than 4,000 angel investors and over 100 member organizations across Canada. Our members have invested more than $1.8 billion into over 2,000 Canadian companies.
Wealthsimple, Verafin, Hopper and Kepler Communications each began with an early cheque from a local angel investor. Together, these four companies are worth over US$20 billion today. They employ thousands of Canadians and serve millions of customers.
Innovation-driven firms are a powerful engine of productivity growth. They generate more revenue per employee than the average company. They make other firms more productive. When a Canadian retailer adopts Shopify, that retailer becomes more efficient. The earliest stages of capital determine the growth trajectory of these innovative firms.
Canada has the talent and the research base of a knowledge-based economy. What it has not built is the capital architecture to keep its companies, its intellectual property and our founders at home. The consequences are now measurable. Canada’s GDP per capita has fallen 0.4% per year over the past five years, the worst performance among the top 50 developed nations.
Canadian companies, at the earliest stages, raise 40% less capital than their U.S. peers. Our top three innovation hubs — Toronto-Waterloo, Vancouver and Montreal — have lost a combined US$66 billion in ecosystem value over the past five years, costing Canadians 133,000 high-paying jobs as a result.
The trajectory is visible at the founder level as well. The U.S. is producing 45 times more high-potential start-ups than Canada, and only one in three Canadian-founded start-ups are still being founded here at home. Access to risk capital is the most powerful determinant of growth trajectory, and that trajectory is defined at the earliest stages of company formation.
Angel investors bring something institutional capital does not. They are hyperlocal and bring patient capital, mentorship and domain expertise at the critical early stage of the growth journey.
International experience is instructive. The United Kingdom, through its Enterprise Investment Scheme, or EIS, has mobilized over £33 billion in private investment toward British early-stage and growth-stage companies. Leading economies are making deliberate choices to address the early stages within a national strategy. Canada has not yet made that choice. Global competition for high-potential founders is accelerating. Without bold action to address gaps at all stages, Canada risks losing its talent, companies and economic sovereignty.
Three areas require urgent attention. First, Canada must resource the front end of the capital continuum. Angel investors, seed funds and the networks that support them need the scale and capacity to consistently fund Canadian companies at the earliest stages, when one cheque, one mentor and one local network can determine whether a company stays in Canada or moves abroad.
Second, Canada must treat the capital life cycle as a connected system. Early-stage investment, growth capital and the liquidity that comes from institutional investors are sequential stages, not separate ones. A weakness at any one stage compounds across the others.
Third, Canada must take a more deliberate approach with its tax policy to incentivize private capital participation in the economy of the future, similar to leading jurisdictions like the United Kingdom.
Canada’s innovation outcomes are decided at the earliest stages of company formation. If we get that right, the rest of the capital continuum has a solid foundation to build on. If we don’t, no amount of growth-stage capital can compensate.
Thank you. I look forward to the committee’s questions.
The Chair: Thank you to both of you, Jim and Claudio. It was very interesting to see your chart, Jim, as 54% of SMEs trying to access financing is an issue. I think that justifies our study.
Senator Varone: Thank you. It always becomes a problem trying to match your opening statements with questions that I created last night, so forgive me for misaligning them.
I want to concentrate on procurement, specifically government procurement. What can the government do in terms of its own procurement policies to prioritize SMEs that possess innovative solutions for intellectual property that can stimulate demand and enhance credit availability for SMEs? At the end of the day, if you have a purchase order in one hand, financing is available on the other.
Given that the government is the largest purchaser of goods in this country, what more can they do?
Mr. Balsillie: Procurement is an enormously important issue. Every country has been doing it since the beginning of time. I’m glad it is getting on our agenda now.
I think what you have seen here, my greatest concern on procurement is you are seeing a lot of shenanigans by companies trying to define themselves as Canadian when they are not Canadian. You are also seeing this with sovereign compute; they are trying to call something sovereign when it is not.
I would not try to make the case for procurement because I think that case has been made now. We could lose almost all the benefit of that if we do not define what a Canadian company is properly. That is a standards issue. It’s hard to do. It’s easier to define what is not a Canadian company than specifically what is, and it requires different thinking in different cases.
I’m 100% for procurement. Absolutely, it’s better than a grant, but you are seeing the shenanigans of definition going on right now.
Senator Varone: Mr. Rojas?
Mr. Rojas: Angel-backed companies have been validated by the private sector. These companies have a higher propensity to service the government as a vendor.
Our recommendation would be that, in addition to prioritizing and ensuring that Canadian companies are the beneficiaries of procurement, the government look for ways to accelerate the procurement process in order to minimize the administrative burden and look to the private sector, which has already validated these companies and is already supporting them.
Senator Varone: My theme here is the role of government. In terms of what role it can play toward fostering collaboration between SMEs and research institutions to enhance the innovation and commercialization of their intellectual property, is the government involved in that process to incentivize the research to make it stay in Canada?
Mr. Balsillie: Not at all, and it’s been a catastrophic public policy failure over the past 30 years. The government spends $7.5 billion per year on research, $4.2 billion to the granting councils and $3.3 billion internally with absolutely no strategy whatsoever to generate and corral that research money into intellectual property that has positive spillover for Canadian companies.
I chaired a panel on this subnationally. I have chaired two of them on this in Canada, and I have not found a developed country in the world that doesn’t manage it for their internal benefit. Nobody does it like we do. It’s a catastrophic gap in public policy thinking.
From the beginning of the intellectual property revolution 35 years ago in this country, it has never been on the agenda. It has never been thought of. It has never been oriented.
There was deep engagement with the government on this file. I was gobsmacked that it wasn’t even considered in the budget, let alone the Spring Economic Statement. The inattention to this is unimaginable to me, yet we are happy to spend the money.
Senator Fridhandler: Mr. Balsillie, I will address your specific remarks and your focus on banks. I think you have crafted that in your penultimate paragraph, where you say, “Canada should enable the creation . . . .” Because anyone can create a bank — or almost anyone — if they can pass the capital tests. How do you visualize Canada enabling SME-focused banks?
Mr. Balsillie: I will challenge your core preamble that “anyone can.” Nobody can. That’s a policy choice: We need cars, but you are only allowed to drive the car to church on sunny Sunday mornings. So your car is in good shape but nobody can get around.
This hyper-orientation to the absolute principle of stability at the exclusion of other things has been to the enormous cost of Canada. The U.S. is bumpy too. I want to reiterate the divergence — if we had kept growth at the rate of the U.S. over the past 15 years, we would have another US$1 trillion a year in our economy. That is US$100,000 per family of four every year. That’s the delta, and it is growing.
We have to start to ask how we can address that gap. There are a few ways to do it. But absolutely enabling banks that are going to be bumpy and serve this thing and design the products and attune to small businesses — they are not being served right now. The fact that it is at 25% of the OECD average should cause national alarm.
There are different things that can be done. However, fundamentally, the commercial banking system is not there for them right now and not anywhere near what it needs to be. If you are going to think of three or four core recommendations, I’m hard-pressed to see how that cannot be one of them.
Senator Fridhandler: I will throw this out to both of you. Staying on banks for a minute, if you are a start-up or an SME — maybe not so much the medium enterprises as the small ones — you are not going to get bank support without putting your house on the line. I will always say to start-ups, “Equity is the way because there is no call on it if you get bumps in the road.” Do you want to comment on the debt side versus the equity side of the equation for start-ups?
Mr. Rojas: I can comment. Some years ago, we partnered with one of the large national banks on a credit product where they relied on our network as a validation mechanism. If a start‑up had raised capital from a qualified angel investor within our national network beyond a certain threshold, then the bank would forgo the personal guarantee. So we are seeing an attempt to address these issues. However, the level of support is not at the stage at which it will enable companies in this country to be as competitive as they would be if they had the support of an SME-focused bank with a higher risk profile.
Senator Fridhandler: Over to you, Mr. Rojas. In your list of three points, your last point was a more desirable approach on tax policy. You referenced the U.K. and the EIS. Can you tell us a little more about the EIS and then maybe your top couple of tax policies? We have heard many, but we want to keep reinforcing from various sectors what people think about it.
