INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 22, 1998

• 0904

[English]

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

We are very pleased to have with us today a good group of people who are here on behalf of the Canadian Bankers Association. They are representing the large banks in Canada.

• 0905

Mr. Kelly Shaughnessy is senior vice-president of small-business banking for the CIBC. Ms. Lynda Brochu is vice-president of small and medium-sized enterprises for the Bank of Montreal. Mr. Dieter Jentsch is senior vice-president of Canadian commercial banking for the Bank of Nova Scotia. Ms. Stephanie Jones is manager of communications and branding for the Toronto Dominion Bank. Ms. Anne Sutherland is senior vice-president of small and medium-sized enterprises for the Royal Bank of Canada. Mr. Jim Howden is senior vice-president of risk management and credit services for the Hongkong Bank of Canada. Mr. Jean-Pierre Guindon is manager of corporate credit services for the National Bank of Canada. Mr. Tim O'Neill is executive vice-president and chief economist for the Bank of Montreal. Mr. Alan Young is vice-president of policy.

We have a letter of regret from John Leckie, who was unable to be here due to a board of directors meeting.

With that, I will turn it over to Mr. Shaughnessy to begin the presentation.

Mr. Kelly Shaughnessy (Senior Vice-President, Small Business Banking, Canadian Imperial Bank of Commerce): Thank you, Madam Chair. As I said earlier, I'll make some brief opening remarks this morning. Ms. Sutherland, from the Royal Bank of Canada, would like to make a brief statement in respect to their statistics. Then I'm going to turn it over to Mr. O'Neill, who, as you said, is the chief economist of the Bank of Montreal. He'll do a brief economic overview.

We welcome the opportunity to discuss with you today the results of the most recent business lending statistics. Since we last met, the committee has welcomed a number of new members. Consequently, it may be worth while to once again highlight the fact that the reporting mechanism for the quarterly statistics was developed in consultations between the banking industry and this committee.

As a result of the consultations, the statistics are broken down by eight dollar bands, eight regions, seventeen industries, and seven reporting banks. The statistics are published by the the CBA in a report entitled “Business Lending by the Major Banks” and are also available on the CBA's web site.

Three weeks ago, on October 1, we made a commitment to the members of this committee that the Canadian Bankers Association would publicly release the Q2 1998 volume on October 15. These statistics were distributed to the members and made available to the public on that date.

I'm pleased to report that the Q2 1998 statistics reveal that the amount of credit authorized to small and medium-sized enterprises in Canada increased by 4% from the second quarter of 1997. The seven reporting banks have authorized over $69.9 billion in credit to small and medium-sized enterprises in Canada, of which almost $47.3 billion is outstanding. The banks' small and medium-sized business borrowing client base is also expanding. The number of SME business customers who borrow from the banks has increased by 4.1% over the last year. There are now over 751,000 small and medium-sized businesses borrowing from the seven reporting banks. This represents over 95% of the banks' business borrowing clientele.

We know this committee has a particular interest in the relationship between the banks and small businesses, typically those borrowing less than $250,000, as they form an integral component of the SME community. Lending to this segment grew by 2% between the second quarter of 1997 and the second quarter of 1998. There's currently $32.9 billion in credit authorized and almost $22.5 billion outstanding to small business borrowing clients.

Small businesses represent over 85% of the banks' business borrowing customers in Canada. Over 672,000 small business customers borrowing from the seven reporting banks. This represents a growth of 4% over the second quarter of 1997.

These solid numbers reflect the importance of small and medium-sized businesses to Canada's banks. We value our relationships with our small business clients and understand that we have a role to play to ensure their stability and their success.

As we have stated in past experiences, the information we provide this committee is only half of the debt-financing picture. To truly understand the depth and breadth of the SME financing market, policy-makers need more information from other suppliers of credit about other types of financing.

• 0910

The task force on the future of the Canadian financial services sector reinforced this fact in their recently released report. In assessing the SME debt financing market, the task force highlighted the fact that banks represent just over 50% of the debt financing market. It also noted the growth of specialized finance companies, which increased from 9% in 1994 to over 15% in 1996.

We are encouraged that the task force recommended that SME financing data by all regulated and non-regulated providers should be collected and published on an annual basis. They recognized that, without detailed information from all providers of SME financing, it is impossible to tell whether the capital needs of small and medium-sized businesses are being met. We, as individual banks and as the CBA, will be pleased to work with the government on this matter.

In today's marketplace, responsiveness to the needs of the small business sector is important. Canada's banks will continue to be responsive to small businesses, and will continue to develop innovative solutions to meet the unique needs of Canada's small business community.

