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Publications - May 5, 1998




[Recorded by Electronic Apparatus]

Tuesday, May 5, 1998

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The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order, pursuant to Standing Order 108(2), study of small business access to capital and bank loans.

We're very pleased today to have before us the Canadian Community Reinvestment Coalition, represented by Duff Conacher, the chair of the CCRC and the coordinator of Democracy Watch, and Luc Lapointe, the coordinator.

I believe you have some opening comments for the committee. If you'd like to begin, we'll have questions afterwards.

Everyone should have in front of them the reports done by the witnesses.

Mr. Conacher and Mr. Lapointe, go right ahead.

Mr. Duff Conacher (Chair, Canadian Community Reinvestment Coalition): Thank you very much for inviting us to testify today on the issue of bank business lending.

You should also have in front of you a copy of the analysis we have prepared for today's presentation, along with summaries of each of the position papers that the Canadian Community Reinvestment Coalition released throughout the fall. We're just going to briefly take you through each of these pieces.

By way of further introduction, the Canadian Community Reinvestment Coalition is a project of Democracy Watch, a group that I coordinate here in Ottawa, which is a citizen advocacy group working on government and corporate accountability. We now have 80 small business, consumer, labour, community economic development, anti-poverty, and social justice groups in the coalition from every province and the Northwest Territories, representing over three million Canadians.

We are particularly interested in banks' performance in lending, investment, and overall service to customers. Initially, four years ago now, as Democracy Watch, we released this report entitled, “The Capital Idea: The Case for Accountability Mechanisms and Reinvestment Requirements for Financial Institutions in Canada”. As Democracy Watch, we have been pushing on this issue for a number of years in order to have more detailed disclosure on business lending and also detailed disclosure on the investment in service that is provided by financial institutions, and most particularly by banks.

As you know—when some of you were in attendance—the government, through 1994 and 1995, negotiated a disclosure system with the banks that is voluntary and involves quarterly reports. In the analysis before you, we've analysed the period from September 30, 1995, which was the time of the first full report that broke out lending by size of loan for the big seven banks, through to the most recently available report, which is the statistics as at September 30, 1997.

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It's clear of course that small business.... The statistics are only becoming more numerous in showing how important the small business sector is—this is moving into the medium-sized business sector—in terms of job creation and simple employment in Canada, which we summarized in the first section of our analysis.

What has also become clear, especially when compared to surveys in the U.S., is that surveys of small businesses have shown that access to capital is an ongoing problem. It has ranked over the past 10 years as a top-ten concern for small businesses in every single annual survey.

By comparison, in the U.S., the same survey done by the National Federation of Independent Business found that access to capital has never ranked higher than 43rd as a concern for small businesses in the U.S. It's currently ranked in the 60s. This is a stark difference that we think is in large part due to a system they have in the U.S. of detailed disclosure and also a review of a bank's performance in lending, investment, and overall service.

As we will detail, we see that flaws exist in the negotiated system of disclosure. One of the major flaws that we see is that the banks are not required to track the demand for loans. In the U.S., which has been under the U.S. disclosure system for more than 20 years, the 9,000 banks in the U.S. have been tracking the demand for loans, and then the number approved and rejected.

As you'll see in section II of the analysis we prepared, the banks have been doing a survey commissioned by the Canadian Bankers Association that was conducted by Thompson Lightstone. There have been two surveys completed to date.

Unfortunately, the surveys are inadequate and flawed. They are simply inadequate to close this gap and track demand and the turn-down or rejection rate.

I'll just go through briefly a few of the flaws we have found. The results of the surveys are based on responses from mostly larger businesses with more than 50 employees. That goes far past the notion of small business lending. So essentially, they may be surveying some medium-sized businesses, but they're not surveying small businesses.

At most, 200 start-up businesses have been surveyed. Again, that's simply inadequate. There are 760,000 business credit customers of the banks currently in Canada, so to survey only 200 businesses that were trying to start up and get initial start-up financing is statistically an invalid group to be sampling and this results in an invalid response rate.

Essentially, the banks are surveying large existing businesses with these surveys, and it's not surprising that large existing businesses would not have much trouble getting their loans approved, because they exist, they have inventory, they're a going concern, and they have a track record. They are not at all surveying people who are trying to start a business to create jobs in the country.

These flaws make it clear that such a CBA-commissioned survey is inadequate and an invalid means of tracking small business demand for capital and whether banks are meeting that demand.

In the U.S., as I mentioned, there has been systematic disclosure by the banks of demand, rejection, and approval rates for over 20 years. Some 9,000 banks have been able to do this quite successfully in the U.S. There's no reason why our big seven banks, and other financial institutions as well, should not be able to do the same here in Canada.

Turning to the analysis of the statistics, look at page 2 of the analysis we prepared. It shows quite clearly that between September 30, 1995 and the most recently available statistics, which are as of September 30, 1997, the support for small business by the big seven banks decreased. This is according to their own numbers. As you'll see in the bullet points, there are credit authorizations of under $250,000. The share of credit decreased from 7.17% of the total in September 1995 to 6.47% of the total in September 1997. The same occurred for credit authorizations between $250,000 and $1 million, a similar decrease of about 0.5%. In both categories, small business customers and medium-sized business customers, there was stagnation in terms of the percentage of bank customers who were small or medium-sized businesses.

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Despite the banks' claims, it shows that small business, which creates over 35% of Canada's gross domestic product and over 80% of the jobs in Canada over the past ten years, is receiving at most 6.5% of the total business credit extended by the banks. This shows a persistent unwillingness to support the job-creating small business sector, especially when you compare it to big business lending.

Several people say, well, small businesses have alternatives and will be able to find other places for financing from other sources. As this chart that we have prepared shows, based on statistics that were available up to the end of 1997, the banks are responsible for 80% of business financing in Canada. That is a total, at that time, of $456 billion in financing. Just to give some comparison, the total provincial and territorial expenditures—the second column—in 1997 were $150 billion.

So the banks were three times the size of total provincial and territorial expenditures in terms of their lending. They were more than three times the size of total federal government expenditures, which were $116 billion in 1997.

The last four boxes show trust companies, financial cooperatives, including credit unions and caisses populaires, venture capital, and the total federal government current business financing programs through the regional economic diversification programs, such as the Atlantic Canada Opportunities Agency. Those supposed alternatives to the banks only add up to 20% of total business financing in Canada.

If you are not doing something about what the banks are doing in terms of performing and serving small businesses, then these businesses simply have nowhere else to turn. There is not the competition that the banks claim; they dominate the market. And, unfortunately, most of their money is going to big business. Between September 1995 and September 1997 there was a $99.8 billion increase in the total business credit that was authorized. However, $81 billion of that $99 billion—in other words, 81% of the total—was loaned out in loans in excess of $5 million. Those are not small business loans; they're not medium-sized business loans.

There was also a decrease in customers having loans in excess of $5 million during that time period—a drop of 13%. So through a two-year period, where there was a 13% drop in the number of big business customers, at the same time the banks extended more money to fewer customers, and, as shown already, decreasing, during that same period, the proportion of credit extended to small and medium-sized businesses.

Of particular importance is the comparison between the amount authorized and the amount outstanding. When a bank authorizes a loan of $100,000, the business does not necessarily use the full $100,000 as an operating line of credit. For small businesses it usually runs at about 70%, so they would use $70,000 of a $100,000 loan. For big business with loans of over $5 million, the utilization rate runs at the most at 29% through that two-year period.

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In essence, no new money was made available to small and medium-sized businesses over this two-year period. There was a stagnation in the number of customers. There was a decrease in the proportion, and yet at the same time, the number of customers for big business dropped, but the banks extended more money to big business—big businesses that need the money the least, because they usually use less than one-third of the total amount authorized to them.

Again, of almost a $100 billion increase in the total business credit over this period, $81 billion went to the largest businesses in the country, and—not that we've tracked this in detail—it's certainly fairly clear from the newspaper headlines that a lot of those loans were going for mergers and takeovers of other businesses. That's why you see the reduction in the number of big businesses with bank loans through that period, and that has led to job loss. The banks are throwing money at job loss while reducing the amount of money to the job-creating business sector.

I will now turn it over to Luc Lapointe, the coordinator of the Canadian Community Reinvestment Coalition, to take you through three pages of charts where we break out the statistics in a bit more detail.


