INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 26, 1999

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[English]

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

I'm very pleased to welcome today from the Canadian Bankers Association, Mr. Kelly Shaughnessy, independent business committee, and senior vice-president of CIBC; Mr. Aron Gampel, who is deputy chief economist with the Bank of Nova Scotia; and Mr. Alan Young, vice-president of policy.

Mr. Young, I understand you're going to begin.

Mr. Alan Young (Vice-President, Policy, Canadian Bankers Association): I have a few opening remarks.

Madam Chair and members of the committee, thank you very much for inviting us to be with you this afternoon. We welcome the opportunity to discuss with you today the banks' business lending statistics. Our focus is on the fourth quarter of 1998.

Mr. Gampel has joined us to comment on factors that have influenced the economy and that have impacted the small and medium-sized business community since we last met.

As you can see today on the screens on either side of me, we are introducing a new format for our presentation. We're all hopeful that it's going to work satisfactorily, and we'd welcome your comments after the fact as to the new format we're using today. We do hope that you find it helpful.

I would like now to ask Kelly Shaughnessy to conduct the formal part of the presentation. Kelly.

Mr. Kelly Shaughnessy (Senior Vice-President, CIBC; Independent Business Committee, Canadian Bankers Association): Thank you, Alan.

Madam Chair and members of the committee, thank you for permitting us to join you today to discuss this important topic.

At the outset, I think it is worth while to highlight that the reporting mechanism for the quarterly statistics was developed in partnership and consultation with the banking industry and this committee of Parliament.

As a result of the consultations, the statistics are broken out by eight dollar bands, eight regions, seventeen industries, and the seven reporting banks. The statistics are published by the CBA in a report entitled Business Lending by the Major Banks. They are also available electronically on the CBA's website. The data is also provided on a diskette form to Industry Canada.

For the purpose of the banks' lending data, small and medium-sized enterprises are defined as businesses borrowing less than $1 million. Within this group, small businesses are defined as businesses borrowing less than $250,000. The information we will discuss today is only half of the business debt financing picture in Canada. Research indicates that the banks provide just over 50% of the debt financing to SMEs in Canada.

The Task Force on the Future of the Financial Services Sector acknowledges that there's a serious gap in the availability of information relating to SME financing or relating to the SME financing market. It recognizes that the gap adversely impacts on the ability of policy-makers and stakeholders to properly assess and act on the financing needs of SMEs. We believe implementation of the task force's recommendations for improved data collection will help to ameliorate this situation. More importantly, it will benefit the small business community in Canada. We support the task force's recommendation that the government collect, analyse, and publish data on SME financing from all regulated and non-regulated providers of loan, lease and equity financing.

The next set of slides provides an overview of the year-over-year changes in SME and small business authorizations, outstandings, and number of business borrowing customers.

I am pleased to report that the amount of credit authorized to small and medium-sized enterprises in Canada increased from $69.8 billion at Q4 1997 to $72.1 billion at the end of Q4 1998. This represents a 3.3% increase. The amount of credit actually used by SME borrowers increased from $47.3 billion to $48.4 billion over the same period of time. This is an increase of 2.3%.

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The banks' small and medium-sized business borrowing client base is expanding. The number of SME business customers who borrow from the banks has increased by 3.3% over last year. There are now over 769,000 small and medium-sized businesses borrowing from the seven reporting banks. Small and medium-sized businesses borrowing from the seven reporting banks account for 95% of the banks' total business borrowing clientele.

When we analyse credit distribution across Canada, we find that business lending by the banks is distributed proportionate to their regional distribution of SMEs across the country.

We now look at small businesses only. We find that authorizations to the small business market segment increased from $32.9 billion to $33.6 billion, which represents a growth of 2.1% since the fourth quarter of 1997. Small business owners are using slightly less credit than in 1997. At Q4 1998, $22.6 billion was outstanding to small business borrowing clients. There are over 687,000 small business customers borrowing from the seven reporting banks. This represents a growth of 3.2% over the fourth quarter of 1997. Small businesses borrowing from the banks represent 85% of the banks' business borrowing clientele.

At previous hearings, members of this committee expressed an interest in receiving an historical analysis of the banks' business lending data. The following slides show the growth in authorizations versus outstandings, and the growth in the number of bank business borrowing customers since our first report in December 1995.

As a reminder, as I said earlier, for the purposes of a bank's business lending data, small and medium-sized business enterprises are defined as businesses borrowing less than $1 million, and within this group, small businesses are defined as businesses borrowing less than $250,000.

Since Q4 1995, the amount of credit authorized to SMEs has risen from $66.9 billion to $72.1 billion at the end of Q4 1998. This represents an increase of 7.7%. The amount of credit used by SMEs increased from $46 billion to $48.4 billion, which represents a rise of 5.1% over the fourth quarter of 1995. At the end of Q4 1998, the number of business borrowing SME clients had increased by 9.8% over the fourth quarter of 1995.

Since Q4 1995, authorizations to small businesses increased from $32.3 billion to $33.6 billion at the end of Q4 1998. This represents an increase of 3.9%.

The amount of credit used by small business rose slightly to just over $22.6 billion, or 0.2%, over the fourth quarter of 1995. The number of small business customers has increased by 9.6% since Q4 1995. These figures indicate that the banks are now giving smaller loans to more small businesses than they did in Q4 1995. This trend reflects both steady economic growth and the fact that the banks are focusing more attention on the smaller end of the market. Through better technology and innovation, the banks are providing a higher number of convenient and simplified credit products to their small business borrowing clientele.

We thought we would take the opportunity to highlight a year-over-year analysis of bank lending to SMEs in the manufacturing, retail trade, and business services industry sectors.

Small businesses in Canada have benefited from a strong Canadian economy. The economic recovery is a result of a sustained economic growth that has allowed companies to build at a level pace and develop more balanced capital structures. The credit activity for the sectors we will examine reflect this trend. With better financial strength, the banks' business borrowing customers sought smaller amounts of debt capital and have shown moderate credit usage. The sectors have performed well, and the banks' business borrowing client base for these industries has expanded.

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In 1998, manufacturers in Canada benefited from high demand in the United States for machinery, telecommunications and electronic equipment, and automotive products, the latter being led by parts and accessories. Manufacturing grew every month since July 1998. At the end of December 1998, the banks had authorized $6.4 billion to SMEs in the manufacturing sector. This represents an increase of 1.3% over the fourth quarter of 1997.

Overall, credit usage among SMEs in manufacturing increased marginally by 0.6%. As a result of the sector's good economic performance, the average amount of credit used by SMEs in manufacturing actually decreased by 2.5% over Q4 1997. The number of SME business borrowing clients in the manufacturing sector increased by 3.2% over Q4 1997.

Retail sales rose by 4.3% in 1998. The furniture sector was the strongest performer among all retail sectors, with an increase of 8.4%. The second most active category was retail stores, in the other category. This includes sporting goods, jewellery and music.

At the end of December 1998, banks had authorized $7.8 million to SMEs in the retail trade sector. This represents an increase of 1.3% over the fourth quarter of 1997.

Reflecting more stable financial positions, credit usage by SMEs in the retail trade sector actually decreased by 1.7% over Q4 1997. The average amount of credit used, the banks' number of retail trade SME business borrowing customers, increased by 2.5% over Q4 1997.

Demand for business services maintained steady growth through 1998. Lawyers, computer programmers, other professionals, and temporary-help workers were the most active in this sector. The banks authorized $4.1 billion to SMEs in the business services sector in Q4 1998. This represents an increase of 3.9% over the fourth quarter of 1997. SMEs in this sector increased credit usage by 2.3% over last year.

However, the banks' SME business borrowing customer base from the business services sector increased by 8.9% over Q4 1997. This resulted in a 6% decrease in the average amount of credit used by SME clients in business services. This reflects the fact that, like manufacturing, business services experienced good, profitable growth throughout 1998.

These solid numbers reflect the importance of small and medium-sized businesses to Canada's banks. We value our relationship with our small business clients. We understand that we have a role to play to help ensure that as Canada's small businesses enter the new millennium, they are well prepared to face the challenges of a rapidly changing economy.

As the small business community in Canada has blossomed, so has the banks' understanding of its diverse and changing needs. Independently and in partnership with others in the private sector, associations and government, banks are working to meet these needs.

We look forward to responding to your questions, and I'd now ask Mr. Gampel to give you a few remarks on the economy.

Mr. Aron Gampel (Deputy Chief Economist, Bank of Nova Scotia; Canadian Bankers' Association): Thank you, Madam Chair and members of the committee. It is my pleasure to provide you with an overview of Canada's economic prospects as we approach the new millennium. In addition to a copy of my brief formal remarks, I've provided you with a collection of charts and tables illustrating some of the key themes of my presentation.