Mr. Rojas: As a starting point, what we can take from the EIS system is that it is a system. It incorporates companies. It is mindful of companies at each stage of the capital pipeline. Within EIS, there is also a Seed Enterprise Investment Scheme, or SEIS, that recognizes the higher risk profile of seed stage companies. EIS itself provides 30% tax relief. In this country, it would be the equivalent of a 30% national investment tax credit.
With SEIS, companies with a higher risk profile receive 50% tax relief — to the investor, I should be clear. Then, in addition to the investment tax credit, which, within our frameworks, mobilizes new supply of capital into the ecosystem, it mobilizes new investors. There is a capital gains deferral for when an individual exits an investment from another sector and puts that money into British-based companies. There is also a capital gains exemption, which is quite powerful. It sends a clear signal that if you invest in these companies that drive the economic growth of the future, you don’t have to worry about the capital gains component at the end.
The reason why all of this is important is because it corrects for the ultra-high risk, the risk of losing the entirety of your capital when you are an investor. So it corrects for a market failure. That is why a tax policy should not be a silver bullet; it should be a comprehensive system that understands the full capital continuum and the risks at all stages.
Senator C. Deacon: Thank you for coming back, Mr. Balsillie, and for being here, Mr. Rojas. We have been talking a lot about SMEs generally. But it is like a number of other things — we have to get the system working, and we need to have some early action. If you were to focus on all of Canada’s small- and medium-sized enterprises, what would be the clear highest-value return that we could put our efforts into, in terms of policy and tax incentives and others? Describe those small- and medium-sized enterprises if you could.
Mr. Balsillie: Sure. I’m very substantially active in this, both in Canada and the U.S., every day. That’s my day job. I think, to Claudio’s comment, we have to fix the tax system. The tax system is unfavourable. I think you all know this domestically. I don’t think you are quite as aware of how severely we are commercially underbanked and how adverse that is. It is a really big problem. A third thing is the relationship of debt and how you bring these in.
Sorry, am I not answering your question?
Senator C. Deacon: I want to focus on the companies themselves. We cannot necessarily focus our efforts on all of the SMEs. How do we make sure we are serving the core group that are going to cause the biggest early kick? We can broaden out over time, but if we are to really prime the pump here in Canada, what would the company characteristics look like that we are going to really focus on?
Mr. Balsillie: Should that be done by the government? It is —
Senator C. Deacon: In Ottawa, these companies are not identified as being high need because the high growth potential and the companies I’m focused on in my head are not identified. How do we help them identify them better?
Mr. Balsillie: Oh, how they get to know them.
Senator C. Deacon: What do they look like?
Mr. Balsillie: The issue is that there is no relationship of any proper sort between the ecosystem and Ottawa. It was fundamentally broken, and there was no desire to form a relationship.
So many successful companies are deeply engaged with the White House in their most critical public policies. My engagement in Washington is much more active than it is in Ottawa. They are just Hoovers for it.
One of the things I thought was very encouraging in the CBCA’s testimony was suggesting, “How about we create a relationship?” They are starting to rebuild the relationship with the resource economy. Let’s be honest — there is no proper relationship between our small businesses and the policy community in Ottawa. Look how they dropped capital gains tax on them. That would never happen in any proper developed country, that you would drop it on them out of left field. This happens all the time. But if you have a relationship, you season these things before they come out.
I think that’s the core issue, and then everything falls out because there is an inability and lack of desire to relate.
Senator C. Deacon: I’m also trying to find out whether we should be focusing on companies — CCI has a definition of the types of companies that we really need to focus on.
Maybe I will go to you, Mr. Rojas. What are the companies themselves that we should be making sure the policies move the needle on so we can measure the effect?
Right now, those companies are leaving the country. Let’s describe them so that we can start to get that relationship built and we know who to invite to the table and get the government to pay attention to.
Mr. Balsillie: I used to have, for many prime ministers, a direct line; they would call me back that day. It was much smaller. The companies were growing fast, and that has died, essentially, during some era over our time here. I think if you cut off your pipeline of relating, you’re not going to find the gems.
Mr. Rojas: It’s critical that we let the private sector lead. The private sector can see things that others don’t. There is an idiosyncratic value to be captured by these high-growth companies that quite often can’t be perceived by the government.
I’ll give you an example: Wealthsimple, in 2014, was looking to compete with large banks. Most people would not think that is something that could succeed. Our angel investor of the year wrote a $250,000 cheque to Wealthsimple. They now have $100 billion in assets under administration. They have raised capital across the full pipeline, and they have a value of US$10 billion. That is not something that the government would have determined in advance, but the private sector can.
My co-panellist similarly did something extraordinary when he wrote a $114,000 cheque to a company with a team of engineers and took that company to a level at which they became a global behemoth and made Canada proud, and even the U.S. president couldn’t part ways with his BlackBerry.
That is not something that the government is positioned to see in advance. It’s idiosyncratic, and it represents the idiosyncratic nature of entrepreneurs who are building something different and of the angel investors that can back them.
[Translation]
Senator Henkel: Gentlemen, thank you for being here; I really appreciate your answers and the summary you provided on the situation of small- and medium-sized enterprises, which is very worrisome.
You mentioned something in your report about the suggestion to create five or six banks. If the government were to respond to that — and it will respond — by saying that we already have banks that supposedly serve small- and medium-sized enterprises, such as BDC, Investissement Québec in Quebec, Entreprendre ici, or a completely different association that used to focus exclusively on women and was called Femmessor, and now is called Evol, what would we say? What does that mean? Is the system not working at all for these organizations that are supposed to finance and assist small- and medium-sized businesses?
[English]
Mr. Balsillie: It’s definitely not working. You just have to look at the outcomes.
[Translation]
Senator Henkel: What would your answer be? What are your suggestions? What is missing?
[English]
Mr. Balsillie: Einstein’s definition of insanity is doing the same thing over and over and expecting a different outcome.
It’s not to the exclusion of these other things, but clearly, they’re not being commercially banked, and clearly, when it comes to operating lines and getting services and moving around, it’s not happening. But a lot of these investment things are very important: how you crowd in debt capital, which I think is very important, and how they participate in the equity stack. That’s fine, but the credit book of the commercial banking system is not aligned with our company and our economy right now.
The answer is you need entities that are purpose-built to bank that. If you look at the excellent situation that my co-panellist mentioned, if you look at all these different things, like Wealthsimple and Questrade and KOHO, they’re all focused on the consumer, which is good. If they’re going to offer licences for consumers, do it for small businesses too.
I have a mantra: When you have a big problem, shrink it. When you have a complex problem, simplify it. We have to take this problem out of being the number one problem so that the next problems can surface.
When you do your report, I think tax reform has to be one. I think debt has to be something. I think the relating structure has to be one of them.
I can’t see how the commercial banking operatives shouldn’t be one of the priorities, but I it has to be a very finite set of catalytic things that you have to lock into.
[Translation]
Senator Henkel: I spoke with Mr. Rojas a little earlier, and I have put this question a number of times to other witnesses we have heard from, so I would really like to hear the answer you’ll give me.
Are there any specific reasons or barriers that the government should address when it comes to women-owned businesses? We know that only 4% of women entrepreneurs with medium-sized businesses — I’m not even talking about small businesses — have difficulty obtaining venture capital. What do you think the reasons for that are? What should be done to improve their access to venture capital?
Mr. Rojas: Thank you.
[English]
The starting point is recognizing that there are barriers. It’s system-wide. We need to address the system. Then, to your point about recommendations, we need to look at steps we can take that are actionable.
I can tell you what we have done. I like the phrase “If you see it, you can be it.” We hear this across the board for a wide range of women entrepreneurs.
In 2017, we started tracking the number of women angel investors in our network, and it was embarrassing. It was 14%. But if you don’t measure it, you can’t change it. That number has steadily increased, and over the past three years, the number of women within our national network of 4,000 angel investors across the country has been steady in the range of 35% to 37%.
The value that women investors bring is, first, it creates spaces in which women entrepreneurs feel welcome. It helps overcome things like unconscious bias, which, by definition, we don’t know that we have. What it also does and what we’ve seen is that angel investors bring purpose, and women angel investors, in some cases, bring a commitment to taking a higher level of risk on women-led companies, recognizing that if you’re a woman-led company, you have had to overcome many more barriers than your male counterparts.
Senator Loffreda: Thank you, Jim and Claudio, for being here. We always have interesting discussions together, and they’re very insightful.