Mr. Luc Lapointe (Coordinator, Canadian Community Reinvestment Coalition): If you look at the last three pages of the document you have been given, you will see that, in the first section, we provide the categories where you will find the majority of the banks' customers. You will see quickly that, for the first three categories, 85.4 per cent of the customers, including small businesses, find themselves in the category of lower loans, of $250,000. In the last category, corresponding to loans of $1 million or more, we find only 4.7 per cent of the banks' customers.

In the other table, you can see that there is a disproportion as to the number of loans granted to those clients. Most of the investments, as you can see, are aimed at big corporations. The category of authorized loans of more than $1 million represents 86.42 per cent of the total loans granted by the banks, whereas the first five categories receive very little from the banks.

You can also see how unequal are the loans granted. Most of the customers are small- and medium-sized businesses but they receive only a small portion of the total amount loaned by the banks. The major clients, making up 4.7 per cent of the customers, receive 86 per cent of the loans granted by banks.

You will find more detailed information on the next page where we look at each bank. All of them claim to be very close to small- and medium-sized companies and they claim that they grant a higher percentage of their loans to that category each year. On average, the proportion of loans of less than $250,000 granted to businesses is about 6.47 per cent. The range is from a maximum of 9.02 per cent to a minimum of 3.98 per cent.

For larger businesses, authorized loans range from $250,000 to $1 million and they represent 13.57 per cent of the total amount loaned to companies.

Once again, most of the amounts granted are given to large companies and not to small businesses, whereas these remain the economic engine of Canada.

On the third page of the document, we provide even more detailed information about the regions for which the banks gave us the data. Out of the eight regions mentioned, five have seen a decrease as to the proportion of amounts invested by the banks. Only three had seen an increase.

A bit further down the page, you see that, as far as percentages are concerned, Metro Toronto receives 40 per cent or more of the loans granted by the banks, and that most of those loans are granted to big business, not to small- and medium-sized businesses. The banks provide less and less information that would allow us to measure their performance in the regions.

Thirdly, the Coalition believes that it would be necessary to have more detailed information about each community, and that the banks are able to provide this detailed information, so that we could measure their level of service to consumers and to small- and medium-sized businesses in a given community.

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It is rather difficult to measure the performance of a bank when you have to look at eight large regions rather than at individual communities. That is why we are asking for better disclosure of regional data.


Mr. Duff Conacher: To take you quickly through, if you look at the one- to two-page summaries we've provided of each of our five position papers, if you look at the third position paper, “Disclosure by Banks of Business Lending Statistics: How to Correct the Flaws in the Current System”, you will see the background, and on the back of the page the recommendations. I'll just take you through very briefly, and then we'll open it up to questions.

The disclosure system and the initial round of hearings, now four years ago, in April 1994, was based largely on one statistic that was available at that time. That statistic showed that between 1989 and 1993, the lending of banks in loans under $200,000 decreased from about $21 billion down to just under $18 billion—a $3 billion to $4 billion drop.

What were the small businesses saying through that period? They were saying there's a credit crunch. The banks were saying “No, no. Demand dropped. That's the reason for the $4 billion drop in lending. The number of customers, small businesses demanding loans of less than $200,000, dropped.”

Now we have had about three years of disclosure by the banks. If the amount loaned out goes down again, or, as we've seen in some of the regions, the proportion to the region in small business lending has dropped, when the banks appear here on Thursday and you ask them about whether it has been a credit crunch in these regions or demand dropping, they can say to you, “Oh, demand dropped”, and you do not have any statistics to challenge them on, because they are not required to track demand. They are not required to track the number of applications, and they are not required to track whether they're meeting that demand in terms of the number of approvals and number of rejections.

That is our first recommendation. As in the U.S., as U.S. banks have been doing, 9,000 of them for 20 years, have them track the number of applications, the number of approvals and rejections, categorized by the size of loan as they currently are, and we also think by the size of business in terms of numbers of employees or sales, and also the location of the business and the gender of the business owner.

As you can see from our final chart, the breakout is only regional; it's not even province by province currently. In particular, when you have the finance minister today expressing concern about the impact of bank mergers on small communities across the country, if you are not tracking what banks are doing community by community, you have no idea what their service levels are now. If you are not measuring their service levels now, then you will have no idea whether that service will improve or decrease as a result of the merger of any financial institution.

Banks should also be required to disclose reasons for rejections, loan defaults, loan losses, and the number of called loans. That will allow you to track the risk of lending to different sectors, different sizes of business and different communities, and, by tracking the number of called loans, will allow you to track whether the banks are simply arbitrarily starting to pull out support from a particular industry or region or sector, or at least be able to track the rate.

As in the U.S., we think the statistics should be analysed by Statistics Canada, as opposed to receiving these volumes from the bank, which they carefully spin in their direction and try to present in the most favourable light. They should also be available electronically, because this is very unwieldy for Industry Canada staff to try to crunch the numbers and determine what the actual patterns are. It's taken us a lot of time, because they are only available in this hard copy form.

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They should also be reported branch by branch, by federal riding, so each member of Parliament would receive a report for each bank that has branches in their area and would know how they're performing in their riding, and as well, by province and nationally, so we can track provincial and national trends.

In addition, other deposit financial institutions, including the crown financial institutions, should be part of this whole disclosure system.

That's just a brief summary of why we are making recommendations to close the gaps and correct the flaws in the system. We will now be happy to take any questions you have about both the U.S. system and the recommendations we are making. Thank you very much.

The Chair: Thank you very much, Mr. Conacher and Mr. Lapointe.

We're going to begin with Mr. Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you, Madam Chair, and thank you for appearing before the committee.

I would like to start with your central point about measuring demand. How do you define demand?

Mr. Duff Conacher: The way we define demand is the government would sit down with small business groups, the financial institutions, and consumer groups, as they have in the U.S. for over 20 years, and draw a line. When you cross this line you have applied for a loan, and the banks will count every person who crosses the line. It's worked very well. It's been time tested and there are no complaints from banks in the U.S. We've talked with several of them who are here in Canada and they have no problem with the system in the U.S. They've been able to track demand for over 20 years.

It's done by simply drawing a line and defining an application as a certain action. For example, if someone just calls up to their loans manager and asks for $1,000, you could say that's not an application. But if they filled out the form, that could be the line you draw. Once the form is filled out, it's an application. It's counted as demand. Then you track the approval and rejection rate.

In the U.S. 9,000 banks, many of them much smaller than our banks in Canada, have been able to figure out how to do this for 20 years, and there's no reason why our big seven can't do it here.

Mr. Werner Schmidt: My question isn't about whether it can be done; my question is whether we can find a measure that will be considered valid and reliable and an accurate reflection of what an application is. You have just said filling out a form is evidence. Is that your recommendation?

Mr. Duff Conacher: We would like to sit down with groups such as the Canadian Federation of Independent Business and other small business groups in the country who hear from their members about problems of access to capital, negotiate it, and determine what is a reasonable line to draw, and anyone who crosses that line will be counted. It's done in the U.S.

Mr. Werner Schmidt: All right. So you do this. Is that number any more reliable than what we have now?

Mr. Duff Conacher: It's certainly much more reliable than these surveys. If you accept these surveys at face value, you're accepting the banks pulling the wool over your eyes.

Mr. Werner Schmidt: I'm not talking about the Thompson Lightstone—

Mr. Duff Conacher: That's all we have, and it's not surveying start-ups. It's not surveying people who are trying to get loans who do not have businesses yet. We don't have anything now, so that's why we need this.

Mr. Werner Schmidt: The point I'm trying to press home is that unless and until there's common agreement that there is such a thing as a measure for demand, the results of any numbers that are generated will be disputed forever and they become meaningless. It's really important that you and others, whoever is going to do this, clearly define what is demand and how it will be measured. Because unless there is common agreement and a common definition, not only by you, the Canadian Bankers Association, the caisse populaires, or whatever else, these numbers will not be comparable; in fact, these numbers will be meaningless numbers.

It's really incumbent upon you to come up with not some vague notion that we should measure this thing, but specifically what it is you are measuring, because these numbers can become absolutely misleading, far worse than what we have now.

Mr. Luc Lapointe: With the recommendation the coalition is making, we're using a model that exists already. Our banks are using that system. The Bank of Montreal with Harris BankCorp Inc. in Chicago, TD Banks in New York, and these 9,000 other banks in the U.S. are using a measuring system.