The global economy is approaching an important turning point, with North America's favourable economic momentum soon to be augmented by varying degrees of revival in Europe, Asia and Latin America. The financial turbulence undermining global growth has begun to lose intensity. While another year of adjustment is likely for the countries most affected by last year's contagion, investor confidence is already on the mend.

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Stronger currency and equity market performances in Korea, Thailand and Malaysia, for example, have coincided with impressive rebounds in industrial production. This turnaround, a sharp reversal from the eroding sentiment in growth expectations of just half a year ago, has been built upon a foundation of domestic restructuring, competitive realignments, official international assistance, and lower global interest rates.

Regional growth differentials are expected to give way to a more synchronized global expansion beginning in 2000. The economies of continental Europe remain in the doldrums and the United Kingdom is flirting with recession. However, European policy is now assuming an increasingly pro-growth bias that will pay dividends next year.

Asia, including Japan, which is still stuck in recession, will gain momentum in 2000 as corporate balance sheets strengthen and excess capacity becomes less burdensome. Prospects for Latin America, and Brazil in particular, improve next year as commodity markets and world trade gear up.

The globe's economic locomotive, the United States, is on track to post another strong 3.9% output advance in 1999, for the third successive year, followed by a 2.4% increase in 2000. Consumer spending will continue to be underpinned through next year by relatively buoyant labour market conditions and healthy income gains. Exports will be bolstered by improving overseas demand.

An increase in world production, combined with firmer trade in commodity markets, should give Canada an edge going forward. This country's improving international trade fortunes will benefit from the ongoing strength of the U.S. economy—the destination for more than 85% of Canada's shipments—and rising terms of trade as export prices firm up. Canada's output gain should average 3% in 1999, for the second year in a row, and 2.5% in 2000.

While Canada has been lagging behind the United States, we should close the performance gap next year. This will be much more visible once the downside of the year 2000 preparations—inventory drawdowns and scattered computer disruptions—has worked its way through the system. Retail sales and housing-related activity will benefit from this year's declining borrowing cost and a solid pace of job creation. Gains in the high tech sector and a rebound in the resource sector will help revive corporate profits as the country moves into 2000, though many industries are still being squeezed by limited pricing power.

Taking a look at Canadian industries, this country's forest products and energy industries have the advantage of ongoing consolidation—trimming costs, bolstering balance sheets, and increasing global market presence. Motor vehicle output has climbed to a 20-year high in North America, and vehicles assembled in Canada and the United States now contain almost $2,000 of Canadian-made parts compared to only $950 in the mid-1980s. Canada's world-class telecommunications sector is also a bright spot, garnering contracts in the United States, Europe and emerging markets.

Broad-based exports to the United States are insulating central Canada, while offshore energy development is fueling strong growth in the Atlantic region. Prospects for the prairie provinces are brightening with strengthening in oil and agricultural prices, entering 2000. A recovery in British Columbia will be slower to materialize, reflecting in part the province's close ties to Asia.

The prospect of uninterrupted growth through 2000, notwithstanding temporary Y2K-related disruptions, should provide a favourable operating environment for Canada's small and medium-sized business enterprises. Competitiveness is being enhanced by the sizeable investments in productivity-enhancing computers and communications equipment. These capital expenditures now account for one out of every three investment dollars spent by all businesses on machinery and equipment. The demand for business services is being bolstered by the rapid growth in information technologies.

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Pro-growth public policies will also be supportive of the economy's forward momentum. With inflation tame and the Canadian dollar on a firming trend, the Bank of Canada will retain an accommodative policy bias.

On the fiscal front, both Ottawa and most provinces have entered a new era of sustainable budget surpluses. Governments are already implementing growth-enhancing tax cuts and new spending, and more initiatives are in the offing. Some provinces have introduced new incentives to improve the performance of sectors that are heavily dominated by small and medium-sized business enterprises.

The comparatively good news economic report I am presenting is not without some risk. Eventually the consumer spending spree south of the border will moderate as American shoppers pause to catch their breath. A broader earnings revival in North American probably lies on the other side of the new millennium with the beginnings of a global economic upturn. Massive fiscal and monetary stimulus may have ended Japan's slide but so far has failed to kick-start that economy, and debt-related concerns may flare up again internationally.

Inflation will be held back by intense competitive pressures and the deflationary influence of the rapidly growing high tech sector. However, the technology-productivity paradigm now used to rationalize the absence of inflation in the midst of strong growth and tight capacity in the United States is being challenged. The underlying low inflation trend is being temporarily broken by a cyclical upswing in wages and prices as activity strengthens.

Canada's core CPI jumped 0.3% in April, pushing the key year-over-year increase to 1.4%. The U.S.A.'s core CPI jumped a corresponding 0.4% in April, pushing the year-over-year increase to 2.2%.

Scotiabank's commodity price index, which is weighted by the contribution to Canadian exports, has risen nearly 4% since October. While this year's oil price revival has been a major factor, this commodity represents less than 6% of the total index.

The pickup in world activity and the re-emergence of some inflationary pressures will trigger a directional shift in international interest rates by the spring of 2000. Short-term interest rates have bottomed in the United States—with the U.S. Federal Reserve Board now leaning to tighten monetary policy—and are within a quarter percentage point of their lows in Canada and Europe, probably, and are already bordering zero in Japan.

Canadian short-term interest rates are expect to remain below U.S. levels, assisted by a better inflation and fiscal performance as well as a stronger currency. The Bank of Canada will probably lag next year's policy tightening by the U.S. Federal Reserve, though our experience with maintaining negative short- and long-term interest rate differentials while Canada remains a large borrower on international capital markets is rather limited.

Thank you, Madam Chair.

The Chair: Thank you very much.

We're now going to turn to questions.

Mr. Pankiw, please.

Mr. Jim Pankiw (Saskatoon—Humboldt, Ref.): Mr. Shaughnessy, on the amount of money that you have lent out and the amount of money that the bank borrows, I can't remember the exact numbers, but is the difference the amount that you have in deposits?

Mr. Kelly Shaughnessy: Mr. Pankiw, you may have misunderstood my point. We were breaking it down into three different levels or three different units. One is the amount of money that we authorize to small and medium-sized businesses, and so that is the authorization. A small business may have an authorization of, for want of a number, say, $100,000. The amount of money that the small and medium-sized businesses actually borrow from the banks was the second unit we had discussed, and then we talked about the number of small businesses that actually dealt with the bank. I don't believe I spoke about the two sides of the balance sheet.

Mr. Jim Pankiw: Okay.

Mr. Gampel, when you talked about the prospects for the prairies, you said you thought there would be a strengthening in agriculture prices. On what do you base that?

Mr. Aron Gampel: It's based on a general firming in global economic conditions that is in the process of generating now but probably will show in more evidence in the year 2000. At that time, we're likely to see a firming in demand for many commodities, including a strengthening in agricultural prices.

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Mr. Jim Pankiw: Did you say the same for oil?

Mr. Aron Gampel: Oil has already strengthened quite considerably. It's up around 60% since the beginning of the year, and our forecast is for oil to trend higher. Again, I think the operative word is “trend”. It's already starting to give back some of its recent gains, but, going forward, we look for a firming global economy to put upward pressure on oil prices.

Mr. Jim Pankiw: When you're making these projections, what timeframe are you looking at? You paint a pretty bright picture if you're right. How far into the future are you looking? How far does this prediction go?

Mr. Aron Gampel: The forecast I have included in a summary table basically goes to the end of the year 2000. I would hazard a guess—and economists are good at guessing—that we could probably go through a few more years without realizing, I think, the typical pressures that have ended business cycles in the past. I think this cycle is going to be one of longevity. It's already eight years old and probably will go on for at least another two years, if not three. I would say that this will continue. I don't see anything on the horizon that will temporarily, let's say, terminate this long cycle.

Mr. Jim Pankiw: Thank you.

The Chair: Thank you, Mr. Pankiw.

[Translation]

Mr. Bellemare, go ahead please.

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): Thank you, Madam Chair.

[English]

I appreciated your presentation. It was an inundation of figures. One thing that strikes me, which is the thing that reoccurs all the time, is the definition of a small business. You keep coming back with the size of the loan. Now, my question would be this: do businesses make more than one loan a year or do all businesses only do one loan and that's it?

Mr. Kelly Shaughnessy: If I may comment, you made a point and asked a question—

Mr. Eugène Bellemare: I have a series of questions. You should go quickly on the answers.