Our economy, as you mentioned, is heavily weighted toward SMEs — 99.7% of our businesses. If I refer to Reuters research, and they were quoting OSFI in it, 73% of major bank loans are tied to mortgages and household lending versus roughly 27% for businesses, and of that 27%, SMEs are 11% to 12% of outstanding business lending.
There is a disconnect there. This is why access to capital is such an issue in this committee, and it’s an exceptional study.
I won’t repeat your recommendation, as I’m limited in time. Let’s take a market. Jim, I’m certain you know that. If we look at regions, if we look at Quebec, where you have a co-op that’s extremely strong, if we look at a regional bank that’s strictly in Quebec, I don’t believe that SMEs are underbanked in Quebec. Now, to be more pragmatic, can we take that model and somehow bring it across Canada? Because those figures, I’m sure, nationally — in Quebec they’re totally different. I don’t want to take a look at that, but what do you think?
Rather than creating five or six SME banks, which might take a few years, how do we take the co-ops and bring that model across the country?
Mr. Balsillie: The U.S. and Canada are in the process of starting new banks, so it’s going to happen. They say it’s going to accelerate in a year. I think it could be active very quickly, but it’s not to the exclusion of what you’re saying. There is a gap. It’s seismic. I think the co-ops definitely — you could ask them, “What is between you and changing your book percentage to this kind of problem?”
But I do think there is a place for de novo banks in this, just as there is for consumer banking. You have to start to squeeze it. Expanding the co-ops, looking at how they rate their capital, how the government — you see, the reason banks do mortgages, a lot of it — I don’t have to tell you this. We both know banks. You pay an interest rate of 1%, you charge mortgages at 5% and the government guarantees the risk, and somehow that 400% markup works out. That’s the math, and that’s a public policy issue.
So we’ve made that business. There has to be a public policy that says, “If this is our engine and we’re starving our engine, let’s not starve our engine.” I think there is a huge place of tax policy up front. I think there is a huge place of commercial banking. I think there is a huge place of catalyzing debt. And it will all begin if they bloody well learn to relate and actually talk to these people, not poke them in the eye.
Senator Loffreda: I like that, but I’ll ask this question: Why haven’t the co-ops been as successful across Canada as they have in Quebec? If you look at Quebec, they have 50% of market share, and there is competition. People refer to banking and no competition. In Quebec, for small business lending, there is competition, because the co-ops, the regional banks — the National Bank of Canada deep-dives in each and every one. Why hasn’t that been pragmatically expanded across Canada? Because SMEs do need access to capital.
Mr. Balsillie: I’m not a deep operator in that, but if I knew that there was a lot of consolidation in the trust sector —
Senator Loffreda: Yes, there was.
Mr. Balsillie: — and shrinking it — I know that there are a lot of structural pieces that they have to depend on and that the profits are grabbed before it gets to them. They have legacy operations that are very expensive, and you have to look at de novo types of 21st century IT systems that can service this. It is kind of like what Wealthsimple is.
There are a lot of reasons why it’s hard for them to do it, but I do think that Quebec has been very well served in some of their national approaches to ensuring that they’re okay, and the rest of Canada could take a page out of that playbook.
Senator Loffreda: They could take a page, and I’ll end on that. What I’m saying is if it’s underbanked and underserved, there is an opportunity there. I’m surprised that opportunity hasn’t been seized by some of the co-ops, but that would be a study in itself. But Quebec is a good example to follow.
Mr. Balsillie: Yes. But don’t underestimate how many roads go to the policy constraints of the regulators.
Senator Loffreda: For sure. Thank you, Jim.
The Chair: I think we made history today in regards to the intellectual point of view of our colleague senator, and former vice-chair of Royal Bank — for him to propose having a look at expanding the credit unions outside Quebec. I will remember that one. Just kidding, colleagues.
Senator Ringuette: It seems to me that we’re still in the mantra, government-wise, that if you help the big corporations, the domino effect will be to help the SMEs. That was the mantra in the 1980s. We’re in 2026, and it’s still the same mantra. We definitely need a cultural change.
I want to ask you specifically about your statement in regard to our research funding in Canada having a catastrophic gap in policy. For 10 years at this committee, I’ve been highlighting the fact that we supposedly invest in all this research without any conditions, without any share — you know, it’s Canadian money, so Canadians should have a share in that research and IP. And if you have a share, you have an interest in its development, commercialization and so forth, whether it’s having a pool of IP for investors to purchase or something else.
You were very specific that this is a catastrophic policy, and I want you to dig into that more and provide what could be elements of solutions.
Mr. Balsillie: I am very happy to. I think this regards whether the government get 10 cents out of the money they spend or $10 out of what they spend. And they don’t govern for spillovers — that is what they’re called economically.
I’m deep into this file, and I’ll just give the example of Fraunhofer because you hear about Fraunhofer a lot. They have roughly 80 research entities, over 30,000 researchers and one centralized technology transfer office, or TTO. You touch Fraunhofer, and it all defaults to the institution, and then they carve out from there.
Here, it’s just extreme mismanagement. It’s not as if there hasn’t been policy engagement at the highest levels of the government. It’s as if they have a blind spot to the nature of this, that they don’t understand that if you don’t think of it up front, it’s gone.
It’s like AI. We had all the fundamental AI. We set up all these research centres. We gave it all away. Then they partner with big foreign companies, because they take them to conferences and put them on prestigious papers, and then they block our emerging SMEs from participating in that research. You go to the U.S., and it’s hand in glove between the research money and U.S. SMEs.
And then they do many other structural things — I’m testifying at the Standing Committee on Industry and Technology after this — on AI, where they’re doing what I call economic statecraft. I give 10 specific examples of what Trump has done in the economic statecraft of AI in the past year, and I would call governing your IP one of them, and they did two or three very specific things, though I know we don’t have time to go into them today.
We don’t even know statecraft is going on. They just say, “Tangible production economy. Here is the money.” And that was my opening statement. It has changed and needs to be governed differently. We never changed our governance. I would ask whether we can name one policy or institution that has changed its thinking in the past 30 years of this change. That’s policy thinking failure.
Senator Ringuette: Can I further ask for your help in this? You just indicated that you have been to many conferences and you have a lot of research and so forth. Could you provide that research to this committee via our clerk?
Mr. Balsillie: Sure.
Senator Ringuette: I find that, with respect to the issue we’re studying, it’s fundamental. If we don’t start there, then the rest doesn’t follow.
Mr. Balsillie: Yes. I’m going to, if I may, just elaborate a little bit. We also have no strategies for data or sovereign compute. So we’ve taken ourselves out of the IP game. We’ve taken ourselves out of the AI game. I would bet 90% of the most promising companies have that as a core aspect, and there is a policy and institutional inattention to it from the beginning.
I’ll get you the papers for that, yes.
Senator Ringuette: Thank you.
[Translation]
Senator Saint-Germain: Thank you very much for giving us the OECD data. Obviously, there’s a lot of talk about the erosion of Canadian companies that move abroad, particularly to the United States; the figures are significant.
I am interested in what isn’t necessarily written in this study, namely the fact that some companies — especially start-ups — have to sell because they lack the capacity to continue and grow, and that some of them will simply go bankrupt because they started out in an unfavourable context.
As you know, this committee reports to the government.
I would like to hear your thoughts on the part that doesn’t necessarily deal with government investments in financial capital for start-ups and maintenance, but rather on what Canada could do differently to provide better support to businesses. You have spoken at length about deficient public policy. I am looking at Table 4 in your document, where it says:
[English]
“Finding information and resources to get my business up and running.”
[Translation]
It says that 38% are dissatisfied with the services.
[English]
“Finding government support programs” — and I do not believe that those are only financial support programs.
[Translation]
It says that 35% are dissatisfied. It goes on to say:
[English]
“Applying/qualifying for government support programs.”
[Translation]
It’s a matter of 32%.
So, from the perspective of better support for business start-ups, but also for their growth, do you have any recommendations for us to include in our report to the government?
[English]
Mr. Rojas: We did root cause analysis, so, in partnership with the Startup Genome, what we found were compounding gaps. These compounding gaps are challenges at all stages of the capital pipeline and are contributing to the erosion and loss of companies at all stages in different ways.