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We don't think we have the solution to all the problems, but we want to sit down with the bankers, small businesses, and consumers and actually establish an application, so there will be no argument as to what is an application and what is not an application.

Mr. Duff Conacher: This is not something we as a coalition and a non-governmental organization can do. It is up to the government to strike an advisory committee, as has been done in many instances—I won't go through and cite them all because it would be such a long list as to be overwhelming—and have representatives from the various sectors come up with the line that has to be crossed. Paul Martin said quite clearly in 1995 we will be working with the banks to establish benchmarks against which their performance with small business will be measured.

This is a benchmark that should be established. If it isn't, there is no accountability on this issue. Whenever the amount loaned out goes down, the banks will tell you demand dropped and the government will not be able to say one thing because it will have no evidence of whether demands remained constant, went up, or dropped. The banks have the figures and they should be tracking them and disclosing them. They already claim demand dropped, so they must be tracking it in some way already. Let's find out how they're tracking it and work from there.

The Chair: Last question.

Mr. Werner Schmidt: We'll leave that point. I just got started here.

I think you want a much finer breakdown by gender and almost by address. What would you use as a criterion that would protect the privacy of individual businesses or individuals? If we go as specifically as you have suggested here, the danger is you could invade privacy. How do you prevent the intrusion into the private affairs of an individual or a business?

Mr. Duff Conacher: There is no danger at all. If the banks on Thursday appear before you and state there is such a danger, they are making a false claim. There is no danger.

Mr. Werner Schmidt: I'm not defending the banks. I want to know what you want.

Mr. Duff Conacher: The Competition Bureau is currently reviewing the proposed mergers. It will look at competition using Statistics Canada data and information from the banks in terms of the products and services they provide. Branch by branch, the banks will provide this to the Competition Bureau for 6,000 defined markets. The markets are defined by census track subdivisions of Statistics Canada, of which there are 6,000 in Canada.

If the Competition Bureau can do this without invading anyone's privacy, in terms of the products and services and the market share the banks have, then the banks can certainly provide this information for the purpose of these statistics.

What is the standard the Competition Bureau will be using? The Competition Bureau will use the same standard Statistics Canada uses, which is why we recommend these statistics, as opposed to receiving these spin-doctored reports from the banks each quarter.

Statistics Canada should be analysing the data for you and presenting reports, breaking it down by census track. That means if there is a grouping of less than 13, you do not break it out into any subgroups. That is Statistics Canada's census data collection policy to protect the privacy of anyone they are collecting data on. So any grouping of less than 13 would not be broken out into the smaller subcategories.

As long as you have 13 loans in a grouping, there is no possibility, according to Statistics Canada, that anyone's privacy will be invaded. So when the banks say this is not possible, it is possible. You simply follow Statistics Canada guidelines. That's why we recommend having Statistics Canada break down the data, because it will be able to follow its own guidelines, hopefully.

Mr. Werner Schmidt: Nobody's arguing it's not possible. I don't think the banks argue that either.

Mr. Duff Conacher: Yes, the banks are. I'm sorry, they've made the claim several times that they would—

Mr. Werner Schmidt: That they can't track?

Mr. Duff Conacher: No, they say it will uncontrollably invade people's privacy if you do this.

Mr. Werner Schmidt: If you go to 13—

Mr. Walt Lastewka (St. Catharines, Lib.): When both of you start talking at the same time, I'm not sure what the question is or what the answer is. I think your questioning is good, but let's not interrupt.

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The Chair: The researcher has just clarified to me that they do now apply Statistics Canada's rules when they're doing this. They did have problems in the past, but the banks' statistics do now have Statistics Canada's rules applied to them.

Mr. Werner Schmidt: Yes, exactly.

I'd like to pursue this one step further in terms of a technicality, and that is with regard to the tracking system that Statistics Canada uses. Are you telling us that the tracking Statistics Canada uses today would be in terms of loans in groups of 13 or not less than 13? Does Statistics Canada do that now?

Mr. Duff Conacher: No, they don't break out by census track. Nobody does. That's why we're recommending—

Mr. Werner Schmidt: Including Statistics Canada; they don't.

Mr. Duff Conacher: The banks don't provide them with the data to do so.

Mr. Werner Schmidt: But they could.

Mr. Duff Conacher: They could, definitely.

Mr. Werner Schmidt: Of course, they can. The issue is if they did, what would happen to a group of 13 businesses that would all be in the $25,000 or less category?

Mr. Duff Conacher: You wouldn't break it out less than that.

Mr. Werner Schmidt: Do you want to break it out by province? Do you want to break it out by—

Mr. Duff Conacher: By census track, as they do in the U.S.

Mr. Werner Schmidt: Which one takes precedence here now? In other parts of your organization you want it on the basis of geographic area. The census track may not be sufficient in a census area or a geographic area. Do you now combine them? Is that what you're suggesting?

Mr. Duff Conacher: It would then go to the next largest category that we would like the statistics broken out by, and that is by federal riding. If a census track had less than 13 people in a particular category, you would have to put “cannot disclose” for that category.

Mr. Werner Schmidt: That would be acceptable to you?

Mr. Duff Conacher: Yes. It would then be grouped into the riding. It would be able to be shown through the whole riding. Maybe not; maybe some ridings are so sparsely populated in terms of bank lending—which would be an interesting thing for any member of Parliament to learn, that their riding is sparsely populated in terms of bank loans—that it would only be able to be broken out on a provincial level in some provinces.

If that's the case, then maybe it's the result of the small number of customers, but since you'll be tracking demand as well, you'll know that maybe there are a lot of people in that province who are trying to get loans and the banks are turning them away at a much higher level than any other province. In any case, the breakdown with more detail will allow you to track by community, which is essential in terms of determining whether a merger is a good idea or not.

The Chair: Thank you very much, Mr. Conacher. Thank you, Mr. Schmidt.

Mr. Lastewka, please.

Mr. Walt Lastewka: Thank you, Madam Chair. I have a number of questions. Have you met with the Canadian Bankers Association on your presentation?

Mr. Duff Conacher: Of this particular presentation?

Mr. Walt Lastewka: Yes.

Mr. Duff Conacher: No.

Mr. Walt Lastewka: Are you intending to?

Mr. Duff Conacher: Yes, we send all of our materials to the Canadian Bankers Association.

Mr. Walt Lastewka: But are you intending to meet with them and discuss what you've presented here?

Mr. Duff Conacher: If they will meet with us.

Mr. Walt Lastewka: Have they refused to meet with you?

Mr. Duff Conacher: No, to date they have not refused to meet with us. They have certainly considered all of our recommendations, and we're waiting to hear back from them on a number of our recommendations.

Mr. Walt Lastewka: So you've requested to meet with them and you're waiting for them to get back to you.

Mr. Duff Conacher: No. We spoke with them about one of our issues in particular, position paper number 4, on the creation of a financial consumer organization in Canada, which is summarized here as well. That was the specific reason for the meeting, but we did pass on copies of all of our position papers and the summaries and we requested that they also review those recommendations and get back in touch with us.

Mr. Walt Lastewka: I'm not sure whether you've answered my question. Have you requested to meet with them, to dialogue, yes or no?

Mr. Luc Lapointe: No. What we've done, first of all, is make sure we develop our position paper and do the proper research, so when we do meet with them.... As you know, December 1997 is our last position paper. We've done some more research, and we're certainly going to be meeting with them. We've not requested a specific meeting for them on the whole proposal, such as a Community Reinvestment Act.

We've met with them through other sources, at the National Council of Welfare when they talked about access to basic banking services. We've met with all the banks about the banking ombudsman. We've met with them about the financial consumer organization, but we will be meeting or making a formal request to them to meet and talk to them about the Community Reinvestment Act.

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Mr. Walt Lastewka: On Thursday I'm going to ask the CBA and the bankers if they have responded to your request to meet with them.

Mr. Luc Lapointe: Since there haven't been any requests other, than the one I've mentioned, they will say no, because we haven't met with them on a—

Mr. Tony Ianno (Trinity—Spadina, Lib.): So ask them.

Mr. Luc Lapointe: We will, and that's why I was explaining to you that we did, first of all, develop our position paper. When we meet with the banks we will have all the research. We're actually looking at some of their activities in the U.S. as well. They are using the same arguments, that they cannot do this in Canada.