Mr. Kelly Shaughnessy: If I may, I will first address your point on the definition of a small business. If there were seven banks at the table today, you would probably hear seven different definitions of “small business”, but we had to come to an agreement with this committee of Parliament on how to define it in conjunction with the members of this committee. That was when we agreed to the $1 million and the $250,000. It wasn't something we as an industry said, that this is what a small business is. A definition was required and that's what we did.

Now, with respect to your question—

Mr. Eugène Bellemare: Excuse me. I don't recall this committee having an agreement. I do recall a discussion on the topic and I do recall asking the chair and the rest of the committee about the fact that we should have a definition, a definition that is not the size of the loan, because the people who come to our riding offices may have 10, 15, or 20 employees. We consider them small businesses.

You could have a very large company making, for a variety of reasons, a variety of loans in a year. I am sure that some big companies probably make loans every third or fifth day for different projects and it goes on forever. Therefore, I would assume that a large company could be considered a small business 10 or 15 times on your charts, while they're in fact not a small business, they're a big business doing many small loans—your definition of a small loan.

You're not defining to me what a mom-and-pop shop is, let's say, and I'll leave the the mom-and-pop shop aside for a minute. The 10, 15, 20, or even 30 employees, the value of a company, the book value of a company, the annual revenues of a company—isn't that what a small company is, as opposed to the amount?

Mr. Kelly Shaughnessy: Most definitely. I would agree with you that the way to define a small business is not by the amount it borrows. I agree with you wholeheartedly. In 1995, though, this committee was very interested in banks lending to small businesses, and with a subcommittee of this committee to set bounds on the numbers that we would report to the committee, $1 million and $250,000 were agreed to back at that point of time.

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With respect to your question on the impact that a company would have if they borrowed once, twice, or three times a year, what we're doing is reporting this on the level of authorizations to individual clients. So the report we give to you is not based upon counting as three customers a company that has three loans with a bank; what we're doing is counting the authorization that an individual client will have with their respective bank. If a client came in and got three loans of, say, $10,000 over the course of a year, in these reporting statistics, for purposes of reporting this data, we would say that the client had an authorization—assuming they're all outstanding—of $30,000. But it would be one client, one authorization.

Mr. Eugène Bellemare: I'll change the subject. I was looking at knowledge-based industries, and your statistics say that between 2% and 3% of the total credits are to knowledge-based industries. Why is that?

Mr. Kelly Shaughnessy: That represents within the country, within the definitions that we agreed to with this committee, an approximation of the knowledge-based industry population relative to the total number of small businesses. In regard to the difference in the amount outstanding that KBIs have with the banks and the actual percentage of KBIs in the population, I believe you're talking one-tenth of 1% difference.

Mr. Alan Young: The definition that we use for KBIs is the definition that StatsCan has agreed defines a KBI. Using the StatsCan calculation, we're finding that the number of KBIs is roughly equivalent to the outstanding credit to the KBIs from the banking industry.

Mr. Eugène Bellemare: Thank you.

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

[Translation]

Mrs. Lalonde, go ahead please.

Mrs. Francine Lalonde (Mercier, BQ): Good afternoon. I have looked at your “Highlight Sheets” and it states that 95% of the businesses taking out loans with the seven large banks are SMEs. I could have made the calculation, but that 95% does not deal with the issue of the definition as to whether they are borrowing $250,000 or less. This is quite annoying. How much are they borrowing in absolute figures? The figure is there, but you can give it to me. What percentage of the loans given to businesses does this 95% represent? Finally, what are the administration charges for these loans in comparison to those of all loans to businesses?

[English]

Mr. Kelly Shaughnessy: To address the question on service fees, to be honest with you, I simply don't have that information. I do not believe that information is collected on that basis, so I very honestly can't answer that question.

[Translation]

Mrs. Francine Lalonde: That would be interesting, and it might explain why there are fewer loans to small businesses.

[English]

Mr. Kelly Shaughnessy: No. Once again—while my colleague gets these statistics on lending—very seriously, when you look at the needs of a small business person, it is not only loans. In the case of my employer, the CIBC, only 40% of our small business clients borrow. But the small business person needs an RRSP. He or she needs a house. They need assistance with buying a car, with the whole range of financial products or services that a bank can provide. So I would say to you that small businesses are a very profitable aspect of the banking industry, not only on the borrowing side but on the wealth management side and meeting the personal needs of small business people.

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With respect to the number of total loans, I don't believe that number is correct. As for the percentage of total loans of all the banks to small businesses, I'm guessing right now, madame, by looking at the numbers, that it would be a little over 20%.

[Translation]

Mrs. Francine Lalonde: I usually do the calculation, but I wanted to check.

[English]

Mr. Kelly Shaughnessy: Those are the SME loans, madame.

[Translation]

Mrs. Francine Lalonde: Up to the $250,000 limit, I believe?

[English]

Mr. Kelly Shaughnessy: No, up to $1 million.

The Chair: Just to clarify for the committee, it was 23.4% in September 1998 and 26.7% in September 1996.

Mr. Kelly Shaughnessy: And that would be the SME.

The Chair: Right.

[Translation]

Mrs. Francine Lalonde: Are the most recent figures from December?

Mr. Kelly Shaughnessy: Yes.

Mrs. Francine Lalonde: I wanted to have the December figures.

[English]

Mr. Kelly Shaughnessy: We expect to have the figures for the first quarter of 1999 available for this committee on or before 30 June.

[Translation]

Mrs. Francine Lalonde: In December 1998, the situation was about the same. Is that what you are saying? You have said 24%. Is that an increase or a decrease?

[English]

Mr. Kelly Shaughnessy: The amount quarter by quarter would be approximately the same.

The Chair: Make this your last question, please.

[Translation]

Mrs. Francine Lalonde: Can you tell us how many businesses have taken out loans related to the Y2K bug? Particularly in the manufacturing sector, where we know there are major problems?

[English]

Mr. Kelly Shaughnessy: No, madame, I have no statistics in that respect specifically for Y2K, because it would be very difficult to say the loan is solely related to Y2K. In the case of even large businesses, such as the banks, we're taking the opportunity to buy new equipment, new software, and things of that nature, which perhaps we would not have done this year or last year if it weren't for Y2K. So we have no statistics that could isolate the number of loans given to small and medium-sized businesses specifically for Y2K.

The Chair: Thank you.

[Translation]

Mrs. Francine Lalonde: I would have liked to ask a question of a representative of the National Bank. A few months ago—I have the precise date here, The Gazette published a series of articles saying how surprisingly easy it was, in some cases, to obtain loans under the BLP. I was surprised, since the information that I had received in my office indicated that it was rather difficult for small businesses to obtain loans; the articles seemed to say the opposite. Can you answer this question, even if you are not with the National Bank?

[English]

Mr. Kelly Shaughnessy: Well, I most certainly cannot answer vis-à-vis the National Bank. Our bank, the CIBC, gives loans under the Small Business Loans Act, and we have an obligation to perform appropriate, prudent due diligence. I can only speak for my own bank; I believe, though, I'm speaking for all the banks. I believe they apply their stewardship obligation and their due diligence with all loans, whether it's a loan that is 85% guaranteed under the program or a loan where the bank is assuming the entire risk.

Mr. Alan Young: Madame Lalonde, I can take your question back to the National Bank and ask them.

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

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

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First I'd like a clarification on your charts. At the front of the presentation, you show authorization to SMEs of $72 billion, and that's a 3.3% increase over 1997-98. When I go to the back and look at where the money is authorized—manufacturing, retail, and business—it doesn't add up, and I'm not sure what I'm missing.

Mr. Kelly Shaughnessy: Mr. Lastewka, we just chose, as an indication of how individual industries are doing, three industries. In reporting the statistics, we're reporting on 17 different industries. So those are just three of the 17.

Mr. Walt Lastewka: Okay, I understand.

When I look at your authorized and outstanding, and then at your customers, one of the things that comes out is I can't identify new business growth. Your customers would be the net, right—those that have gone bankrupt and left and the new businesses that have come onstream? Could you give me an indication of new business growth amongst the seven banks?

Mr. Kelly Shaughnessy: No, I can't, other than to say a good proxy for that is the number of new businesses coming on, so for instance, 3.3% of new borrowers. They're not necessarily new businesses; they may be an existing business that has taken out a loan but did not have one other than that.

We're having trouble, as an industry, collecting that type of data. We'd like to collect pure new business data and provide that to you, but we're having problems with that, frankly. If a loan moves from CIBC to my colleague here at the Bank of Nova Scotia, that could get recorded as a new loan. In fact it would be recorded as a new loan by the Scotiabank, and it is not in fact a new loan. So it's a very tough one to capture in the systems and to get a definition of.

Mr. Walt Lastewka: But bankers go face to face with the businesses and know who's a new business and who isn't, through their due diligence. Is it possible to get some statistics on new businesses?