We identified that there is a 30% seed stage gap. When a company raises capital in Canada, 30% fewer companies raise that seed stage capital, that early-stage capital. This compounds. It has cascading effects with 40% at Series A — so a 40% deficit of companies raising Series A capital — and then that compounds further into a 50% Series B gap.
This compounding effect creates issues at all stages of the capital pipeline, and the challenge that we have as a country is that we tend to focus on the top floors of a skyscraper, and we don’t understand that it’s the breadth and the depth of the foundation that determines the magnificence of the structure itself.
As a result, what is occurring is that entrepreneurs are leaving for other jurisdictions and for other countries that do understand that and where they can gain access to capital at a greater rate. There are three dimensions to access to capital, and I’ll focus on one in particular that tends to be overlooked.
We are and must continue to be a nation of builders and risk takers. However, our small- and medium-sized enterprises, or SMEs, spend an extraordinary amount of time with the administrative burden — rather than building their companies — of raising capital and of applying for government programs. The administrative burden is a distraction from company building.
If they do succeed, they end up becoming third or fourth in the market if they get to that later stage. When you’re third or fourth in the market, it’s rational to sell as opposed to being crushed by your competition.
There is one company in particular, and this is straight from the founder: They sold their company for $100 million in the West, because if they didn’t, they would have been crushed by their competitor. That early exit contributed to the success of something called Harvest Venture Builders, an accelerator in that region that gave rise to Neo Financial, a multi-billion-dollar success story.
So exits and liquidity are important. Early exits are suboptimal, and those early exits tend to come from this compounding effect that begins at the earliest stages.
[Translation]
Senator Saint-Germain: Thank you.
[English]
Senator Fridhandler: This is primarily to you, Mr. Rojas, but, Mr. Balsillie, I’m certainly glad to get your input.
On democratization of investment — your angel investors are probably 99.5% accredited investors, but we heard from earlier witnesses that people are free to invest in crypto-currencies and the markets that project what things are going to happen. They can throw their money around, but securities regulations restrict democratization, and people who want to put small money in just can’t get into the system and would probably be more supportive of nationalistic opportunities, as well.
We have FTQ in Quebec, which is a fund where $5,000 from workers per year gets matched with two 15% tax credits. How do we democratize a bit more, and do you think that that will help bring more capital into the marketplace?
And my last point is this: The recent Canada Strong Fund is talking about issuing bonds so that people can participate. That’s in major projects. We need to get them into SMEs.
Senator Loffreda: Jim, we discussed it: You can’t get a fish to climb a tree. Our banks are not doing SME lending. We know why; many know why.
Is there any way we can get them to do more SME lending while waiting for alternative solutions that you’ve suggested and that we will look at and we will recommend?
Mr. Balsillie: Sure. I’ll answer it indirectly and then directly.
Facebook used to be the most privacy-protecting company out there, and then when they attained dominance, they became privacy exploiting. You would be shocked. You know how people respond to competition. If you put two or three de novo banks in there that start to take business away from them, they will behave. But if you hector them — you can’t push capital; you pull capital through. It’s when they respond to the competitive environment, and it’s not there right now.
Mr. Rojas: To the question related to democratizing access to capital, it’s very important that when investors put their capital at risk, those are well-informed investments. We have a national network of 100 early-stage investment organizations, including angel networks, that help educate new investors so that they can put their money — their capital — at risk into qualifying companies and companies that are worthy of that capital and likely to succeed.
We have consulted with the regulators. Early in my law career, I spent some time on secondment at the Corporate Finance Branch at the Ontario Securities Commission. I can appreciate the challenge they have in ensuring that they’re protecting the integrity of the capital markets and protecting investors.
I’m hopeful that we will continue to see the kind of leadership we have across the regulators around recognizing that the accredited investor exemption is a proxy for protecting investors. It assumes a certain level of sophistication. However, educating those investors, ensuring they have the appropriate level of education as it relates to this asset class, is important.
I would emphasize that education as it relates to this asset class is not the same as being a Chartered Financial Analyst, or CFA, which I am; being a trained lawyer, which I am; or having a Master of Business Administration, or MBA, from a large business school.
This asset class has a very unique dimension to it, and so knowledge sharing, which takes place throughout angel networks across the country, and best practices between angel networks are the best way to protect investors, to increase access to capital and to democratize this important asset class.
[Translation]
Senator Henkel: I would like to come back to one of the intangible yet extremely important assets: intellectual property in our universities. These are public investments that are made, but that, unfortunately, because of a lack of support for commercialization, are assets that are very easily appropriated by foreign companies and put to good use.
If you had two recommendations to make to the government to protect these intellectual property assets that would increase the productivity of our businesses and foster growth, what would they be?
[English]
Senator C. Deacon: For high-growth, high-IP, high-value exporters — they’re the companies we really want to support in this country — right now, there is $4.5 billion being spent through 134 different programs in Ottawa. There are no key performance indicators, or KPIs, associated with those programs.
Answer afterward, if you could, with a written response about what you would do differently in that regard, to have it driven by investment and turn that $4.5 billion around into something that we know will have KPIs.
Thank you.
Mr. Balsillie: Sure. The most important thing is to put conditions on the money.
It has to be governed in a certain fashion, but you cannot manufacture frustration where you say, “Jim, you need to be six feet seven inches tall with a full head of hair.” So you have to say if you cannot fulfill this, there needs to be a government or Crown corporation or agency mechanism that says, “I will fulfill that function with you,” in terms of management of the assets and creating a pull, not unlike the Fraunhofer does. We need a Fraunhofer for Canada. I testified to National Defence last month on the Defence Industrial Strategy, or DIS. There is absolutely nothing in the DIS to ensure that the IP is properly managed in the data.
We are spending hundreds of billions of dollars with no strategy on this. So, the conditions, institutional management and expertise to go with it are the main things. That is what everyone else in the world does. They understand it matters so they orient to it. We have never oriented to it like it matters.
Mr. Rojas: My contribution would be to ensure that as we think about these frameworks, we are approaching it from a fulsome perspective. We suffer as a country from silver bullet reasoning, hoping that one thing, one tax mechanism or one particular sector will turn everything around. There tends to be reactionary policy, as much as we have learned over the last 35 years as it relates to the development of the innovation economy, in other jurisdictions and in this country. We had the labour-sponsored investment funds in the late 1990s. We learned one lesson there. Within our framework, we see that as a supply of capital that moved into the ecosystem, but we did not have the deployment mechanisms necessary.
IP-rich companies and knowledge-based companies need capital at the formation stage in order to be globally competitive. There is a power law that is often overlooked. Governments of all stripes sometimes have an inclination to try to pick winners. That is not possible. You cannot pick the BlackBerry of the future in advance. You can’t. Jim did. Many of us would not have been able to. We have to let the private sector lead en masse. It will find the IP and the companies and the founders and back it all with risk capital, and it will surprise us with the Wealthsimples, the BlackBerrys, the Hoppers and the Shopifys of the future.
The Chair: We could spend another hour with you all; it’s been so interesting. Jim, it would help us if you could elaborate in writing and send some written material regarding your recommendations for the banks. Canada has a higher banking concentration than any other G7 country. In the U.S., it is obvious. There is the experience of the Silicon Valley Bank. It was a financial partner important for innovation. You remember that period. How could we protect that?
We will talk about banks in the next panel because we will speak with the CEO of the Canadian Bankers Association; perhaps that topic will be back. It would be helpful for us. I found your recommendation very interesting.
Thank you for your time. We appreciate it very much.
[Translation]
Honourable senators, welcome to this second panel. We are continuing our study on access to credit and capital markets for SMEs as the basis for growth and productivity.
[English]
We are fortunate to receive representatives of the Canadian Bankers Association. I want to welcome Mr. Anthony Ostler, President and CEO; and Mr. Darren Hannah, Senior Vice President, Financial Stability & Banking Policy.
Welcome. The floor is yours.
[Translation]
Anthony Ostler, President and Chief Executive Officer, Canadian Bankers Association: Good morning. Many thanks to the committee for giving us this opportunity to participate in its work on access to credit and capital markets for SMEs.
I am Anthony Ostler, President and Chief Executive Officer of the Canadian Bankers Association, or CBA. With me today is Darren Hannah, Senior Vice President, Financial Stability & Banking Policy.