Mr. Walt Lastewka: My second question is, have you taken an example of a business that didn't get a loan and backed it up to find out what happened and why they didn't get a loan and so forth? Have you examples of that?

Mr. Duff Conacher: Yes, we do from our ombudsman paper, and it is posted on our website, as all our position papers are.

There's a summary there of 20 complaints to businesses where they did not receive an adequate response either through the ombudsman system or from the bank branch themselves. We have investigated some of those. Essentially, we do not have the resources, which is why we are advocating the creation of a financial consumer organization that would have the resources to take people's complaints and help them work through with the banks. We are not a service organization.

Mr. Walt Lastewka: No, but you made claims that a business couldn't get a loan, so I'm asking if you have taken a business and backed it up to be able to say here's a business that had a business plan, that went to the bank to get a loan and they were turned down, and for what reason they were turned down, and did the bank help them go to the next step? Have you done that as a group?

Mr. Duff Conacher: No, we're not a service organization, so we don't provide that service to people in terms of helping them. We certainly do have documentation from people, but that is their side of the story, and then there's the bank's side of the story. That's what the ombudsman is supposed to work on.

We hear from a number of people, one in particular, currently, who has been waiting since August 1996 for the industry ombudsman to deal with his complaint. He seems to have a very well-documented case of abuse of his business service by the bank. But we're not a service organization, and that's why we need a financial consumer organization, which we could talk about in more detail if you like in terms of how it would be created and would it be able to take calls from people and be able to help them work through....

That's why we recommend that the banks, as in the U.S., be permitted to give a reason, which again would be that you would have a list of industry sectors, as they do. You could have a list of 20 reasons that they could slot into a database and it would give a reason for rejections. That would help the government. If, for example, the number one reason for rejections was lack of a good business plan, and you saw that in particular provinces that was a real concern, it would help the government and the Business Development Bank of Canada design educational programs and be able to target them where they're needed most.

The Chair: Last question, please.

Mr. Walt Lastewka: I'm not one to start adding another structure or another step in place. Mine is to reduce it and to make sure the business people are getting loans.

I do back up every business case that I get a complaint on in the office and have been very successful, but I find out more often than not that it's the businessman not providing at all enough information in doing what he or she should have done to make sure there's a loan.

In fact, I'm at the point of thinking—and I'd like your response—that we should stop all the surveys and all the statistics and all that and have the banks work more at the local level in understanding businesses, spend some money there so they could exchange and facilitate the businesses to get loans.

Mr. Luc Lapointe: That's what our banks have done in the U.S. When the Bank of Montreal went and bought the Harris Bank, they sat down with community groups, they sat down with small business and they said, what can we do for you? How can we help you? This is what we want to hear our banks say: what can we do for you?

We notice the survey from the Canadian Federation of Independent Business shows that there's a problem with access to capital. There's all kinds of anecdotal evidence about people complaining about the banks and the banks saying, maybe this is a legitimate loan, maybe it's not. I think what we're trying to say is if we don't have the numbers...and it's impossible; it's only anecdotal evidence that we're getting all the time. Let's get the numbers. The banks are coming out and saying yes, we are doing a good job with small business lending.

So let's get the numbers and let's put an end to this. I'm sure they're doing a good job, or they might be doing a good job, and if they're doing such a good job, why not post it? Why not show it that they're actually starting small business here in Canada and they're answering the demands for loans?

• 1615

The Chair: Thank you, Mr. Lastewka.

Madame Lalonde, s'il vous plaît.


Ms. Francine Lalonde (Mercier, BQ): Thank you very much for your presentation. Had I known what you were going to speak about, I would have brought a survey carried out by a company whose name I have forgotten. I had other types of questions to ask you. I have stated several times that I am absolutely surprised by the poor results that we are given as to rejections. As far as I know, that does not correspond to what I have seen in my riding.

Now, this is a survey. To answer a survey, your business has to be in existence. We're not talking about a longitudinal survey, which means that they cannot measure the level of service among a sufficient number of companies.

If, in a given case, the role played by the bank has contributed to the bankruptcy of the business, we will never know that because that business will not be there anymore to answer those questions. It will have disappeared.

Your recommendation is very interesting and we will look at it closely. What you want is that the small- and medium-sized companies have access to capital. We know how important that sector is for job creation.

Therefore, I find your recommendation extremely interesting. I understand Mr. Schmidt's question but it seems to me that it would be possible to resolve the matter by discussing it, as you stated.

That being said, have you looked at other causes linked to loans? I talked to some bank managers in my riding and they mentioned some problems related to the SBLA and to the fact that the guarantees that are being asked are excessive. They hold people by the neck, if I can use that expression. Or by some other body parts, if you want to translate.

Mr. Antoine Dubé (Lévis, BQ): Hard to translate.

Ms. Francine Lalonde: Indeed. Local managers told us that their problem is the risk of bankruptcy. Since they have a quota to achieve and that their main bank wants them to achieve a given level of profit, whenever a new business goes bankrupt, that comes out of the results. Because of that, they are being extremely careful and very conservative. We know that young entrepreneurs who want to start a business do not always have the same level of support as a well-established company, with a business plan and with the possibility of obtaining routine loans.

Since our concern is job creation, we know that jobs are created when the first loan is given to a businessman to create a business and, later on, to expand it. This being so, have you looked at the link between bankruptcies and the fact that loans are given or not to small- and medium-sized businesses?

Mr. Luc Lapointe: Yes, we looked at the data provided by the banks on their losses for various categories of loans. Our analysis proves that the losses are not any bigger in the case of small companies than in the case of big business. Of course, there are fewer bankruptcies in big business, but the losses are much larger. There are more bankruptcies in the small business sector, but the losses are much lower. As far as proportions are concerned, there are actually more losses in the big business sector than in the small business sector.

Ms. Francine Lalonde: That is interesting. If you have specific data about that, I would like to get it.

• 1620

Small- and medium-sized businesses apply to small bank branches, whereas big business deals with regional or central banks.

Mr. Luc Lapointe: With the various mergers proposed, we run the risk of not having any small banks left for small business. We hope that will not be so but, in any case, Mr. Lastewka and yourself have raised another issue, that is the fact that people do not have the required information and do not know how to establish a business plan.

One always refers to the U.S. example where, after twenty years' experience, banks said: "We have many loan requests coming from businesswomen but we don't know how to work with those groups". So, they have established partnerships with their own community groups, telling them: "Now, we can help you work with businesswomen or with ethnic groups in order to help them prepare business plans that will be acceptable to the banks". So, there is progress and partnerships are indeed established. They do not say anymore: "We are the bank, you are the community. If you do not meet our criteria, too bad. Get lost."

Ms. Francine Lalonde: I had mentioned the problems that businesswomen face in obtaining loans, because the surveys told us that there was no difference between women and men on that issue. However, this did not agree with my own experience as an M.P. nor with the survey carried out by the Canadian Federation of Independent Business. The survey stated there was no such problem but you do not agree with that either.

Mr. Luc Lapointe: Indeed. If we could get the data, we could start establishing programs through municipalities. We met with the Canadian Federation of Municipalities. Do not forget that municipalities deal with banks also. We know that most of the loans are granted to the three levels of government: municipal, federal and provincial. Municipalities say that, if they were to get data on what happens in their community, they could establish better programs in order to help new businesses to get established. At the present time, it is very difficult to start a new business.

Ms. Francine Lalonde: As far as the mergers are concerned, you wonder what will happen about the role that banks should play in the communities, with small- and medium-sized businesses. You say that something should be done, that we should help people prepare business plans, that partnerships should be created and that capital should be made available but, if smaller banks disappear, it will be even more difficult than before.

Mr. Luc Lapointe: Absolutely. Banks refer more and more to other options, such as co-ops and deposit companies, but that represents a very small amount. I do not believe that those other institutions will be able to satisfy the demand. They have different requirements as far as reserves are concerned, and they have different systems. Banks are very well established in our communities, they are very close to the people and they know how to work with business persons. They have resources and expertise. That being so, why not work with them?


The Chair: Thank you, Madame Lalonde.

Mr. Ianno, please.

Mr. Tony Ianno: Thank you, Madam Chair.

Back to the census tracks. You talk about 13 loans. Is that all sizes?

Mr. Duff Conacher: That would be if you were breaking it out, for example, by a location or by a size. If it would be a grouping of less than 13, then you would not break it down to that level.