Mr. Kelly Shaughnessy: We are attempting to do that. Of the seven reporting banks, I think six are in a position to do that, and we're hoping the seventh one will be in a position to do that in the not-too-distant future. But they're all struggling with the problem I articulated earlier: what exactly is a new business?

Mr. Walt Lastewka: I want to preface my next question by saying I don't want to forecast a downturn or be any part of forecasting a downturn. But we know that during the 1980s, when there was the last downturn, many businesses got cut off loans and so forth, or at least that's what we heard. Are you doing anything, as a bank organization, to prepare yourselves to be more diligent and more careful when we do get into a downturn? And as I said, I don't want to be a doom-and-gloomer, but I want to be able to prepare if that time ever comes.

Mr. Kelly Shaughnessy: As the bank's senior credit risk officer in Ontario, I lived through the last recession, and I can guarantee you that was is going on today is entirely different from what went on in the late 1980s and early 1990s.

In the late 1980s and the early 1990s, especially in Ontario, we saw almost explosive growth in some industries—very rapid growth. We saw explosive growth in things such as real estate, construction, and things of that nature. Then the recession hit. I don't know if Aron would agree with me, but I don't know if “recession” was even the right word back then, because we grew so rapidly. I think, living in Ontario anyway, it was almost a depression.

What I see this time around, in this part of the cycle, is entirely different. We've seen moderate, sustained growth. I believe you're seeing that in the business lending statistics, and that's why we brought out sectors such as manufacturing and other services. You're seeing the number of clients go up and the authorizations going up, but the outstandings are going down or increasing very moderately, and the number of clients are going up. I believe this indicates that businesses this time have had the opportunity to rebuild their balance sheets.

Mr. Lastewka, the businesses are in a far stronger position today. Like you, I'm not predicting this at all, but if we do see a period of slower growth or even a moderate or small recession, small businesses are much better positioned this time than they were in the last go-around.

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Mr. Walt Lastewka: That leads me to my last question. When I looked at the manufacturing side, I saw the increase of 1.3% in authorization and the manufacturing outstanding being almost the same, but the SME customers went up. Does that mean we're loaning less to the banks or that the banks are loaning less to SMEs?

Mr. Kelly Shaughnessy: I think it's a combination of at least two, if not three, things. One is just my earlier comment: the manufacturers have had a period of moderate, sustained growth, so they're rebuilding their balance sheets, they're getting more equity into their businesses, and their debt-equity ratio is improving.

Secondly, virtually all the banks have simplified loan products, whether they're card-based products or products based upon the lending platform of the banks, that are targeted at the low end of the market. For instance, in the zero to $25,000 band of borrowers—this is for all SMEs, but I've no reason to think it's any different from manufacturing—the average loan out there is $4,600, with over 300,000 clients.

So you're beginning to see the impact of what I'll refer to as these convenient or simplified low-end loan products coming into the statistics. When the first bank introduced that type of product a couple of years ago, we had expected that we would start seeing average loans go down and more of a focus on the lower end of the market.

The Chair: Thank you.

Thank you, Mr. Lastewka.

Mr. Jones, please.

Mr. Jim Jones (Markham, PC): Mr. Shaughnessy, in your presentation, you said this represents half of the debt financing in Canada. Please explain who the other half is. Also, was this true 10 years ago? This report is based on the seven largest banks. And where do you think this debt financing from the banks for SMEs will be five years hence? Will it still be 50%, or will it be less?

Mr. Kelly Shaughnessy: The most independent research that has been done in this respect, Mr. Jones, is by the Conference Board. They did research, I believe it was in 1997, that indicated the banks were providing 50.1% of the money to SMEs.

The sector that increased most rapidly from their previous research, which I think had been done two years previously, was specialized finance companies. Some of the better-known names in that area would be Newcourt and GE Capital. I'm going by memory now, but they went from about 9% to 15% or 16%, something of that nature.

Then you have other significant players—for example, in the province of Quebec, the caisse populaire movement, as well as trust companies and players of this nature.

In respect to your question as to the going forward—

Mr. Jim Jones: And backwards. Where were the seven largest banks 10 years ago in the SME market, and where do you think you'll be in five years?

Mr. Kelly Shaughnessy: I don't have the data before me for 10 years ago. My gut feeling though is that the banks' proportion was much higher than 50%, just because there weren't those types of players in the market. You did not have the specialized finance companies to the extent you have today. So my guess would have to be that the percentage was much higher.

What is it going to look like? I see continued intense competition for this market. I can see new entrants, in a figurative sense, on a daily basis, such as the American Expresses of the world. We see Wells Fargo lurking out there, as well as companies such as Newcourt and GE Capital. They're able to help a small business person who wants to buy a piece of equipment through vendor finance programs and that, before the banker knows the small business person is even contemplating that type of acquisition. So I see very intense competition in this market, and unfortunately, as a banker, I believe our market share globally will probably go down.

• 1625

Mr. Alan Young: If I can just add to that, the government received a report from the MacKay task force last September that put forward a number of policies that would increase the number of competitors in the financial services marketplace. We're anticipating that the government will release its response to the MacKay task force some time next month. There are a number of policy initiatives that have been recommended that would increase the number of competitors in the marketplace.

For example, they recommended permitting co-ops to establish themselves on a national basis. Part of the rationale for that is to create another competitive force from coast to coast. And right now the co-op movement, the credit union and caisse populaire movement, is isolated. Certainly in Quebec it's very strong, and it's strong in British Columbia and Saskatchewan. But in provinces like Ontario, you don't have as strong a second tier of institutions as you do in some of the other provinces.

There are also policies that have been put forward or suggested by the task force to change the ownership structure of financial institutions to encourage more financial institutions to start up. For example, one of the recommendations was to permit closely held banks, which means that one individual or a couple of individuals could launch a bank if it was under a certain size in terms of shareholder equity.

So there are a number of initiatives the government is presently contemplating that are aimed at increasing the number of competitors in the marketplace.

I agree fully with Mr. Shaughnessy that five years from now, to use your timeframe, we are looking at a policy framework that is designed to increase the number of competitors in the marketplace. And I see nothing to suggest that won't happen.

Mr. Jim Jones: This report is based on only the seven largest banks, right? Aren't all the other banks members of the Canadian Bankers Association? Why aren't we collecting the data on them too, instead of zeroing in on just the seven largest banks? It's not a true reflection of what we're doing for SMEs and small businesses in this country.

Mr. Kelly Shaughnessy: Once again, Mr. Jones, that goes back to the negotiations we had with the committee in 1995. These were the banks that could provide the information. It's fairly complex information when you look at it. It's divided up, as I said earlier, by different dollar bands, 8 regions, and 17 industries. As unbelievable as it may sound, it takes some computing power to do it.

I would say to you, though, that most of the schedule II banks, aside from Hongkong Bank, aren't in the market that this committee is interested in. So you're probably getting a pretty meaningful representation. Two of the smaller banks have indicated that they would like to attempt to provide information, but I don't think they're going to materially impact the information that's before you today.

Mr. Jim Jones: I think in your presentation you mentioned that Canada is lagging behind the U.S. in productivity growth. But you said you expect Canada to close the gap next year. How are we going to close the gap? Why do you think we're going to close the gap?

Mr. Aron Gampel: The gap I was referring to was the economic output gap and not just the productivity that's part of the equation. But Canada should do well next year because of our strengths on the trade side and an expanding global economy where commodity prices are rising. We should get a double bang for the buck in terms of both volume and price increases filtering to the bottom line. With the trade picking up, it will give Canada, I think, a much better picture for growth and affect most regions of the country.

I did not address the issue of productivity directly in that. But it is obviously one that is increasingly garnering everyone's attention. I have long been a proponent of having a long economic cycle, which we are currently involved in. The true test will be whether or not our productivity over time will grow. What I have found in the past is that productivity is highly correlated to growth.

We had strong growth and long business cycles in the sixties and for a good part of the seventies. It was only in the eighties and nineties that we had very truncated types of economic activity, where it was interspersed with high inflation and volatile interest rate and exchange rate developments, that the economy did not perform well and productivity lagged.

• 1630

There were a lot of other reasons for it. But I find that over time there's a very good correlation between growth and productivity, and I would think that even now we are seeing through the benefits of technological change that Canada as well as other developed nations are doing much better on the productivity side, and to some extent that reflects the longevity of this cycle.

We can continue to record growth year after year. It would not surprise me that we end up having a much higher rate of productivity growth. Businesses expand, they're more confident, they generate more earnings power, they hire more, they will invest more, and the productivity numbers will rise accordingly. So it's in our interest to continue this long cycle, and I think with a little luck, we will.