The CBA is the voice of more than 60 Canadian and foreign banks operating in Canada. It supports the adoption of public policies that contribute to a sound, thriving banking system that helps Canadians achieve their financial goals.
[English]
SMEs are a critical pillar of the Canadian economy, representing the vast majority of businesses nationwide and employing the majority of the private sector workforce.
Across Canada, banks compete aggressively with one another and with non-bank financial institutions and companies to deliver more than $355 billion in financing to SMEs — of which banks provide approximately 60% of that total. Banks tailor financing solutions to meet the diverse needs of a wide variety of SMEs. As part of that, they serve their needs through different types of financing, including commercial mortgages, leasing, revolving lines of credit, overdrafts, credit cards and amortized term loans.
Banks also offer a broad range of non-credit services, including business chequing and savings accounts in Canadian dollar and foreign currency denominations, payment solutions, investments, insurance and advisory services.
[Translation]
This comprehensive range of products and services enables SMEs to develop a lasting partnership with their bank, sometimes spanning several decades.
[English]
This comprehensive offering, supported by diverse funding sources, technological innovation and trust, helps drive growth and stability for SMEs, enabling long-term partnerships.
When providing financing to SMEs, banks undertake due diligence to assess the business and its management using the five Cs of credit: character, capacity, capital, conditions and collateral.
As part of this due diligence, banks increasingly employ technology to automate the process and leverage data. This approach has enabled banks to increase — since the global financial crisis — their authorized, outstanding and unused credit available to SMEs by approximately 80%.
As a result, SMEs generally have ample access to credit financing from banks. In fact, according to Statistics Canada, SMEs have consistently ranked non-financing factors such as the rising cost of inputs, corporate tax rates, recruiting and retaining employees and government regulations ahead of obtaining finance as a primary obstacle to growth.
[Translation]
SMEs do not view loan applications to banks as a barrier, and approval rates remain high.
[English]
This being said, there are ways to provide even more credit to SMEs. For instance, we made several recommendations to the Competition Bureau in our submission Capital for Canada: Financing the growth and stability of small- and medium-sized enterprises.
These include: implementing changes to bank capital adequacy frameworks that enable the deployment of more capital; incorporating growth considerations into the regulatory decision-making process; streamlining and improving government guarantee programs, notably the Canada Small Business Financing Program; expanding data-sharing policy to include government entities such as the CRA; and, finally, addressing non-financing barriers to growth to enable SMEs to apply for more credit.
For example, a recent Statistics Canada study found that regulatory requirements in Canada increased between 2006 and 2021, and this was associated with declines in economic and employment growth.
[Translation]
Again, thank you to the committee for giving us this opportunity today. It’s always a great pleasure for me to speak French and to have the opportunity to practise it.
[English]
Thank you for your patience and your attention. We would be pleased to answer your questions.
[Translation]
The Chair: Thank you very much, Mr. Ostler. The next time we meet, I will speak to you in French. I hadn’t realized how good your French is. Congratulations, it is much appreciated.
[English]
I propose to limit questions to four minutes each in order to have time for a second round.
Senator Varone: I want to correct one thing. The global financial crisis was caused by the tangible asset class, not the intangible asset class. I wanted to frame that for you because it was real estate-based, what created the crisis in 2009, but moving forward, banks have always benefited from innovation and advances in technology, whether it is the chip in the credit card or the platforms of web-enhanced banking. You seem to reap the rewards of innovation, but you do not have a stellar reputation for supporting those SMEs that create the chips and the web-based platforms.
We have heard testimony that a strong business case exists in lending to SMEs in the intangible asset class, and what is missing is what you have: the capital. You are the best lenders in the world when it comes to tangible asset lending, but I’m bewildered why you cannot leverage the available technology of data analytics and AI to enhance your understanding of the intangible asset class and that landscape, allowing you to explore and expand your lending criteria to mitigate any perceived risks associated with focused IP lending.
What would it take for traditional banks to develop specialized lending programs or partnerships, especially for SMEs in the intellectual property sector, addressing the unique challenges and risks they face while offering competitive rates?
Mr. Ostler: Thank you for your question, senator. It is an interesting issue you have raised. If we look holistically, there are millions of small- and medium-sized enterprises. The vast majority that apply for credit get it. As I mentioned in my remarks, 88% get approved.
But in the section that doesn’t get approved, there are a number of different elements that drive that if you think about the five Cs of credit, and specifically for the intangible asset class. I don’t have statistics on that class specifically, but if you think about the five Cs of credit, it could be that, from the lender’s perspective in providing credit to them, they don’t have enough capital to support potential burn rates. If you think about it, if you are developing IP or other elements, you could have a long period prior to revenue. The bank capital rules, and how they assess credit, would suggest there isn’t enough capital on hand to be able to support that business and that burn rate.
I don’t have the facts, but it could come back to the fact that what we need to do is make it easier for those entities to get capital to support their start-up at a sufficient level that a bank would also feel willing to provide credit to those entities.
So if we take a further step back and think about what the Statistics Canada study mentioned, there are a lot of elements that stop small businesses from advancing, and access to credit was the tenth issue. That is obviously holistic across all small- and medium-sized enterprises.
So what you are describing is a symptom of a broader illness, of making it hard to attract enough capital on the capital side versus the credit side in support of these businesses to be viewed as worthy of being approved for the credit.
Senator Varone: Can I have a follow-up?
The Chair: Maybe on second round. I forgot to share with our colleagues that, in fact, Mr. Ostler understands what is tangible and intangible because he started in Canaccord, State Street and so on, so I think we are quite lucky today. All that is to say we appreciate that you are here in person, Mr. Ostler.
Senator Fridhandler: I’m assuming that you cover the equity side too, because many of your members control very large investment banks in this country — in fact, the majority of them. So that’s my focus more, equity versus debt.
One of your members, Royal Bank, issued a report recently on venture capital, or VC, fundraising in 2025; it was great, interesting analysis. I couldn’t find any recommendations or suggestions on what they were going to do in response to the issue. I think that is part of our national problem: The big banks control too much of the investment banking equity system in our country and are averse to supporting SMEs in that system. Can you comment on that, please?
Mr. Ostler: Thank you for your question, senator. I have not had a chance to read that report yet. Have you had a chance?
Darren Hannah, Senior Vice President, Financial Stability & Banking Policy, Canadian Bankers Association: No.
Mr. Ostler: It’s interesting; Likely, what they focused on would suggest there are more opportunities for more venture capital investment in support of all industries. If we think about the Canadian economy, there is a huge amount of uncertainty. A lot of people are not making further incremental investments more holistically.
More specifically on the capital markets side, many of our members have capital markets businesses, but that is actually not in scope for the Canadian Bankers Association. More holistically, looking macroeconomically, when SMEs hit that point in the growth curve and they need more capital and therefore would need public market capital, that is generally not appropriate for a firm with 100 employees. Maybe 500 employees if they have some advanced, intangible element that needs scale to then launch.
There are segments there, but for that venture capital, often, companies of that size, if they need to scale, will leave the country. They are leaving the country because of tax rules, capital gains rules and how the U.S. is incenting the opportunity to get that funding. For those small enterprises, the bigger challenge is that many of those enterprises are actually leaving the country for their financing.
Senator Fridhandler: A recently published article in The Globe and Mail, April 17, said, “CIBC to boost lending for Canadian businesses . . .” They say that they plan to ramp up for energy, agriculture, transportation, small and medium businesses and other sectors deemed critical to Ottawa’s strategy to reinforce the economy. It doesn’t include IPs or companies with intangible assets on the list.
I would certainly appreciate if there are any details, because we are having trouble figuring out exactly what the banking system is doing relative to SME support. If we could get more information on and some examples of the breadth of financing that your members are doing in the SME area.
Mr. Ostler: We are doing quite a bit. Darren is one of our experts on this. Maybe he can give you more detail if you have those examples.
Mr. Hannah: First, lending by Canadian banks largely mirrors the structure of the Canadian economy, not surprisingly. If I look at the breakdown of where banks typically lend, the largest sectors cover the waterfront, finance and insurance, ag, construction and then it goes out from there. I can certainly follow up with a breakdown if you are interested, because the data is available.