Before we continue, we would like to remind members that the different opinions that exist within the industry concerning the evolution of the financial services sector preclude us, as an organization, from commenting today on merger-specific issues.

Thank you very much, Madam Chair. As I said earlier, I'd like to briefly turn the floor over to Ms. Sutherland, and then Mr. O'Neill will do his presentation.

The Chair: Thank you very much.

Ms. Sutherland.

Ms. Anne L.B. Sutherland (Senior Vice-President, Small and Medium-Sized Enterprises, Royal Bank of Canada): Thank you, Madame Chair and members of the committee.

I would like to make a statement regarding the Royal Bank's credit statistics for the second quarter of 1998, which you have received. With regret, I must inform the members of this committee that, since the publication of the data on October 15, the Royal Bank has identified a concern with the figures that we provided to the CBA regarding the information for the Metro Toronto region.

When capturing the Q2 1998 numbers, a new systems programs linked to the main system identified and extracted data for customers who have a small-business relationship with Royal Bank and use personal credit facilities for small-business purposes. This data was then incorporated into the Royal Bank's overall statistics from Metro Toronto only. Unfortunately, upon further review, we are concerned that the specific data captured by the new program may have also identified non-business lending activity. It may therefore have overstated our results.

In an effort to preserve and to ensure the integrity of the industry's credit statistics, the Royal Bank is withdrawing these statistics from our overall Q2 1998 reporting. The impact of the adjustment will approximately decrease Royal Bank's overall SME loans authorized at less than $1 million by $700 million; those outstanding by $500 million; and business-borrowing customers by 20,000. We will work diligently with the CBA to correct this matter over the next two weeks. New, revised volumes of lending by the major banks will be published and distributed accordingly, and the revised data will also be available on the CBA's web site.

Fortunately, this matter will not have a significant impact on either overall industry numbers or Royal Bank numbers. However, I do sincerely apologize to the members of this committee and my fellow bankers for this problem, and for not identifying and rectifying it prior to publication, as was our responsibility. As the head of small business for Royal Bank, I can assure you that we will make every effort to ensure it does not happen again.

Thank you.

The Chair: Thanks very much, Ms. Sutherland.

The ones you just received go to June 30, the second quarter for 1998.

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

The Chair: Mr. O'Neill.

Mr. Tim O'Neill (Executive Vice-President and Chief Economist, Bank of Montreal): Thank you, Madam Chair.

I apologize for the fact that the handout you have received, entitled “The Canadian Economy Review & Outlook” is not translated. In fact, we are just in the midst of doing our outlook for this year. This is the first public statement on our view about next year.

• 0915

I can offer to the members of the committee to send copies about a week and a half from now, when we've completed production of our outlook. You can have the full outlook free of charge. You'll have Canada, the U.S., Mexico, and Japan if you want the outlook for bedside reading. It will either put you sleep or keep you awake.

The Chair: We'd appreciate that very much, Mr. O'Neill. Thank you.

Mr. Tim O'Neill: What I want to do is both indicate where we were in 1998 and where we're likely to be in 1999, especially in an environment in which there is a lot of concern about the degree of global and North American financial market turmoil. There is also concern about what that may mean about economic growth in Canada. Of course, that then has impacts on how the small-business sector will be doing in Canada over the next year or so.

The Chair: Excuse me, Mr. O'Neill.

[Translation]

Madam Lalonde.

Mrs. Francine Lalonde (Mercier, BQ): I would like to know if there is a French version of Mr. O'Neill's document.

[English]

The Chair: Madame Lalonde, he has said that the text is only in English because it's brand-new, out for the first time. Within a week and a half they'll have full results that will circulate to the entire committee.

[Translation]

Mrs. Francine Lalonde: But it should not take a week and a half to translate a document that only contains tables.

[English]

The Chair: This is only part of the global outlook they're going to be providing. It's the first time, and he just apologized at the beginning of his statement for not having French copies.

[Translation]

Mrs. Francine Lalonde: I still do not understand. This is a document that is presented to us by the Bank of Montreal. It only contains a number of small tables. Out of respect, you could have included French subtitles. There was not a great deal of text to translate, sir.

[English]

Mr. Tim O'Neill: What I can tell you is that we just finished these yesterday. There wasn't time to translate them. The only other option I had was not to provide them at all, but I thought it at least was helpful for the members of the committee to see what the numbers were showing. I can provide you with the translated version by Monday if that would satisfy your concern.

[Translation]

Mrs. Francine Lalonde: Frankly, I cannot understand.

[English]

The Chair: Thank you very much, Mr. O'Neill.

Madame Lalonde, we have noted your concerns once again.