The Chair: Thank you. Thank you, Mr. Jones.

Madam Jennings, please.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you for your presentation. I would like to ask you a few questions to fully understand all the information that you have provided this morning.

If I understand correctly, in the fourth quarter of 1998, you authorized $72 billion in credit to the SMEs.

[English]

Mr. Kelly Shaughnessy: That is correct, Madam Jennings.

[Translation]

Ms. Marlene Jennings: Of these $72 billion, $33.5 billion was loaned to small businesses, that is authorizations of less than $250,000. Is that correct?

Mr. Kelly Shaughnessy: That's correct.

Ms. Marlene Jennings: Can you explain what you mean to say when you write that there was a 2.3% increase in outstanding to the SMEs and a decrease of 0.1% of outstanding to small businesses? What does that mean in reality? Is this a good or a bad thing for small businesses?

[English]

Mr. Kelly Shaughnessy: I think we have to look at the number of borrowers too. For loans under $250,000, in Q4 1997 there were 665,000 borrowers, and in Q4 1998 there were 687,000. So I think what you're seeing, aside from the strengthening of balance sheets to my earlier point, is the impact of the simplified lower-end lending products that virtually all seven major banks have now come out with. You're seeing a much easier access to these products. They're basically credit-scored products, one- or two-page applications, things of that nature. I believe that is the impact you are seeing there, that within the $250,000 market there are more and more small and medium-sized businesses getting what one would refer to almost as micro-credit products.

[Translation]

Ms. Marlene Jennings: There were 769 000 SME clients in the last quarter of 1998 and, according to what you have just said, 687 000 of these were small businesses. Is that correct?

Mr. Kelly Shaughnessy: That's correct.

Ms. Marlene Jennings: That therefore means that the 82,000 companies who borrowed between $250,000 and $1,000,000 received more than 50% of the loans or authorizations. Therefore, approximately 12% of the SMEs benefited from 52 or 53% of the authorizations. Are my figures correct, roughly speaking?

[English]

Mr. Kelly Shaughnessy: Yes, it probably is. The size of the loan obviously dictates what you're seeing.

To give you an example of the magnitude of these things, at CIBC we have—and these aren't just borrowers, they're all customers—a little over 300,000 small business clients. Then we have approximately 10,000 to 12,000 medium-sized business clients. The medium-business book is as big as the small-business book. It's just that the needs of these clients are a multiple of.... I was mentioning the micro-credit. We can get down deeper and deeper. I think under $25,000 you're talking about 300,000 clients, so when you look at the averages there it just gets smaller and smaller.

• 1635

[Translation]

Ms. Marlene Jennings: If I understand correctly, there was a larger increase in the number of small business clients than the number of SME clients, namely those that obtained loans of $250,000 and more. Among the SMEs, there were more small businesses than large businesses.

[English]

Mr. Kelly Shaughnessy: There are certainly far more small business clients than medium-sized business clients, by a multiple. But the increase would be approximately the same because from the charts it's 3.3% for the total population and 3.2% for what we're defining as small businesses. So I'm making an assumption the increase is within one-tenth of 1%.

I would assume, though, and we'll try to get the data for the clerk, that you're probably seeing a bigger increase at the very low end.

[Translation]

Ms. Marlene Jennings: I think so, because the small businesses represent more than 80% of the SMEs. It's been a long time since I was in school, but it seems to me that if there was a 3.3% increase in small businesses, their growth is greater than that of the 12% of companies that obtained from $250,000 to $1 million.

[English]

Mr. Kelly Shaughnessy: Certainly in absolute numbers it would be a multiple.

The Chair: Thank you very much, Madam Jennings.

[Translation]

Ms. Marlene Jennings: That was my first question.

[English]

The Chair: No, that was your dernière.

[Translation]

Ms. Marlene Jennings: No, I have a last question.

Mr. Gampel, I note that it says in small print that neither the Bank of Nova Scotia or its employees are responsible for the information contained in your document. Does this mean that the Bank assumes no responsibility at all for the information in this document?

[English]

Mr. Aron Gampel: That's right. Those are the comments of the economics department and they may not reflect management's views.

[Translation]

Ms. Marlene Jennings: Perfect. Thank you.

[English]

The Chair: Thank you, Madam Jennings.

Mr. Pankiw, do you have a question? No?

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): I have just one question about the numbers themselves. These increases reflect dollars in absolute terms, but how would they relate to your asset portfolios? In other words, if I looked at the summation of your balance sheets and asked what the percentage of small business lending would be relative to your entire asset portfolio year over year, what would those statistics show?

Mr. Kelly Shaughnessy: I frankly don't know. It would be a very difficult number to even use. I'm not being evasive, but I'll just take my bank, which has a very aggressive global investment management strategy. Another bank may not have an investment management strategy on a global basis the same as we have, so the balance sheets could grow quite differently.

Mr. Alex Shepherd: But in actual fact, many of the banks are doing that now. So if their asset portfolios have increased by 15%, these figures would not be all that meaningful. Relative to the share of the entire asset base, small business money could well have declined as a percentage of your total asset structure.

Mr. Kelly Shaughnessy: In an individual bank it may well have declined. We've had these types of discussions in the past and I'm sure we're going to have them in the future. I don't think that's an indication of the commitment of the banks—and I mean all the banks—to small and medium-sized businesses. It's just an indication of the different business strategies the banks have.

Mr. Alex Shepherd: I don't want to belabour that. I know we've had this discussion before.

• 1640

Mr. Gampel, I'm interested in some of the discussion on consumer debt, only because I think it's a more lucrative field for the banks and therefore has a tendency to possibly take money away from small business lending. Some of the charts your bank has produced here show something that's well known and has been going on in North America for some time, and that is that consumer spending well outstrips income levels of individuals, so people are actually spending considerably more money than they're bringing into the household units.

I guess I come from the old school of economics when I say we can't keep doing that; it's not possible. The only reason we can do that right now is that we have relatively low interest rates. But we are also seeing a significant rise in consumer debt. At what level is that no longer sustainable?

Mr. Aron Gampel: That's a very difficult question, because we continue to probe new levels of what we consider indebtedness by households.

The one thing this chart doesn't show, of course, is the opposite side of the balance sheet, which is the wealth impact. That has been growing and to some extent providing somewhat of a cushion here, until income gains can start to come back and bolster the spending profile.

So there's a variety of reasons why one could expect that consumers will be able to spend more confidently right now. They have jobs. More jobs are likely to go forward. The income gains are likely to rise. The balancing act is that wealth, through an increased reliance on financial assets, as opposed to real estate and other types of savings vehicles, is now providing a buffer by which consumers can basically spend more and take on more debt.

Mr. Alex Shepherd: I understand what you're saying, but the other thing these charts don't show is the demographics. Since Canada has such a huge baby boom population going through here, the wealth sector you're talking about is almost exclusively related to those baby boomers, and the debt side of that is related to a younger generation. I'm not at all convinced that the younger generation will be able to sustain these debt levels over a long period of time. If we get one of these contractions, or a bump-up in interest rates, what responsibility does a bank have for pushing a lot of these young people into bankruptcy?

Mr. Kelly Shaughnessy: Mr. Gampel is an economist from one of the banks, and it might be an unfair question for him to answer. He came today to give his ideas on what the economy looks forward to. But I can assure you, Mr. Shepherd, the banks do not push debt at young people. The banks don't make money by giving loans where they're going to lose, where people are going to default on loans. They make money by making loans to people who are going to repay the loans. There's absolutely no effort on the part of the banks to see young people assume more debt than they can.

Mr. Alex Shepherd: But we do have relatively high personal bankruptcies.

The Chair: Last question, please, Mr. Shepherd.

Mr. Kelly Shaughnessy: They are relatively high, but I checked the bankruptcy stats yesterday and they're trending down and have continued to do so.

The Chair: Thanks very much.

[Translation]

Mrs. Lalonde, have you any further questions?

Mrs. Francine Lalonde: Yes.

Do you consider that credit cards are part of loans, or are they in a different section?

[English]

Mr. Kelly Shaughnessy: I'll make the assumption, Madame Lalonde, you're talking about SMEs, PME. Credit cards are used by small businesses as a payment mechanism, and I suspect they're used by some small business people as a method of financing. Some of the banks are doing some of the simplified loan products I was talking about earlier. Some of the banks are using their credit card platform, credit card technology, to administer those loans, but the product looks and feels the same across all the banks. But I have no doubt whatsoever that some small business people are using credit cards as a method of financing, and it is not necessarily captured in these statistics except for those formal products where banks are using a credit card platform.