Mr. Tony Ianno: In other words, if it takes six tracks to do a $500,000 loan, then to find 13 of them it would take six tracks. So that's the minimum you would do it on.

Mr. Duff Conacher: That's right. That would be at a census subdivision level, essentially, which is the size of a small town or municipality. So the Competition Bureau is using the 6,000 subdivisions. They're not going right down to census tracked, which is about a ten-block square.

Mr. Tony Ianno: Okay.

On the privacy issue, if it's a region that has, I guess, a lot of land but very few businesses, and you add up to the total of 13, and if it's a competitor that's looking at the number of large- or medium-sized businesses, could they not determine what kind of debt level they have and then determine whether a buyout or acquisition is something they should look at?

• 1625

Mr. Duff Conacher: No, because it would be a grouping of 13 businesses through an area.

Mr. Tony Ianno: If you go to northern Ontario you can have maybe four or five ridings that would meet that 13. You're saying at that point, if there are 13 different businesses all in northern Ontario and all in six ridings, one competitor cannot determine that in effect they might be vulnerable?

Mr. Duff Conacher: If it was one type of business?

Mr. Tony Ianno: No, any of the 13. The point is, if it's a competitor looking to buy one potential competitor, and if it happens to be in northern Ontario and takes six ridings, they assume that might be the one. Is that possible?

Mr. Duff Conacher: I think the most specific you'd get would be a regional and industry-sector breakdown, a cross-reference of those two. You may not be able to do it for a lot of categories—restaurants in northern Ontario, for example. You may not be able to break that out. You might have to just break it out provincially, because you would get two groupings.

All I can tell you is that Statistics Canada is very concerned about protecting people's privacy. Whenever they do reports by census track, you will see “not applicable” or “can't be filled out”.

Mr. Tony Ianno: As you may be aware, when we did our committee report on small business in 1994-95, Dennis Mills actually suggested the possibility of even postal codes. Part of the difficulty was not to in any way hurt some of the businesses that were borrowing money.

I guess a fine line has to be found to achieve what we still want, which is, by area, where they're lending money versus not, but still keeping the privacy.

I don't know via the census track how you're doing it, but with a little bit more development on that, it might be an avenue that could be looked at to satisfy all of the concerns.

Mr. Duff Conacher: What you would get, if Stats Can was crunching the numbers, was a blank for any category where it would have gone below the grouping of 13. That's what the Competition Bureau was doing.

Mr. Tony Ianno: When you take Stats Canada into account as compared with the banks, how does that go in terms of cost?

Mr. Duff Conacher: In terms of cost? I'm not sure. I think the Competition Bureau's process currently will give some sense.

Mr. Tony Ianno: But that's I guess a special case, because what they're looking at is—

Mr. Duff Conacher: Market share.

Mr. Tony Ianno: —yes, market share—and the merger question, which is not an ongoing situation.

As well, you referred to the Competition Bureau. I don't know if their information is going to be public. I don't know if it has to be public, because it's to deal with a sensitive issue.

Mr. Duff Conacher: Yes.

Mr. Tony Ianno: So I don't think we can take that example and then extrapolate and say, “Therefore...”. We have to be realistic in our approach to some of these questions.

Mr. Duff Conacher: We have not checked with Statistics Canada as to a cost of producing these reports, but I guess when we look at the whole cost-benefit analysis, we also take into account the benefit of having this information. The government is spending tonnes of money through the economic diversification regional agencies, through the Business Development Bank of Canada.

Mr. Tony Ianno: What's your point there?

Mr. Duff Conacher: If you have broken down by community, or at least regions, as we have for Ontario—we have the three regions of Ontario—the government will be able to target spending. It is one of the three central purposes for the disclosure regime in the U.S.

Mr. Tony Ianno: Somehow, with your Ontario analogy and with the three regions, does that produce spending by the federal government?

Mr. Duff Conacher: No, but if you had the breakdown of demand and the reasons for rejections, for example, and you found that there was a high rejection rate there but it was because people didn't know how to do business plans, then the Business Development Bank of Canada could go in and do a special training program, knowing there was a need there rather than just trying to figure it out through people who call them. Not everyone knows they're there. They'd be able to target the government spending.

That's one of the three main purposes, actually stated in the disclosure act in the U.S., for the disclosure they have there. Government will be able to subsidize private institutions' activities in areas in which none of them are going. They'll know where they aren't performing, where they're not serving anybody, and they'll be able to ensure that those people are served.

Mr. Tony Ianno: I see with our discussion you're still using the authorization versus outstanding. Is there a reason for that?

• 1630

Mr. Duff Conacher: We point out in one section the difference between “authorized” and “outstanding”. It's simply because we had done a comparison before using “authorized”, and it is the total amount of money that is out there by the banks. That is the reason why we use that.

We recognize the difference, though, as you have pointed out with your analysis. When you have a 70% utilization rate for small business of the amount that's authorized and only a 29% utilization rate by big business of the amount that's authorized, when you look at the amount outstanding, the percentages of the amount of money that small businesses are using bank by bank will increase because they use a larger percentage of whatever is authorized.

But we are very much in agreement with the point you've made that with the authorized amounts—and that's why we say the banks can easily.... Even though that $99 billion increase in total business credit has been out there over the past two years, that can be an increase in the authorized amounts—not needed, because small businesses on average only use 70% of what's authorized. So if the small business has a $100,000 loan, the bank can easily extend it to $110,000 and say “We've increased credit to that business.” But if that business is still only using $70,000 on a daily basis, they haven't really extended credit. It's not going to help create jobs because that business is at a certain size.

We think both need to be looked at, and this is our take on this subject.

Mr. Tony Ianno: Last question. We talked about you supplying us with some information about what it is the Canadian banks have offered to do or are obliged to do in the States that they're not willing to do here. If you could supply us with that information, I think it would be very helpful.

Mr. Duff Conacher: Yes, and there is more detail of what is required in the U.S. compared to Canada in our full position paper, but we can provide you with a much more detailed breakdown of this.

Mr. Luc Lapointe: The Harris Bank, the Bank of Montreal, just went through a CRA review in Chicago, so they did have full disclosure of their activities.

Mr. Duff Conacher: We can give you that as an example. What's good for the subsidiary is good for the parent. That's what we believe.

The Chair: Thank you.

Mr. Solomon.

Mr. John Solomon (Regina—Lumsden—Lake Centre, NDP): Thank you, Madam Chair.

Thank you very much for your presentation. The Canadian Community Reinvestment Coalition has put forward some suggestions that I think have merit, in particular when you look at the birthplace of capitalism and free enterprise in the world: the U.S.A. has more open regulations and more strict requirements for divulging information by large institutions like banks and other businesses than Canada does.

So I'm wondering what you think about a couple of things in that light. For example, I come from Saskatchewan and I always get these bank reports about the outstanding loans from “Manitoba/Saskatchewan”. I'm personally insulted, and I find those statistics from the banks meaningless.

I guess the question my Reform colleague and Mr. Ianno asked with respect to the baseline information you're looking for.... For me, as a person from Saskatchewan, I can't tell what's happening with respect to bank loans now because they don't provide that information. So how in the world would our committee or the Government of Canada or some other authority, after bank mergers occur, be able to judge whether service to small business, in Saskatchewan, for example, or in Manitoba, for example, is better or worse as a result of these mergers?

Mr. Duff Conacher: Well, it is very important. You have the summary and our fifth position paper, which sets out the system. They also have more detailed disclosure in the U.S. of investment and service, but they also use the disclosure in the U.S. and the statistics that are provided by the banks to judge the banks' performance in serving not only small business but also customers on a community by community basis. They also break down their lending by gender, race, and income level, for mortgage lending. All of this is taken into account when they are reviewing any expansion of a financial institution in the U.S., whether it's a merger or a takeover or the bank wants to move from one state to another.

For example, Harris Bank in Chicago, which is owned by the Bank of Montreal, wanted to take over another bank in 1992. Its performance was reviewed and the statistics showed that it was arbitrarily turning away certain customers in certain parts of Chicago. They had to take corrective action over a five-year period and set out a plan. It involved reinvesting more than $320 million in the Chicago area and providing technical assistance to borrowers and to others who were trying to help people who were trying to start up businesses.

• 1635

That delayed their takeover of the other bank for two years. That was delayed until they corrected their performance.