It broadly mirrors the GDP of the Canadian economy. If you actually look at the structure and the GDP, you will find it more or less follows pretty closely. Ultimately, the banking industry is a reflection of the economy it serves.
Senator Ringuette: When I go to my bank, which is one of your big members, and I want to invest, they show me that, in regard to mutual funds, you have low, medium and high risk. I guess it’s standard for all your members to have that kind of evaluation of mutual funds.
Mr. Ostler: They have, obviously, different growth objectives or mandates for those mutual funds. A growth mandate, for example, would likely be higher risk because you could have a bunch of winners or a strong economy and it’s going well, but if something changes in the economy or a sector, it could drop more quickly than a traditional asset mix, which would generally reflect how the markets would move. Then there may be a lower risk. Let’s say you want income. My mother has been a shareholder of a Canadian bank for 67 years. She likes collecting dividends. She has never sold that stock and continues to collect dividends. A dividend-type fund may be lower risk because there is cash flow in support of that.
What they would be looking at are the mandates and then be talking to you about what your objectives are: if you’re retired and you want to protect your capital, those sorts of elements.
Senator Ringuette: Thank you. With regard to the high-risk sector, what is the percentage that you offer — or what is the percentage that is taken by consumers?
Mr. Ostler: That’s a great question, senator. I don’t have those facts with me, but if it’s okay, we can get back to the committee with a response.
Senator Ringuette: Yes. And if you have the reason why there is no uptake from your customers, I would also like to understand that.
Mr. Ostler: All right. I think the key thing is the advisers in the branches would learn what the problem or objective of the customer is and try to deliver a solution that would support that. There could be a mixture of funds and solutions in support of that —
Senator Ringuette: Within the slate of products that you offer, there is a limit there.
Mr. Ostler: Yes.
Senator Ringuette: Next, would you say that regulation through OSFI is limiting you from looking at intangible asset financing?
Mr. Ostler: That is a great question, Senator Ringuette.
The risk-weighted asset requirement that OSFI has for small- and medium-sized businesses is 75% to 85%. There is a range there based on the risk profile that the banks assess. The equivalent for mortgages could be as low as zero if they are guaranteed up to 70. On a comparative basis, small businesses attract more capital than, let’s say, someone buying a home.
Now, there are different scenarios for buying a home. Maybe they have a paycheque. There may be two people paying for the mortgage. That may warrant it and/or the supporting guarantee.
The reality is that a high level of risk-weighted assets means the cost of the credit for small businesses is higher than it would be if someone had a mortgage.
Senator Ringuette: Is OSFI regulation through our banking institutions in regard to this particular area?
Mr. Ostler: Part of our recommendations to the Competition Bureau was to look at the regulatory capital frameworks to see if they are set at the appropriate level for the risk profile the country wants in support of small businesses. Implicit in that is the fact it appears conservative.
OSFI’s mandate is to ensure the stability and security of the financial system. They respond to the policies set by the government. OSFI is doing what they are being asked to do very effectively. So the question would be this: What are the policy makers asking OSFI to do?
Senator Ringuette: Thank you.
The Chair: Thank you, senator, for raising that question. I will get back to that at the end.
Senator Loffreda: Thank you, Darren and Anthony, for being here. We have had interesting conversations in the past together.
Darren mentioned that banks follow the structure of the Canadian economy. I don’t want to number dump, but we had Jim Balsillie, CEO of the Council of Canadian Innovators, here before you, so you know where I’m going with some of these numbers.
According to the Competition Bureau, 99.7% of employer businesses in Canada are SMEs. That’s the number. I know with the billions on capital lending in capital markets — I did a lot of that — it distorts some of those numbers, but that’s a fact.
If we look at Reuters and OSFI, that number is changing as we speak. They say that close to 70% of major bank loans are tied to mortgages and household lending, versus roughly 27% for business lending overall and only 11% to 12% of the outstanding lending is to SMEs. I don’t want to dispute those numbers. They are changing as we discuss here.
With Jim, I had some discussions. You cannot get a fish to climb a tree. We are never going to make the banks into venture capitalists, but how can we get banks to do more SME lending? Are there any restrictions there that we should look at or any policies we could put forward? How do we do that?
Without getting into the details as to what. It’s the strongest banking system in the world, arguably — $70 billion in profit for the big six this year. There is something to be done there.
Mr. Ostler: Great question, senator. As I mentioned earlier in my remarks, 88% of requests for credit are approved, but that remaining 12%, there are a number of different combinations with that.
One of our biggest priorities as a country right now is the defence sector. We don’t have a strong small- and medium-sized enterprise business class in defence. Picture if you are trying to move in there. Maybe you are a tool and die maker in southwestern Ontario or a manufacturer of some sort in southern Quebec, and tariffs have really changed your business. You therefore think you want to move into defence. There is a huge amount of work involved in getting approved and going through security clearances, and then you have to design whatever it is that you’re doing. You have to build a factory and hire people. There could be years between your desire to be a defence contractor and actually delivering.
That is an example of a sector where it would be really important for us to find ways to make it easier for them to get those approvals, to incent them, to provide risk capital, because that would be a longer tail before you get to revenue. But if you think about it, if they have at least one major guaranteed customer in the Government of Canada, there would be some ability to show either some guarantee or support for that.
That is an example of a sector that is underfinanced currently on both sides, is integral to our security as a country and would warrant time and attention.
Additionally, the Canada Small Business Financing Program that we made comments regarding in our Competition Bureau submission has opportunities for improvement. If you would like, we can provide you with that submission to the Competition Bureau after this meeting, because that has several ideas that could help regarding small business lending.
If you want more specifics, Mr. Hannah can answer.
Mr. Hannah: Sure. I just want to disentangle a few things here because I think they sometimes get co-mingled, and I think they deserve treatment on their own.
If I look at conventional small business credit to the vast majority of the small business market, that market, by every data point I can see, seems pretty well served. There is $300 billion of SME credit and only $186 billion has been drawn, so there is $112 billion that is undrawn at the moment —
Senator Loffreda: The problem is the one that is not authorized, not the authorized. It is the ones that couldn’t get the authorizations. Those are the ones we would like to have.
Mr. Hannah: If I may, senator, the approval rate for authorizations is nearly 90%, and if you ask small businesses — and Statistics Canada did — what they consider to be their principal obstacles, obtaining financing is actually very low on the list: Only 10% even identified that, as opposed to issues such as cost of inputs, cost of labour, taxation and regulation.
So, that component of the market for conventional credit, by every measure I can see, is pretty well served.
The issue, I think, senator, is around the high-growth firms that are early stage, often pre-revenue and often, frankly, in need of capital. Those are the firms that I think are the missing middle. I think that is a term that C.D. Howe uses. And that is important. We have to find mechanisms to address that component of the market. It’s a very specific component. It can’t be a bank solution alone — clearly. To your point, the structure of that industry at that stage is one that needs more than conventional credit, but the conventional credit side of things is pretty well served.
The Chair: Thank you. I have to interrupt.
Senator Loffreda: Could we get it in writing with your recommendations?
The Chair: You referred to the SMEs in the defence sector. I think the new banking office in Canada will help will this transition.
Senator C. Deacon: Thank you for being with us. I want to build off what you’re talking about.
I think one of your statements, Mr. Hannah, was that lending mirrors our economy. The trouble is that our economy doesn’t mirror where wealth is created in the world. Wealth is created in the world in intangible assets, and 90% of the S&P is intangible assets.
One of our challenges in this country is that our biggest banks own our biggest brokers and investment dealers. When I was a broker in the 1980s, we would see 150 new listings a year in Toronto. Now it’s one a year. If you’re a client of the big banks — or one of their brokerage firms, I should say — the risk profile of what we’re going to see investment in is not something that really fits within how they operate at all. You have to go to somebody else.
The challenge is that you have over 90% of our assets controlled by what I described as six men behind six doors.
I’m a proponent of de-consolidating, going back to the 1980s and having investment dealers, banks, payment companies and insurance companies separate again because cultures are very different, and we need to see that.
It was proven when you said you have to have the capital to get credit, but if that’s the same door you’re still going to, we’re not going to fix this problem. Push back on me: Why on Earth would we not want to see a de-consolidation of the industry, get back to banking and investment and move down that road? Push back or agree with me.