• 1645

Mr. Alan Young: I was just going to say it can be difficult to calculate that, because some small business people may be using a personal card in their business capacity. So it's difficult to track that and to pick that up in our statistics.

Mr. Kelly Shaughnessy: In virtually most cases, madame, the credit cards would be in the personal name, except for those very specialized products, so it would be very difficult to get our hands on those numbers. If we go back to some of the Thompson Lightstone surveys, there is an indication of the use there.

[Translation]

Mrs. Francine Lalonde: I see that it is extremely difficult to obtain specific answers. I imagine that you are aware of this in seeing the quantity of figures presented. Sometimes, it is simply difficult to obtain answers. I am not saying that you are showing any ill will, but you will agree that this is a little frustrating for us.

In your statement you said that the SMEs were borrowing a little less. Have I understood clearly?

[English]

Mr. Kelly Shaughnessy: We outlined in this statement that the average use.... Just let me try to find my notes here.

[Translation]

Mrs. Francine Lalonde: I will immediately ask a related- question. Who can tell us for sure that it is because they are making fewer applications for credit? Do you recall the questions that we asked in our quarterly meetings? Is it not because they find it too difficult to obtain credit from financial institutions for small loans, and don't apply, is it because they have been rejected? We have no tool for measuring that, and this is extremely frustrating. This is why you can say in all good faith that they are obtaining fewer loans. But what is the truth? I would like to know. Once again, I am not impugning your motives.

[English]

Mr. Kelly Shaughnessy: Well, most certainly, when we look at whether they are applying, are they getting the credit they need and things of that nature, we go back, one, to the Thompson Lightstone surveys that show.... They did three surveys, once again in partnership with this committee—

[Translation]

Mrs. Francine Lalonde: [Editor's note: Inaudible]

[English]

Mr. Kelly Shaughnessy: It is, but it is the only way we can ask that question: did you, the small business owner, get what you asked for? So that showed a continuing increase. At the same time, the CFIB did a survey of their members, and as I recall, that showed a loan approval rate of approximately 80%. No, it was somewhat greater than 80%; it was 89%, I think. So les sondages or the surveys are showing that the loan approval rates are there.

On this data that you're seeing, quarter after quarter after quarter, we're seeing more and more small businesses dealing with Canada's banks, despite the fact that that's only 50%, and dealing with Canada's banks to borrow.

So I would say yes, they're getting what they need. I also say you're seeing in just a two-year period, I think, that each and every one of the banks have brought out products that are specifically targeted at the low end of the market, the very low end. In our case, a two-page application will get you a loan as high as $100,000, and then they're credit-scored as opposed to coming into the bank with a stack of paper this high.

So I think all of the banks are making an effort at the low end of the market to make access to credit much easier for small and medium-sized businesses. If you and I, Madame Lalonde, had had this discussion three years ago, I don't think I could have said that, but I think I can say that today.

Mr. Alan Young: I can just confirm that the CFIB's 1997 banking survey revealed an average loan approval rate of 89%.

• 1650

[Translation]

The Chair: This will be your last question, please.

Ms. Francine Lalonde: We have never got to the bottom of the surveys issue, because your surveys were not longitudinal. They did not cover the same businesses, year after year, nor did they cover those who had gone bankrupt for lack of credit, and could no longer reply. Moreover, those that never got off the ground for lack of credit were not part of the sample, and, therefore, could not reply.

In my opinion, this instrument does not adequately cover business start-ups. I know enough about surveys to say that it would be difficult to find anyone who conducts surveys who would confirm that this is an adequate instrument.

I have no doubt that companies who have been established for five years are 89% satisfied with your services. My fears and my questions deal with those people who are starting up, and who are creating businesses, because Quebec and Canada need them. It is often in those areas where investments are needed to import equipment and biotechnology and the people are young and often have only their talent and a good idea; they have a hard time getting loans. To take up the challenge, they need a loan. I want you to understand my meaning. I am not trying to criticize you.

[English]

Mr. Kelly Shaughnessy: I recall the passion that Madame Lalonde had with her point when Ian Lightstone was before you. So she still has that same passion, and that's great.

I think one of the things we can do, though, as a financial services industry, not only the banks.... The MacKay task force recognized what I'll politely refer to as some of the skepticism over the surveys that the banking community had sponsored, and the MacKay task force recommended that the government assume responsibility for that. So maybe that is the opportunity, madame, to include longitudinal research in it. But also, as I understand you do know, it's going to take a period of time to get meaningful data from that type of survey.

The Chair: Thank you.

[Translation]

Thank you, Ms. Lalonde.

[English]

Mr. Ianno, please.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Thank you, Madam Chair.

Thank you very much, Mr. Shaughnessy and company.

It's interesting to note how the presentation...and you're choosing, I guess, fourth quarter 1997 over fourth quarter 1998, as the speaking notes sort of zero in on. I've been doing the reports since you first presented them in December 1995, and as you know, the overall small business loan percentage compared to large business loan and overall corporate commercial loans at that time, in December 1995, was 26.86%; and today, with December 31, 1998, it is 23.42%. So the industry, of course, is still in the negative direction, although it did stop from the third quarter 1998 to fourth quarter 1998 and stayed roughly at the same number.

I was hoping that with the increased opportunities that exist and the more small businesses that are using the banks, as you said, quarter after quarter after quarter, businesses would be expanding and would be utilizing the banks' ability to lend to small business, as of course are the large businesses. In your report you never stated how much the large business increase in loans was.

So just to tell the committee and the public, as you stated, you went up roughly 2.3% in outstanding loans over a one-year period, but for large business—larger than $1 million—you went up approximately 12%. It's a $16.7 billion increase for large business compared to roughly $1.73 billion for small business.

• 1655

As you know, the women entrepreneurs held a conference that I'm sure many of the bank leaders attended, and one of their major concerns was still access to capital—and we're talking about today. I don't think we've really solved the problem yet. As you know, we've been trying to encourage the banks to lend more to small business, which is the engine of growth in this country and employs a large number of Canadians, but that lending doesn't seem to be increasing at the same rate as lending to the large businesses. I'm hoping that somewhere down the line the banks do take hold and actually start making a difference.

We know that some individual banks are doing okay with the small business loans. I'd like to commend the Bank of Nova Scotia. They've actually increased the amount they lend to small business from 17% to 19%, which is still dismal, but at least they're going in the right direction.

Your bank, Mr. Shaughnessy, has gone from 23.67% in December 1995 to 22.17% on December 31, 1998. We're hoping that somehow it will change.

I won't comment on the other banks, but it's unfortunate that we are not seeing more lending to small business, especially because, as you indicated, the economy is growing not in spurts but in a direction of constant and steady growth, which is healthier for everyone, I think. With the export market and many small businesses expanding on that basis, many of them do need more loans so that they can expand and fill the orders that they do have.

You indicated that roughly 600,000 of your clients basically ask for $4,600. That of course comes to about $2.7 billion in terms of the total amount. You also indicated that 80,000 borrow approximately $250,000 or less, but the potential on that basis if you.... That's where you get your $20 billion. The question is, how much of that—the $250,000 on the 80,000 clients that you have—is SBLA, which is government backed?

Mr. Kelly Shaughnessy: Madam Chair, with your permission, could I address Mr. Ianno's opening comments?

The Chair: Certainly.

Mr. Kelly Shaughnessy: As I understand it, I only have one question before me, and that is the percentage of SBLA. However, I do believe that I owe it to the industry to address his opening comments with respect to the bank's assistance to small business.

As I have stated in the past, and as employees of other banks have stated in the past, the banks—and certainly the bank I'm employed in—do not restrict capital to small and medium-sized businesses because we go out and make a loan to a large corporate business. In my bank and, I believe, in all the banks that's run by separate business units, if anything, we would love to lend far more money than we do to small and medium-sized businesses. I want members of this committee to understand that because I make a loan to a large business that does not mean I can't make a loan to a small business.

Frankly, as a banker and as a citizen of this country, I would be very concerned if we had that type of regulation for the banks. If a medium-sized or a large business went into your riding, Madam Chair, or into Mr. Ianno's riding, and said they'd like to open up a business that's going to employ 100 people but they needed $10 million, I would have to say, if there's a regulation that said I have to maintain this ratio and if I was underneath that ratio, “I'm sorry, Mr. or Ms. Businessperson, I can't help you because of this ratio.” What I'd rather do is say, “I have a lot of money for small and medium-sized businesses.”

I look at what we've done since 1995, as we spoke about in my presentation earlier, Mr. Ianno, and since 1995 the authorizations have gone up 7.7%. Since 1995 the outstandings have gone up 5.1%. Year over year the authorizations have gone up 3.3%, and the outstandings year over year, 1998 over 1997, have gone up 2.3%. That is throughout a period, as we spoke about earlier, of very sustained, moderate economic growth, in which small and medium-sized businesses have had an excellent opportunity to rebuild their balance sheets and improve their debt-equity ratio.