So by having that disclosure, you can determine how they're serving people now because it's measured in great detail. Then you can determine whether service improves or decreases as a result of any expansion.

In particular in the U.S., the government denies applications to expand—they have done so in several cases—if the financial institution is not serving all of their customers fairly and well. We should have the same system in place here for at least a couple of years before we even consider looking at mergers in Canada.

Mr. John Solomon: With regard to that particular takeover of the Harris Bank of Chicago by the Bank of Montreal, I believe the figure was somewhere around $450 million to $500 million Canadian that the Bank of Montreal had to invest in the Chicago district.

Mr. Duff Conacher: That's right.

Mr. John Solomon: Do you have any idea what criteria were used to establish by the regulatory authorities for the Bank of Montreal to approve the sale? What kind of criteria did they use with respect to achieving the number? Where was the money loaned?

Mr. Luc Lapointe: There are two ways they can go about it through the CRA. They can actually sit down and go through the three tests: the lending test, the service test, and the community development test. They can also actually sit down with community groups and small businesses and municipalities once they have defined the geographical areas they will be serving. They'll sit down with these groups and ask what they can do for them.

They provide a detailed plan of action that they will be using for actually reinvesting—we always use the term “reinvesting”, but it's actually investing—in the communities from which they take deposits. I guess it's the same situation.

So there are two ways to go with the Community Reinvestment Act. Either the bank sits down with the group in the community, asks what it can do for them, and actually comes up with an agreement, or it'll say it won't do it until the end of the year. Go through the actual CRA test and you'll find out if they're doing well or badly.

There's another example that I use all the time. Last year I met with Fred Buhler, the past president of the Bank of America Canada, which is based here in Toronto. I actually said that most bankers say they don't like the Community Reinvestment Act, and I'm sure there was an appeal in the U.S. not to go through this. He said they actually didn't like the CRA. They never thought that investing in some communities or actually making these partnerships would be profitable.

He said that after making more disclosure or getting more detail on the people they were serving or not serving, they realized they were profitable. He said you can look at them: they're a good bank, they're making money, and their communities are doing extremely well. He said look at their economy; small businesses are thriving in America. He said for that reason they're getting good disclosure. They know what their communities want. They know what they can do for their communities, and he said they're doing it. He said look at the Bank of America; it's a successful operation in the U.S., and they've done well.

Mr. John Solomon: This sort of process of information is almost like an industrial policy of the States.

Mr. Duff Conacher: They don't set a quota in terms of setting benchmarks. It's not a quota that a bank has to lend this amount of money back into each community. Because they are tracking demand for loans and tracking the approval and rejection rate for mortgage loans by, for example, race, gender, income level, and neighbourhood, they're able to track whether someone who is black with a certain income who is buying a house of a certain size is rejected more often than someone who is white. By tracking that, they are able to track patterns of lending as well as the banks' practices overall. They're able to determine which neighbourhoods are being underserved. The community groups also present their cases and they're able to figure out what corrective action is needed.

This is not in terms of setting a quota; it's in terms of simply meeting the demand that's there. If there's no demand in the neighbourhood, then the bank doesn't have to go out and find people to lend money to. If there's no demand, then they don't have to serve, but if there is demand and they're arbitrarily turning people away, then they have to take corrective action.

The Chair: This is your last question.

Mr. John Solomon: I have a comment, if I might, and then a question. As a former corporate planner, I think baseline information is extremely important when you're measuring progress one way or the other.

• 1640

As a former small business person, I think this kind of information you're putting forward as a request is something we should consider very seriously, because the people I speak to in small business, the CFIB representations, reflect clearly that one of the top ten issues of their clients and their members, and of the people that I relate to and meet with, is access to capital. I'm very concerned about this in the context of the upcoming mergers of the banks.

In that light, Madam Chair, I would move that the industry committee immediately convene a series of public meetings into the impact of the proposed bank mergers on small business, consumers, and rural Canada, and that the witnesses include among others, representatives of the chartered banks, the Canadian Federation of Independent Business, the Canadian Chamber of Commerce, the Credit Union Central of Canada, the Consumers' Association of Canada, academics who specialize in small business finance, the Saskatchewan Association of Rural Municipalities, and the Canadian Federation of Agriculture. I give notice that this be debated or discussed at the next meeting, on Thursday, in light of this presentation today and in light of all of the representations that have been made to me and fellow members of Parliament with respect to the bank merger.

The Chair: We have a slight problem, Mr. Solomon. We don't have a quorum to accept a motion. We're going to have to get some rulings on this.


Ms. Francine Lalonde: If nobody asks for the quorum, it is supposed to exist.

A voice: If not, it will be another time.


Mr. John Solomon: I'll table it for Thursday. There will be a quorum on Thursday, I presume.

The Chair: This is notice for Thursday, okay? Great. Thank you.

Have you finished, then, Mr. Solomon?

Mr. John Solomon: No, for the record, this is a tabling motion. It is not a motion to be debated. I was informed that I could do that today, to give 48 hours' notice for Thursday discussion of this motion. So it is duly tabled, then. Is that agreed?

The Chair: That's what we're determining.

That's fine.

Mr. John Solomon: Okay. Thank you.

With respect to this issue, I think it's extremely important that we have an all-party parliamentary committee, and the industry committee might be the venue for this at this point. I know there's a Liberal committee going around the country, and that's all very well and good, and I think it's an important exercise that they conduct themselves in. But with respect to the bank mergers, I think it's really important that we have all parties, with the quasi-judicial authority of a standing committee, and have witnesses appear to take testimony and information so that the information under oath is accurate and correct.

Secondly, I think for a Liberal committee to be touring around the country that may not have—

The Chair: If you have questions for the witnesses, that's fine, but your time is up.

Mr. John Solomon: Okay. My—

The Chair: No, we're not debating the motion.

Mr. John Solomon: My question to the representatives, Mr. Conacher and Mr. Lapointe, is whether they believe a public review of the bank merger with respect to small businesses and its impact is in order or not.

Mr. Duff Conacher: A public review? Yes, we think so very much.

There is the Liberal caucus committee, which we appeared at about a month and a half ago. As well, we have been meeting with the task force on the future of the Canadian financial services sector that has toured the country. Although those meetings weren't strictly out in the open and public, we very much hope and expect that when their report is released, there will be a full review by parliamentary committee of all of their recommendations, not simply the recommendations with regard to mergers.

We also hope and expect that the competition bureau, although it is rare, will conduct full consultations, that there will be public consultations as well, as opposed to meetings behind closed doors with interested parties, as they are also a key player in terms of the review of the mergers.

We hope all of those reviews will continue and there will be many more open hearings.

The Chair: Thank you very much.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Thank you very much.

You constantly mention the U.S. this, the U.S. that, race relations. Do you really think the U.S. civil problems with inner city degradation and race problems are applicable to Canada?

• 1645

Mr. Luc Lapointe: I'll just make a quick comment on that point. It was the basis of the CRA back in 1975, when they started with the Home Mortgage Disclosure Act, to get more data, because they felt community groups, small groups, and ethnic groups were not getting access to capital. This is not the reason for our recommendation to the industry committee, that we have civil, racial, or specific problems here in Canada.

We feel banks should be disclosing. Banks do get capital from communities. It's not as though an actual shareholder is looking for money. They do take capital from communities, and they should be investing in those communities.

There's a lot of anecdotal evidence at this stage that says we are not getting the evidence. What the industry committee has already done by getting more data from the banks has resulted in banks having to appear and explain why they're not investing. We need more data, and that's the reason for—

Mr. Alex Shepherd: I'm just saying the foundation of your organization is basically born out of a U.S. system, and the applications of your recommendations are those that already exist in the United States. You've said that yourself.

Mr. Duff Conacher: It is a model. As you will note, in our recommendations we have not included race or income level. Also, in the U.S. they started with disclosure on mortgage lending and have extended it to business. Based on the surveys and the evidence available currently, the concern in Canada is business lending, and maybe it will be extended to other areas of lending at a later date.

It is completely applicable in Canada to have it by size of business, type of business, and location of business, and to have location broken down in much more detail than the banks currently do, because, as the finance minister expressed this morning in the Globe and Mail published interview, if you are concerned about the impact on communities, then you need data broken down by community.

We also have added in our recommendations that the lending patterns and practices should be broken down by gender. That is also because there have been numerous surveys showing problems and others showing no problems. What we are saying is let's get past the anecdotal evidence and have some systematic tracking by these key factors.