Mr. Ostler: Senator, I love your question; it’s great. For me, what you’re describing is a symptom of broader illness. Let’s take a step back. If we think about financial services, what we should be doing is having regulation that has the same activity, the same risk, the same rules and the same regulations. In Canada, we now have a financial services sector for our members — they have 44 different regulators or self-regulatory organizations that are all justifying their existence and have created myriad rules and regulations.
If you’re a bank-owned broker-dealer and you approve a high‑risk investment, and then it doesn’t play out, some regulator would say you shouldn’t have sold that.
There are a lot of different elements that are driving that behaviour. It’s not out of a lack of wanting to support risk‑taking. Our members —
Senator C. Deacon: How do we fix that?
Mr. Ostler: We fix that with smarter regulations, and if those smarter regulations encourage de-consolidation, that would be fine. However, I actually think de-consolidation is trying to address a symptom of a broader illness, which is too many regulations and too many regulators. We should think about how to consolidate and develop smarter regulations so we can focus on the same activity, the same risks, the same rules and the same regulations. We have large gaps and overlaps. We have regulators that have overlapping mandates and give our members cross-purpose recommendations. That has happened in mortgages in the past few years, as an example.
If we took the time to think about how we could consolidate and improve our regulatory environment, I think we would find that risk capital would be more freely be able to move between the different parts of the system. Our members will not be successful if Canadians aren’t successful, so it’s critical that small businesses and all enterprises that want to get risk capital are able to get it — and get it at an affordable level. We can look at things like risk weights, rules and regulations and the number of regulators. We can look at the cross-currents of federal-provincial elements not necessarily supporting the same outcomes and try to support a financial services sector that continues to be one of the greatest sectors in the world from a safety and soundness perspective but that is then encouraged to support risk capital.
Senator Al Zaibak: Other than government-guaranteed lending to SMEs, are there any successful business models or best practices from around the world whereby banks take substantial and significant equity participation in the ownership of SMEs from which we can borrow? If there are, what legislative and regulative obstacles do you think we have here that would prevent our banks from doing the same?
Mr. Ostler: That’s a great question; it’s interesting. I’ve operated in a lot of different countries, but I haven’t studied that specific question. I’m not sure.
Mr. Hannah: I’ve not studied that specific question, but if I can pick up on it a bit, one example that we have domestically that a number of financial institutions here launched several years ago is the Canadian Business Growth Fund. It was designed to do exactly that: It was capitalized for the purpose of providing growth-oriented capital to small firms that had high growth potential. It was done on a pool basis and continues to operate.
Some of the challenges that typically come into play here that need to be addressed but that could improve our capacity to do that sort of thing — most notably, reduce the risk weight associated with direct and indirect investments in venture capital for financial institutions. Right now, I believe the current risk weight is 47%. It’s exceptionally high. In fact, C.D. Howe mentioned this in a paper two weeks ago. If we could reduce that, it would remove a disincentive to some of that venture capital formation, either individually, directly or indirectly, in a pool basis.
Senator Al Zaibak: What comes to mind is German banks’ participation and support of the creation and scaling up of homegrown technologies and innovation companies. That’s an example that comes to mind.
But I will add an observation that, from my business experience, I believe that, in this country, we don’t have a venture capital industry to help. We are not short of angel capital investors that support start-ups. But when it comes to scaling up, productization and commercialization, we lack that. I believe there is a significant role for banks as well as for government to create such a venture capital industry. I’m not talking about investment banking, but through the investment and venture capital industry. I’m wondering if you have any comments on that.
Mr. Hannah: My main comment, senator, is you are absolutely right. It has to be an ecosystem. There is no magic bullet. You’re absolutely right. The government has a role. Industry has a role. Financial institutions and individual investors, all of them, have to play a role because the ecosystems that are the most advanced in this space are not uniform. They have different components and all work together or interact at some level to provide that kind of investment because, certainly, as you pointed out, it’s not something that banks can do alone.
[Translation]
Senator Henkel: Welcome, gentlemen. I’ll give you a concrete example of what happened here during a meeting of this committee on April 16. An entrepreneur named Hamid Arabzadeh, chairman of Ranovus, a Canadian semiconductor company, told us that, despite a strong foundation, solid intellectual property and the support of major U.S. strategic investors, a Canadian bank refused to give him a loan, citing a lack of a track record of profitability, while a private lender closed a $20-million deal in just seven days. For intangible assets, such as intellectual property, artificial intelligence and data, there is currently no banking governance framework.
Does the Canadian Bankers Association recognize this gap? If so — and I hope it does — what are Canadian banks doing right now to fill it, before high-value companies are bought out by foreign companies?
Mr. Ostler: Thank you, senator.
[English]
This is really interesting. This is obviously something that has been a big focus of this committee, and I think you are collectively doing a great job of surfacing some of the gaps in opportunities for financing. I can’t speak on behalf of my members on what they are going to do, but several of my members have recently announced that they plan to provide more capital and support — not just credit but capital and support — of priority in both sectors.
What I can commit to you is that Mr. Hannah and I will debrief our members about this discussion and think about what ideas or elements that could be done and/or there may be things they’re already working on but we’re just not aware of. We’ll come back to you on anything that we learn.
It is critical to think about — as this committee has effectively raised — the importance of how we support companies that have a longer runway to revenue and, therefore, may also require a fair amount of scale.
Some of our conclusions could come back. My hypothesis is part of it also gets into some of the issues we talked today about regulatory requirements and tax rates. If you’re a small business and you’re converting to a larger size, so you’re bringing more investors in, that may trigger different tax implications due to gains and those sorts of elements. Often, when companies want to scale, they go to the U.S. because the capital gains tax environment in the U.S. is more favourable for small businesses.
So there could be a number of elements that tie into that. Regardless, it’s worthy for us to study along with this committee because I, at this stage, don’t have a full answer to your question.
[Translation]
Senator Henkel: You said earlier that 88% of loan applications submitted are approved. Can you tell us what kind of businesses or what size of businesses you approve?
[English]
Mr. Ostler: That 88% is for all small- and medium-sized enterprises with 500 employees or less. As Mr. Hannah mentioned, real estate, insurance — that is the lead one — agriculture and regulated services, then construction, retail trade, social services and manufacturing are the most material ones. So it covers quite a bit, as we discussed earlier in this discussion today. It generally reflects how the economy is shaped.
What you’re pinpointing is some of those more forward-looking or future-growth sectors or IP-driven ones, the intangible ones, don’t necessarily stand out unless they’re related to supporting those sectors. So if you’re in a real estate services-related business that maybe provides data to brokers or something, that would be included in real estate.
Senator Henkel: But we do have —
The Chair: Before moving to second round, maybe I want to have the opportunity to react. Right now the Competition Bureau has a special study called Capital for Canada: Financing the growth and stability of small- and medium-sized enterprises. I think one of the triggers for this study was an OECD study that referred to Canadian SMEs face disadvantageous loan-pricing conditions and larger risk premiums than appear in other countries.
Have you had a look at that and had any reaction from what has been mentioned publicly?
Mr. Hannah: I’m aware of the study you’re talking about. I’d say a couple of things. First off, be careful trying to do pricing and comparison across markets because you’re comparing across different regulatory structures. You’re comparing across different industry structures. In the case of SMEs, you’re often even comparing across different universes because different countries define “small- and medium-sized” in different ways, and that therefore changes the composition of the outcome.
What we tend to look at from our perspective is we come back to looking at the data and the information that Canadian SMEs provide on their satisfaction with the financial sector and on the degree to which they feel they’re getting credit. What Statistics Canada’s survey of financing of small- and medium-sized enterprises has found is that 88% are getting approved, and most of those don’t identify obtaining credit as being a significant obstacle to growth.
That’s where we start from. Yes, I’m aware of the study, but from our point of view, you have to take it in that context.
Mr. Ostler: The other thing to think about, if we’re talking about risk-weighted assets and the requirement in Canada of 75% to 85%, other countries, like in Europe, put what is called a scaler. They essentially reduce that. They say they’re compliant with Basel, but they make it actually less costly to have credit. The risk-weighted assets have a direct impact on the cost of credit because the more credit you have to hold the more it’s going to cost to give a dollar in loans.