• 1700

Also, as we said earlier, and as the MacKay task force highlighted, that is not the entire picture. Throughout that period, from 1995 to the Q4 of 1998, we have seen the entry of very aggressive lenders and lessors hitting this market. So my suspicion in regard to the amount—not only that the banks have provided, but when you add in the Newcourts, the GE Capitals—is that there's been an awful lot of new debt and lease capital provided to small and medium-sized businesses.

Mr. Tony Ianno: Mr. Shaughnessy, may I can just interrupt you for a second? I just want to ask you—

The Chair: Last question, Mr. Ianno.

Mr. Tony Ianno: He hasn't answered the first one yet.

The Chair: Well, you've interrupted him.

Mr. Tony Ianno: He wasn't dealing with the first question.

The Chair: Mr. Ianno, I gave him permission to deal with your opening comments and then the question, so this is your last statement.

Mr. Tony Ianno: I'm just curious, in terms of—

Mr. Kelly Shaughnessy: Can I answer Mr. Ianno's question?

Mr. Tony Ianno: After this second question, if that's okay, Mr. Shaughnessy, because she'll cut me off.

The Chair: I won't cut you off, Mr. Ianno, but you just cut Mr. Shaughnessy off, and he was in the middle of answering your question.

Mr. Tony Ianno: You mentioned GE Capital and Newcourt. Could you tell me what the overall number is that most businesses use in terms of lines of credit or term loans and what percentage GE and Newcourt have of that?

Mr. Kelly Shaughnessy: The Conference Board's study in 1997 indicated that the banks were providing the SME market about 50.1%. As I recall—I am trying to visualize that report—15% to 16% was coming from them.

Mr. Tony Ianno: Is that lease?

Mr. Kelly Shaughnessy: No. That was loans and lease.

Mr. Tony Ianno: The majority is lease. That's why I asked you if you have those numbers.

Mr. Kelly Shaughnessy: Not necessarily, because in vendor financing, which these companies specialize in, and also in asset financing, they generally give their clients the option of lease and/or loan.

Mr. Tony Ianno: So you're saying that GE and Newcourt also do lines of credit?

Mr. Kelly Shaughnessy: They do asset-based financing—

Mr. Tony Ianno: Which, in effect, is almost leasing. Is that correct? Is it the same as leasing?

Mr. Kelly Shaughnessy: You can't say it's the same as leasing. It's a different product. If you're looking for a product in the banking industry that it would be similar to, it would be similar to a term loan, let's say. But they also do leasing, so the small business owner is left with the option. It depends upon his or her fiscal circumstances.

The Chair: Mr. Ianno.

Mr. Tony Ianno: Can you provide us with any information in terms of the percentage, in terms of lines of credit, other than asset-based lending?

Mr. Kelly Shaughnessy: No, I can't supply you any information on GE Capital or Newcourt. Once again, that is what the MacKay task force was talking about.

Mr. Tony Ianno: But you said 50%? From the Conference Board study?

Mr. Kelly Shaughnessy: It's 50% of total debt and lease financing to the small and medium-sized sector. That is what it is.

Mr. Tony Ianno: Can he answer the first question?

The Chair: Yes.

Mr. Kelly Shaughnessy: With respect to SBLA, as I recall your question, it was what percentage this is of the total portfolios. I don't have that information, Mr. Ianno, but we'll ask the member banks to get that and, with your permission, we'll communicate it to the clerk.

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

Mr. Jones.

Mr. Jim Jones: I think a lot of the things we're talking about here are meaningless statistics, because somehow we're not evaluating ING Bank, Wells Fargo, Newcourt, GE, and other avenues where they can get access to capital over the Internet. Whether it goes to 19% or 20% is really irrelevant. If you could throw out a couple of exceptional deals at each bank and say that was just an exceptional deal—maybe a $1 billion loan or something like that—those percentages are probably higher.

Mr. Kelly Shaughnessy: Mr. Jones, I can't agree with you more vis-à-vis the need to gather information from the other participants in this market. That is exactly what the MacKay task force was talking about and that is exactly what we need. As I said earlier, there's intense competition out there from other people and that competition is growing on a daily basis. So we can sit in this room and talk about the banks, but as I said earlier, I think our market share over time will go down. We have to somehow or other get them in here.

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The problem for the government, of course, is that some of these participants are regulated and some are not regulated. Despite the fact that the MacKay task force has made this recommendation, I have no idea how the government is going to be able to gather all that unless they do it through StatsCan or some body of that nature.

Mr. Jim Jones: I don't know how we'd know the measurement, but do you have any idea how many people are getting access to capital across the U.S. border? What percentage of capital is going to SMEs and small business that could be Wells Fargo, which doesn't have any infrastructure here; it's just call centres in the U.S. or Internet banking? You're at 51%. What percentage would be Internet banking or call centre type banking across the U.S. with no infrastructure in the ground in this country?

Mr. Kelly Shaughnessy: I don't know the answer to your question. My gut feeling is it would be very nominal; from a practical point of view, virtually nothing. There are fiscal problems, withholding tax problems, and things of that nature.

What we're seeing is the participants, whether it be a GE, whether it be a Newport...ING are not in the small business market yet but I'm sure they're going to be there. Under today's regulatory environment they would set up a schedule II bank, or under tomorrow's regulatory environment probably establish a branch banking platform with which to do it within the country.

Wells Fargo are the exception. They received consideration from the government to launch their program, although my suspicion is that if they aggressively continue in the Canadian market they will probably set up at least a Canadian platform from which to do it.

Mr. Alan Young: I'd like to add to that on two points.

First of all, we should know in June, when the government responds to the MacKay task force, if the government will agree to the recommendation to bring in the data from non-bank institutions. Kelly had it right, StatsCan would be the only forum the government would actually have to go out and access data from others. So we will know the response in about a month. I've been meeting with officials in Industry Canada and with officials at Finance to push them to accept this recommendation, because we think it's important to have this data.

Secondly, with respect to new competitors, Bill C-67 is going through the House now, which is to permit foreign banks to open up branch operations in Canada as opposed to having subsidiary operations that are separately capitalized in Canada. One of the facets of that is to permit lending branches. These branches would not be allowed to take deposits of any kind, either wholesale deposits or retail deposits, but they would be able to offer loans. So this is something that is being put in place. The legislation hasn't passed through Parliament yet, but again, it's setting the groundwork for more competition in the marketplace.

The Chair: Thank you, Mr. Jones.

I want to pick up on something. I think Madame Lalonde, Mr. Ianno, Mr. Jones, and others have raised it here today, but it is about the statistics and whether they are giving us a true picture. I'm not sure what picture they are telling us at all. I'd like to know if there is an incentive to banks to lend to small business, and if so, what is it?

Mr. Kelly Shaughnessy: I think the incentive—and it's to a point I was making to Madame Lalonde earlier—for small business that requires debt capital, whether it requires a loan or not, that is their life blood. It is that which is going to let them expand their business, etc. So that is the core product for a small business that has a whole suite of needs. The core product for the one who has to borrow is that loan; that's the facilitator of success.

The incentive to the bank that successfully lends money to that small business is that it gives the bank the right to ask, or the small business person to offer to the bank...all the other products and services that a small business person needs. As I said earlier, they range from RRSPs to home mortgages, the whole gamut.

If you simply go out there in an infrastructure today, frankly, and target loans only, it may not be all that attractive. But when you look at the seven banks that are reporting here, they offer a whole suite of products and services. If you can get the confidence of your small business client and if you can serve that small business client well, you have a very valued relationship to the bank. So that is the incentive: be out there and do a good job on the loan, and then you earn the right to offer other products and services to that client.

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The Chair: Perhaps I didn't direct my question properly, as to whether or not the motivation is the same as it was 10 years ago, for example, for the banks to lend. My understanding is that it's not. I'll preface it with what I believe to be the situation, which is that the deposit holdings of the banks have changed. Maybe Mr. Gampel can speak to this, or maybe you, Mr. Shaughnessy, but 10 or 15 years ago you would have found more GIC and T-bill deposits that would have resulted in the banks taking a much more aggressive lending practice toward small business because they had to lend their money to make money, whereas today you find the majority of the holdings have moved into mutual funds. This creates a whole different situation for the banks, because the banks don't take a risk on mutual funds; it's the consumer that takes the risk on mutual funds. So where is the motivation or the incentive to be as aggressive in small business lending? I guess that's the question I'm asking.