Mr. Alex Shepherd: Okay. We know small and medium-sized businesses are accessing the banking system more through the use of credit cards and consumer credits. Indeed some of our financial institutions are recognizing that small and medium-sized business lending is very expensive to do and that really it's an extension of retail credit. Do the statistics you've given us include the retail side of that?

Mr. Duff Conacher: As to credit cards?

Mr. Alex Shepherd: In other words, you've taken numbers off those statistics that just simply show lending to small business, but not necessarily the number of small businesses that accessed consumer credit. It would show up as consumer loans or retail loans.

Mr. Duff Conacher: The banks do not disclose that.

Mr. Alex Shepherd: Correct. In other words, your figures could be skewed by the fact that it does not include that.

Mr. Duff Conacher: We agree. We're analysing the banks' own stats. We're saying they're flawed. Correct the flaws and everyone will be better off.

They can spin these any way they want right now, the key one being that if the total amount loaned out to small business—currently $32.4 billion in loans under $250,000—drops over the next four years to $28 billion, you can haul them before this committee. CFIB will say there's a credit crunch, the banks will say, “No, demand dropped”, and you will not be able to say one thing to them.

Mr. Alex Shepherd: I didn't see in any of your dissertations the concerns of depositors. Do you think the money these banks are lending out belongs to the banks, or does it belong to the depositors?

Mr. Duff Conacher: Oh, well, very much we believe that when people put money on deposit in a bank, they do not give up ownership of that money. If you're talking about the risk of lending and the concern for depositors in terms of losing funds, we do not have information. There's only been one year the banks have disclosed—fiscal year 1996—their loan loss provisions by size of loan, which was reported to this committee. For 1997, for some reason—I'm not sure why—it takes them six months to produce this figure, so it will not be produced until July of this year.

• 1650

So we only have one year. What does that one year show? It shows that for small business loans under $250,000, the loss rate is about 1.5%. For loans over $1 million, the loss rate is about 0.8%. However, you can lose a lot of $250,000 loans before you make up a $5 million loan. So in fact, the banks in 1996 lost more money in big business lending than they lost in small business lending.

They may say, “Well, yes, but the loss rate is twice as much for small business”. Yes, but they didn't lose as much money. So which size of business is actually riskier to lend to in that case? In our minds, it's pretty even. You can lose a lot of $250,000 loans before you make up the loss of one $5 million loan, and the stats show the banks lose money to big businesses.

According to the bank's own stats, big business, in terms of money loss, is more risky to lend to. Depositors should be more concerned, I think, about the big business lending, especially when you have $99 billion of new lending over a two-year period, and $81 billion of it goes to big business, mostly to take over other big businesses so that they can shed jobs.

Mr. Alex Shepherd: So what is it, a conspiracy? A conspiracy of the banking sector against the people?

Mr. Duff Conacher: No.

Mr. Alex Shepherd: Why wouldn't they loan to small business? It's a lot better to do than to loan to large business, according to you.

Mr. Duff Conacher: It is. You can make one $2 billion loan, as the banks lined up to do, to lend to Ted Rogers to take over Maclean Hunter a few years ago. Many of the banks participated in that $2 billion total lending. What does that do? Ted Rogers takes over Maclean Hunter and 2,000 jobs are lost, because it's a merger of two cable companies that were very similar.

What if they took that $2 billion and loaned $100,000 each to 20,000 businesses that are trying to start up or expand? Just to give a conservative estimate, let's say each of those businesses hires one person. That would create 20,000 jobs.

For the banks, they make a lot of lawyers' fees for their legal departments, for their investment banking departments. They make a lot of interest, and a lot of fees financing that one loan—and it's just one loan to Ted Rogers, of $2 billion—as opposed to having 20,000 loan officers having to watch 20,000 small business loans, a much higher administrative cost, admittedly, but look at the impact on the economy. On the one side, 2,000 jobs are lost. On the other side, 20,000 jobs are created, plus let's say half of those, 10,000 of them, are new businesses that could possibly expand and employ even more people.

In our minds, it's very clear. The banks, if they're supporting the Canadian economy, should be doing that lending. Yes, it's going to cost them more administratively, but they're very profitable. Three of our big five banks are amongst the top 25 most profitable banks in the world—three of them.

Mr. Alex Shepherd: If it's not as profitable, they should lend anyway. They should be forced to lend where it's not profitable—is that what you said?

Mr. Duff Conacher: No, in the U.S. they've shown that they can still make a profit. Maybe it won't be as healthy a profit, but our banks are pretty healthy in terms of their profit.

When we look in terms of the definition of risk, the definition of creation of wealth in this country, job creation had better be part of it, or we're all going to be paying for a social welfare system that we really shouldn't have to pay for if people who want to start and expand businesses and create jobs and get the access to capital to do so.

The Chair: Thank you, Mr. Conacher.

I'm going to move on to Mr. Schmidt.

Mr. Werner Schmidt: Thank you, Madam Chair.

I'm trying to figure out, with all these answers you've given us, what end result you want. Is it simply to have more numbers generated by the banks, or do you actually want to change the economy of Canada and the way our financial institutions operate? What is the purpose that you're trying to achieve with the comments you've made?

Mr. Luc Lapointe: Well, first of all, we're not trying to change the economy. I think the federal government has made it clear that small business will be the engine of the economy here in Canada.

What we're also asking for is not new numbers. The banks do have the numbers. In the U.S. I said there are 10,000 banks. Here, we have six banks with 10,000 branches. They do capture the data. This is how they can close the bank branches or keep one open. They can say, “These are the people we're dealing with. This is the demand for loans. By making so much money or not making money, we might as well close it, take the money and bring it somewhere else.”

We're not asking that banks keep this money in the community. Maybe there is a demand, maybe there is no demand. We're not trying to stop the free flow of capital from one region to the other. This is how Canada is a great country. I mean, money does flow from one region to the other. What we're simply asking, as this committee has done before, is get more data from the financial institutions.

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They do get deposits from consumers here in Canada, and I'm sure if you would ask consumers, they would rather see their money invested in small business where they do live and where their community will thrive as small businesses do exist.

If this thing is so bad, I don't see why the Bank of Montreal is doing more activities in the U.S. and buying banks in Florida. My God, I don't want to disclose because this is bad; I don't want to go to the U.S. because they force me to invest in more racial groups, or ethnic groups, or poor.... They're saying this is good business in the U.S., and they're buying more bank branches.

The only thing we're saying is they do have their data in Canada. The only thing we're asking is that they disclose these data. Communities can decide after that, do I want to deal with the Bank of Montreal, because the Bank of Montreal prefers to invest somewhere else, or would I rather deal with a local bank or credit union? There are alternatives to banks—other financial institutions. What we're saying is the data are there, and we're just asking that these data be disclosed to the government.

Mr. Werner Schmidt: With all due respect, you haven't answered my question at all.

We can collect data from now and forever, for 24 hours a day, and this committee can sit here and analyse data forever and ever. We know the data are there. Ultimately, data are useless unless they do something meaningful. What is it that you want to achieve with all this information?

Mr. Duff Conacher: One, with the data you have now, you cannot determine whether there's a gap between the bank's rhetoric and the reality for business customers across the country. That's one central purpose. If you don't correct and close the gaps—

Mr. Werner Schmidt: May I stop you right there? We know, and you I think have indicated to us this afternoon, that there has been a decrease in the amount of money given to small businesses. You have indicated to us that there have been more customers, though, in the small business area, and that comes right out of those numbers.

We also know—and these are the big conclusions from that information we now have—there are fewer large business customers who have borrowed more money, both individually and collectively. So those are the two big things.

With that information, what do we know? We know that banks have lent more money to fewer big businesses, and they've lent less money on more small customers, but in total, they've lent less over here than here. Okay, so now we know this.

The purpose for gathering that information originally was to encourage the banks to lend more money to small business. It has now been demonstrated that this hasn't happened, so now we have a very obvious thing that we can do as a committee. We can say we accept that or we don't accept it; we like it or we don't like it. What kind of rhetoric is involved here? It's pretty straightforward.

Mr. Duff Conacher: No. If the banks say to you, we are meeting all the demand that is there from small businesses....

Mr. Werner Schmidt: They're going to say that. If they say that to me—

Mr. Duff Conacher: That's what they have said for the past four years. I've been at committee hearings and watched this committee for four years now.