If countries are doing things to support that or if the country has a lower tax rate — so the company is overall more profitable in the same dollar revenue, say our small businesses are competing against U.S. businesses and they have lower tax rates — it could be just therefore they are a riskier profile in Canada because they have fewer profits to support the debt they want to get. So the cross-comparison can be very challenging.
Senator Varone: Your comment about regulatory oversight resonated with me. Back in the early 1990s, OSFI went to the RBC, who was our banker at the time, and said they’re overweighted in real estate, home building and hospitality. They just happened to be the three sectors I was involved in, and all our loans were called, notwithstanding the fact that we weren’t in default.
So when you talk about the five Cs and you superimpose those five Cs today, in the intangible market, they don’t fit. I understand full well what you’re talking about in terms of the regulatory burden that’s placed upon you. However, is there an opportunity to create an SME lending portal that changes the five Cs just for that portal for SMEs, then further changes the regulatory burden that’s placed on you to lend to the new criteria of intangible lending?
Mr. Ostler: We have two minutes total for this question, so thank you for it. I think, conceptually, if we can design something that helps facilitate small business lending for those areas that are underserved, that would be a welcome thing.
When you say “portal,” I don’t know what that specifically would look like, but if we think about some of the things we talked about — regulation, tax guarantees for important sectors and all those different elements — I’m sure that could help us increase it.
But I highly recommend we look at the regulatory environment. How hard it is to get approval or start a business, or maybe expand across provinces? There are a bunch of things we could do that would help before a complex portal because lending is tenth on the list of issues of people surveyed.
Senator Varone: Thank you.
Senator Fridhandler: You said you don’t represent the investment bank side of the big bank business. I tried to Google it: Whom do we speak to, other than the banks themselves? We spoke to the Independent Dealers Association, but I’d like to speak to the big bank investment bank association too. Does something like that exist?
Mr. Ostler: It’s SIMA.
Mr. Hannah: The Securities and Investment Management Association.
Senator Fridhandler: That’s the non-independent —
Mr. Hannah: It’s both. It represents firms in the securities and investment management industry, irrespective of whether they are part of an integrated firm or are independent.
Senator Fridhandler: Second question — and this is probably out there somewhere — but I’m kind of interested in finding out what support programs exist from government, both federal and provincial, relative to SMEs that the conventional banks participate in?
And I don’t know if I’m asking you to send me something that’s massive and there are like 175 programs. Is it manageable for us to receive a summary of those types of programs from you?
Mr. Hannah: We can send you a summary. I can’t guarantee it will be universal, but I can send you a list of the most common ones. How’s that?
Senator Fridhandler: Yes, with some commentary on what business sector —
Mr. Hannah: Yes, we can do that.
Senator Fridhandler: Thank you.
Senator Loffreda: I’ll take a sovereignty and productivity angle. At a time when Canada is seeking to improve productivity, as we all know it’s an issue; strengthen economic sovereignty, as we all know it’s a bigger issue; and keep companies rooted in Canada — and I’ll use the word “should,” but I’ll end with “could” — should our financial system not be playing a more ambitious role in supporting domestic SME growth? How could we have them play a more ambitious role?
We have one of the strongest banking systems in the world. I’m not contesting that, but we are in a different era at this point. And I don’t want to look toward our historical successes; let’s look forward. It’s not how well we’re doing; it’s how well we could be doing.
Mr. Ostler: Thank you, senator. I think that’s a great question, and I’ll put the emphasis on “could.” If we created the environment that supported that — so, for instance, lower risk weights, or a scaler like what’s done in Europe — and for critical sectors that are important for sovereignty, if they have a distinct nature to them, like the defence sector that could provide government support, I think those would be things our members would welcome.
They want to do what’s most effective on behalf of the economy. If Canadians aren’t doing well, if the economy isn’t doing well, they’re not going to do well. They’ve been around for centuries and want to be around for centuries longer. To have that be successful, creating winning conditions would be very welcome.
Senator Loffreda: Thank you.
The Chair: On that note, we will receive the Governor of the Bank of Canada next week, but we will receive OSFI as well.
It would be useful and helpful for us if you can have a table, international comparison on the risk-weighted assets, and some place that if we adopt that kind of approach, that will help a lot. Do you know what I mean? You have your counterparts in OECD countries, and we want to know if we have something on the regulation side and to question Mr. Routledge on the OSFI side.
Senator C. Deacon: Thanks again for being here. You started by saying we have a very robustly competitive market in banking in Canada. I want to push back on that.
Our loans to SMEs are one quarter of the OECD average. We’re one of the lowest nations in the OECD in that regard. Our interest rates charged to SMEs are 50% higher than the OECD average. And our banks are each other’s largest shareholders. So they’re investing, but they’re investing in the model that’s really working for banks and proving our banks are highly profitable.
How do we create more competition? Fundamentally, what you’re saying, no Canadian believes due to their experiences. What we’re paying in fees, and whatever else, is much higher than with any financial technology company that comes along or what you see relative to other nations.
So how do we stop the CBA from repeating lines that are not defensible in data and start to put forward ideas on how to make a more equitable and robustly competitive marketplace?
Mr. Ostler: Thank you, senator. I appreciate the opinions you’ve shared. I have a different perspective, as we’ve already discussed a bit today.
A critical thing to think about is that if we want more competition, we need to have less regulation. A fintech can provide services at low cost because they don’t have to have all the capital and rules and requirements. Our members have 44 regulators or self-regulatory organizations across the country, adding costs to their ability to serve customers.
I have a lot of small- and medium-sized bank members who would like to grow and do more, but they have to hold capital for the same amount of risk as the larger banks have to.
Senator C. Deacon: Less capital than is required by the SIBs.
Mr. Ostler: Correct. So our regulatory structure doesn’t currently enable small- and medium-sized banks to have some of those advantages.
If we want to foster competition and reduce costs, we need to think about how we do smarter regulation. We have a lot of regulations and a very safe and sound system. If we want to have more risk capital available to small businesses, we need to think holistically about our tax system, our regulatory approach and our capital requirements. How do we unlock and enable small- and medium-sized banks? There’s a lot to do there.
The reality is there are also 400 financial institutions that take deposits in this country, 60 banks that are members of CBA and 80 banks in total. There are a lot of non-banks that take deposits and lend, and they’re 40%. of the lending base for small businesses. So there are a lot of other sources; it’s not just the banks themselves.
So there are opportunities there, and there’s always room for improvement, but there’s a holistic opportunity here to foster competition, which would then also reduce costs and enable smaller players to grow and thrive and support the broader economy.
Mr. Hannah: If I can just add to that, because you mentioned you’re going to have Superintendent Routledge here. He announced OSFI will come out with an accelerated framework for licensing for new institutions. You may wish to ask him about that and how that’s expected to unfold.
The Chair: Thank you. On that note, it has been mentioned here a few times that maybe competition is much greater in Quebec than in other provinces. Is that something that you would agree with? It has been mentioned a few times here.
Mr. Ostler: Yes. Desjardins is a significant player in Quebec, has the largest market share for deposit taking and does a great job at small business lending.
They’re deep and broad in the province of Quebec. They know the communities, they know the small-business people and they play an integral role as a large and sophisticated financial institution that competes every day with our members and provides a huge amount of support in the Quebec economy.
The Chair: The data is bank by bank, and you’re not allowed to disclose that, but is it fair to say that, in fact, the lending conditions and the risk premium for SMEs are probably lower in Quebec than other provinces? Or is it impossible to have facts because nobody discloses that and it’s more anecdotal?
Mr. Hannah: We wouldn’t have that level of information. You’re getting into pricing, proprietary things —
Mr. Ostler: I think it would be the five Cs of credit, then they have the OSFI rules. It’s the same regardless of where you are in the country.
The Chair: Thank you. Colleagues, we appreciate it very much. I think that is the first time in a while that we have had the opportunity to have your presence, Mr. Ostler. We appreciate you taking the time very much. I know you are busy. And we appreciate as well —
[Translation]
— your efforts in French. I also want to acknowledge them. Thank you for that.
Colleagues, our next meeting will be held next Wednesday at 4:15 p.m.
On your behalf, I would like to thank our entire team of interpreters, the support staff, our analysts and our clerk.
Thank you and have a good day.
(The committee adjourned.)