Mr. Kelly Shaughnessy: Once again, Madam Chair, the banks are very aggressive players in the wealth management field, in the mutual funds, RRSPs and things of that nature, and we don't get the right to ask that client, the small business client, for that unless we can meet all their other needs. So the incentive is there. The incentive is the ability to meet that core need of a small business client and then to have that client offer to you all the other products and services.

If you're out there in the small business market and you're known as a bank that is off the street vis-à-vis small business, you're not going to get the other products and services that the small business person needs. And if you're a bank, especially one of the big seven that are reporting here, that wants to remove itself from helping small business people, that bank is losing an incredibly important share or portion of the overall banking market.

In my bank, we have a little over 300,000 small business people dealing with us. We have 6 million clients globally, and I assure you that the small business clients make up a disproportionate share of the overall profits of those 6 million. That's because of the wide, wide range of products and services that they need.

So the market is not just borrowing; the market is—

The Chair: I recognize that the market is much larger, but when it just comes to lending to small business, what we're starting to hear again in what should be a good economic time is that banks aren't lending money. It should be a good economic time, and maybe Mr. Gampel will speak to this, because I don't understand why the loans aren't going up. I don't understand why there's not an aggressive movement to lend money to small business if we know that's what drives the economy. That's why I asked the question the way I did, because if the banks make their money on mutual funds differently from the way they did on GICs and T-bills and that way doesn't lead to the same incentive to lend the money and to be aggressive about it, then maybe we need to look at access to credit differently, as a committee.

Mr. Kelly Shaughnessy: I'll let Mr. Gampel speak to the economic activity, but the loans have gone up, Madam Chair, they've gone up 2.3% outstandings. Just in the fourth quarter of 1998 over the fourth quarter of 1997, they went up 2.3%. The economy has not grown all that much more. The authorizations have gone up 3.3%, Q4 1998 over Q4 1997.

The Chair: How does that relate to the other activities of the banking industry, the growth?

Mr. Kelly Shaughnessy: That's to Mr. Shepherd's earlier question. What we're talking about is the banks' domestic lending activities to small business and attempting to extrapolate that on our global business.

As Mr. Jones said, in our case our investment banking activity in the United States could be out there doing a deal right now for $1 billion, who knows? That is not an indication that we're ranking back money here. I don't believe you can compare the overall balance sheet of the banks to our individual lines, such as small business lending. I think all you can look at is their commitment to it.

You see a bank like the Bank of Montreal saying they're starting the bank of small business. That is commitment, I believe. You see each and every bank bringing out, for the first time in their history, over the last two or three years, lending products specifically targeted for small business. You see each and every bank bringing out electronic banking products for deposits, Internet access, things that are specifically targeted for small business. I don't think you saw that ten years ago and I don't think you saw that twenty years ago. So I think that is an indication of the focus we have on the market. I think that is an indication of how important each one of us thinks it is.

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The Chair: I'm not disputing that it's important; I think it's very important. I think the key is access to credit.

I just wonder, Mr. Gampel, if you have any comment.

Mr. Aron Gampel: There's also a demand part of the equation, and the demand probably was a bit slower last year as well. We see that through all the credit statistics for 1998 as a whole. The economy did hit quite a few significant speed bumps last year. Whether it was ice storms, or strike activity, or the Asian flu outbreak, the economy did go into a lower gear, and that would probably coincide with the slowing in credit demands right across a wide swath of businesses. So I think a lot depends upon the economic conditions during that period of time.

The Chair: I have one last question, and then Madame Lalonde has a question.

Do we have statistics that would show us how many loans that were applied for were denied—to show what you're saying, Mr. Gampel, that there hasn't been that demand? I'm only asking this because I spoke to an account manager who told me they've never turned down as many loans as they have recently, in what should be good economic times because of the changing in the banks' way of lending. So I'm wondering if we have that to back it up.

Mr. Kelly Shaughnessy: The statistics that we have, and they're dated now, were from Thompson Lightstone, as you recall. In Thompson Lightstone we looked at loan approval rates. We did the survey of all the clients, and then within the Thompson Lightstone survey we did a one-month tracking at the account manager level too, and they were there. Now, we haven't done a Thompson Lightstone survey this year.

The Chair: My question was more specific to Mr. Gampel. He just said there isn't a demand. Do we have the statistics to show there's not that demand?

Mr. Aron Gampel: No, the demand slowed. I can show you credit numbers that the Bank of Canada produces for the whole system, and those numbers show a deceleration in the rate of growth. It's growing, but at a slower rate. So that's part of the equation.

The Chair: Okay. Madame Lalonde.

[Translation]

Mrs. Francine Lalonde: I would like to make a comment. I have made some calculations. I should have done them before, like Mr. Ianno. I think I have it right now. This also somewhat answers the question that Ms. Whelan asked.

I have taken the loans up to $50,000; they amounted to $6.6 billion for 446,912 clients. If I establish a relationship with the total, I note that these 446,912 clients presented 58% of all businesses, whereas the $6.6 billion of the $568 billion represents a little over 1% of the total. At first view, it would seem that few clients are paying interest, whereas many clients are paying for services. It is lucrative for the banks to provide services because the bulk of the clients are borrowing little. We can understand that the banks are not really interested in providing more loans, and prefer to provide more services.

Mr. Shaughnessy, you must admit that it would be interesting for us to have the entire picture. It is difficult to try to compare the services when we don't know where the banks derive their profits. It is difficult for you to answer, but you will understand that as the representatives of our citizens, we want to ensure that the major institutions, which have both privileges as well as responsibilities, be available to serve not only large lenders, but also small ones.

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[English]

Mr. Kelly Shaughnessy: I don't know if that was a question—un commentaire, oui—but I think what we have to look at, Madame Lalonde, is probably more and more the numbers. You're right that the overwhelming number of businesses in Canada employ fewer than five people. I don't know if we have the statistics here, but I remember the last time I saw it...you're talking 80% or 90%, so they're going to have a relatively small average outstanding. So I think one of the things we have to track, both as a government—as parliamentarians—and as the industry, is the number of customers and things of that nature too.

But I would encourage you as parliamentarians also to attempt to act upon the MacKay task force recommendations so we can get the full picture, because I feel positive going forward that while the number of clients increases here, the number of clients with the other 50%, and in your constituency and in your province—for instance, the caisses populaires movement—is so strong, with such massive market share, that we need people like that in here too.

The Chair: Mr. Shaughnessy, I think this committee would agree that it's important that we do have the whole picture, and it's important that as a committee we continue to go back to the original goal of this committee, which was to study access to capital and determine what really happens. While we've been studying credit statistics, as chair of this committee, I'm telling you today what I'm hearing.

What I've been hearing recently is that banks are moving to these other services that you're talking about, and providing those services, but removing the account managers who would have had the expertise in small business lending. So those small businesses that employ five or fewer people don't have that ability to go there and ask, and as that's disappearing, there doesn't seem to be anything taking its place.

I'm not sure if it's the role of the banks to do that. I'm not sure what the answer is. But I do know that a gap is being created as different services are being provided and as the banks are making their dollars from different revenues. That's understandable, but as a committee we have to be faced with what drives the engine of this economy, and that's small business. We know that's where the jobs are going to come from.

So I think we need to look at what's available to small business and to take a look at...I'm not sure, I hear a lot of concerns about what the statistics are telling us or not telling us as a committee. But we do appreciate the opportunity and the frankness of the discussions with the banks today, as always, and we look forward to them in the future.

I don't know if you or Mr. Gampel have any closing comments before we adjourn.

Mr. Kelly Shaughnessy: All I'd like to say is thank you once again. I've been coming before this committee, I think, Mr. Ianno, since probably 1994 or so, and if I go back and look at the progress we've made, I think the banks since that time have really targeted. We have business segments looking after the industry, we have products that are specifically designed for the small and medium-sized industry, and I think to a degree this committee has helped the banks focus on small business.

I think you always want to raise the bar, you always want to do better, and I'm sure all of my colleagues at the CIBC and the other banks that are part of the CBA want to do better. I know we all have targeted strategies for small business, but I also know there is a heck of a lot of competition out there, and the sooner we can get those people to the table, we as an industry, the other players as part of their industry, and you as parliamentarians can work in partnership, as we have worked in the past, to attempt to improve the products and services we provide to the small and medium-sized business sector.

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

Mr. Gampel, did you have any closing comments? No.

I want to thank you both for being here today. We do appreciate it as a committee, and we look forward to our next meeting. We look forward to growth—hopefully a lot of economic growth. We won't hold the banks responsible for the statements we've heard today, but we do think there's some positive news there and we hope it does come true.

The committee is now going to suspend, and then we're moving in camera to discuss the Y2K report. Thank you very much.