Mr. Werner Schmidt: But we have never had as obvious a situation as we have right now, and you haven't heard what they are going to tell us on Thursday afternoon. You're assuming they're going to say something. Maybe they will say this. I'm not suggesting they won't.

Mr. Duff Conacher: I'm suggesting they'll—

Mr. Werner Schmidt: But I'm not looking at those statistics; I'm looking at the quarterly review, the very issues you raise in your report. Those graphs are based not on that report but on these other quarterly reports, and that's what I'm talking about. That's all we're talking about here, and we don't need any rhetoric to explain to us what the facts are. The facts speak for themselves. They're right there. So what is it that we will achieve by adding all this other information you're suggesting be collected?

Mr. Duff Conacher: You will know the demand for capital in communities across the country. You'll know the risk of meeting that demand. You'll know the banks' record in meeting that demand, bank by bank, and therefore by having that information—

Mr. Werner Schmidt: So we know this. What will we do with it?

Mr. Duff Conacher: Then you will be able to know whether you want to allow a bank to get bigger. If a bank is not serving people well now, then why would you want it to be bigger? It will just serve more people at the same poor level of service.

You will know which banks are doing better than others and be able to establish, as Paul Martin said in 1995, performance benchmarks.

There is a practice in the environmental area that is very well known, the best-of-sector approach, where you look at a company and establish which has the best performance by various criteria in terms of the sector. You will be able to determine that, not just on the national or regional level, but on a community basis, and also in terms of the demand that is out there.

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When you say you want the banks to lend more to small business—and that was the goal of the initial committee hearings—what is more? Where do you stop? What's the magic figure? To determine that figure, you need to track demand.

It could be 30% of the total amount, but what if the demand from the small business sector—and it can be determined that it's a legitimate demand—is for 40% of the total amount the banks lend out? Why should they be allowed to just lend up to 30% if you set that as a particular number? Why shouldn't they meet all the legitimate demand that's out there? It's the job-creating sector of the economy, and those businesses should be getting access to capital if we want to create jobs in this country and solve a chronic unemployment problem.

The Chair: Thank you, Mr. Schmidt.

Mr. Ianno, briefly. I'm going to remind members we're quickly running out of time. The bells are going to go at 5.30 p.m.

Mr. Tony Ianno: I'm sorry. They went to something that was close to my heart. I remember Werner voting against my one-third of corporate commercial loans being put on the banks.

Mr. Werner Schmidt: You're going to start setting your quota now?

Mr. Tony Ianno: I have never stopped, Werner.

Mr. Werner Schmidt: Oh, okay.

Mr. Tony Ianno: For the last four years I've been putting my one-third of corporate commercial loans—

The Chair: You can discuss it later with Mr. Schmidt. I'd prefer if you asked the witnesses your questions.

Mr. Tony Ianno: But without him I wouldn't have been able to lead into it.

Some hon. members: Oh, oh!

Mr. Werner Schmidt: I'm so glad I helped you.

Mr. Tony Ianno: As you know, I've been gauging, every quarter, the amount the banks lend to small business, and there are three banks in the one-third ratio roughly: the Bank of Montreal, the Royal Bank, and the National Bank. The other banks are very dismal in their numbers—in the low 20s.

Unfortunately I haven't seen your organization come out in support of that. How you gauge this, Mr. Conacher, is first of all you set a benchmark that is attainable, and that's the one-third. The Bank of Montreal was the first to achieve that, and then the Royal Bank moved towards that, along with the National Bank. If the other banks come close to the one-third, that will mean $10 billion more in the hands of small business. When you take into account the market you're looking at, which is the $25,000 or thereabouts loan amount required, that will be hundreds of thousands of new jobs for Canadians.

So I wonder, is there a reason your organization has not come out full force in favour of that? It can always be amended and adapted, because we do get quarterly reports. It's been four years, as Werner mentioned, that I've been pursuing this, and some of my colleagues along with me, and we still haven't achieved anywhere near any major improvement. But if organizations such as yours say this is at least one benchmark that's worthy of support....

Why have you been slow, instead of asking just for money so there can be a consumer advocate, when you have avenues available to you that don't require any money to start moving the agenda forward?

Mr. Duff Conacher: We very much do support an increase, definitely, in the lending by all the banks, and as you pointed out earlier, we have looked, bank by bank, at total authorized. At the authorized level, none are above 20%, and some are, again, doing better than others. Some are not even over 10% in terms of the total amount authorized, so obviously they wouldn't be close to 30% in terms of the outstanding lending.

The difficulty we see is that when you have the demand figures, then you will know—

Mr. Tony Ianno: Mr. Conacher, I understand all that, but you know, we want to get to the other side, and you're still dinkering with your own vehicle that's not getting there. Here we have a vehicle that has an opportunity of at least getting closer, and you're still going back to your vehicle and talking about the specific problems within your vehicle.

Mr. Duff Conacher: Our coalition is focused on accountability, so we very much support that all the banks.... We agree completely with using the one-third figure as a benchmark, and it's a benchmark that all of the banks should be aspiring to, but some of the banks may be able to show that they only have demand for 20% of their total credit.

Mr. Tony Ianno: I understand.

Mr. Duff Conacher: So that's why we have focused on closing that gap. Definitely if all of them have demand of one-third and they're not meeting that demand, then we have that as a benchmark that, especially if the banks refuse to disclose these statistics. That gap should be closed first.

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But what we're saying to you is, also ask them for demand, because you have the power to do so. Amend the agreement.

Mr. Tony Ianno: But you see, we have to start with your support, and then Mr. Schmidt's support, as compared to just keeping on talking about it. Unless the committee comes forward and says this is what we believe should happen—if there's been a transition, Mr. Schmidt, as of yet—then we have a chance to do it together. Otherwise it'll just be members of Parliament that support that, hoping to achieve it on a gradual basis as compared to full committee support.

Mr. Duff Conacher: Well, you have to take it as a one-two step. If you say to the banks, “Why not the one-third?” and some of them respond that they don't have the demand for one-third, then you say back, “That's all we would request. Show us that you don't have the demand, and then we'll talk.”

The Chair: Thank you. Mr. Dubé wants to ask a question.


Mr. Dubé, please.

Mr. Antoine Dubé: Everything you have told us is very interesting but I still have a question. I may not have read all your documents but I would like you to tell us how many organizations belong to your Coalition, and how representative it is of Canada. Mr. Lapointe is probably from Quebec. Could you tell us what is the status of your Coalition in Quebec?

You have referred several times to what has been happening in the U.S. during the past twenty years. Do we find the same level of openness in other countries?

You are appearing in front of a parliamentary committee that will hear bankers, among others, but the Minister of Finance has established a working group on financial institutions.

As far as I am concerned, openness means democracy. Would you want this debate to be held in front of a committee made up of all the political parties represented in the House? Of course, the mandate of that committee would be to study this matter in depth. We have the feeling, at the present time, that there may be different options. I would like to have your opinion on this.

Mr. Luc Lapointe: At the present time, the Coalition represents 80 groups from all the provinces and the Northwest Territories. We have about 3 million members across Canada. In Quebec, numerous groups have joined the Coalition very recently, and the CNTU and the QFL are thinking of joining. Several community groups have also joined, as well as some CWSA. And I should add there are some other organizations which are also dealing with the whole matter of reforming the banking system.

Obviously, the work of the working group will be a basic tool. Mr. Martin has let it be known that it won't be the Bible for all the future decisions. Other groups will be made up to study your recommendations and how to implement them.

It would be rather difficult to express an opinion... I believe we have already said that there should be a parliamentary committee made up of representatives of all the parties.

Mr. Antoine Dubé: How is it different in other countries?

Mr. Luc Lapointe: At the present time, the European Union is studying the Community Investment Act. No similar model exists anywhere else, where banks have to disclose their operations. However, Australia and the European Union are studying other systems, as well as South Africa and us.


The Chair: Thank you very much. Thank you, Mr. Dubé.

I want to thank you, Mr. Conacher and Mr. Lapointe, for being with us this afternoon, and for your presentation and your very well-presented, thoughtful brief. It has been a very interesting discussion, which I have a feeling could go on for a lot longer. We're going to adjourn this section of the meeting now and move in camera.

The meeting is now adjourned.

[Editor's Note: Proceedings continue in camera]