Mr. Tim O'Neill: If I had been doing this at this time last year, the growth rate that we would have been forecasting for 1998 would have looked very much like the bar you see for 1997. That is, we would have been expecting growth to be around 4% for 1998, and at about 3.5% for 1999. As you can see from the chart, it's about 2.5% for this year and just under 2.5% for 1999. What has caused this to happen is in fact indicated in the next set of charts, and that is what has happened in our major export markets. You can see that the U.S. economy is slowing in 1998, as compared to levels in the previous two years, when growth had been close to 4%. It's just barely 3% in 1998, and will be about 2.5% in 1999.

The right-hand side of that second set of charts covers the Asia-Pacific economies. As everybody knows, those have been dramatically weaker in 1998 than anybody had been forecasting or anticipating a year ago. In fact, in some sense the very modest amount of growth in 1998 probably overstates what's actually going on there. If you look at the Asian economies, other than China, the bar would actually be below the line. In other words, they'd be shrinking.

What that has meant is an impact on Canada in two ways. First, the trade side of our economy, which is about 40% of our GDP, has been slowing down. That's a negative for Canada's growth. And secondly, as you can see at the chart at the bottom, in the global economy it has also meant that commodity prices have been falling. Although Canada's economy has been transforming, as I'm sure this committee would know, the fact of the matter is that in our export side of the economy we are still relatively heavily dependent on commodity exports. When those commodity prices fall, it has a direct impact on the bottom line for companies that are either exporting commodities or companies that are supplying to commodity exporters.

• 0920

If you move to the second page, the consequence of the pattern of growth that I've shown on the first page is that the unemployment rate is not going to be coming down in Canada as quickly as we might have expected.

Just to give you a context for that, if you see the black line through this chart, it's approximately what most economists would regard as the unemployment rate that would be the dividing line between too high and too low—too low meaning that it could cause inflationary pressures. It's a different way of coming at or looking at the issue of how much slack there is in the economy. If the unemployment rate is above that line, it suggests that there is excess capacity not being used and there are people who aren't being hired who could otherwise be if the economy were performing better. We had expected that the unemployment rate would continue to track down as it has from the latter part of 1996. In fact, because the growth rate is going to be quite a bitter lower than we had anticipated, the unemployment rate is basically going to stay just under 8.5% for 1999.

The other consequence of it is that inflation in Canada will remain relatively low. You can see in the diagram that we are now at an inflation rate that is at the bottom of the target range that the government and Bank of Canada agreed would be the range in which the Bank of Canada would try to maintain inflation. You will see that, over 1999, we expect some modest pick-up in the inflation rate. That's purely a result of the Canadian dollar declining in value over the past year or so. It will feed into higher import prices, and those higher import prices will in turn get reflected in higher measured inflation. But I would point out that, in the absence of any other changes, this would be a transitional adjustment in inflation. That is, it would not last forever. The impact of the weaker dollar would eventually dissipate and the inflation rate, if nothing else were happening and we were still growing at that rate in 2000-01—as I've described in our forecast for next year—this inflation would start to come back down again.

The low Canadian dollar also means that if you look not just at interest rates but at monetary conditions, to use a typical economist's phrase, monetary conditions will remain accommodative. That is, the combination of interest rates and the level of the Canadian dollar will be a stimulative for economic growth, but modestly so. It's important to note, though—and we'll do this on the next page—that if you look at what has happened to interest rates, interest rate have actually gone up since the beginning of the year and the dollar has gone down. They've therefore tended to wash each other out or balance each other, so monetary conditions were basically constant by the third quarter. There will be a modest tightening not because the interest rates will be going up sharply, but because the Canadian dollar will be modestly appreciating from its current levels.

If you move to the next page, one of the important factors influencing financial markets in Canada has been the dramatic improvement in the fiscal position of Canada. You can see that the debt-to-GDP ratio—and this will be very familiar to members of Parliament because of the financial statement recently by the finance minister—will continue to be on a downward trend for the foreseeable future.

The current account, on the other hand, which had improved very significantly in 1995-96—in fact it was actually in a surplus position in 1995—moved back into deficit again in 1996-97. In large part that was because Canada was doing so well, growth was so strong in that year—remember this growth was about 4%—and imports were growing very sharply. That tended to make our current account, or our external deficit, deteriorate somewhat.

• 0925

What has also happened in the past year is where we were in a situation where we were able to maintain interest rates below those in the United States, we haven't been able to sustain that. The primary reason for that is reflected in the final chart at the bottom of that page, which is the deterioration or depreciation of the Canadian dollar.

Whether you're talking about Canadian or foreign holders of Canadian treasury bills or bonds, they will only be willing to take a lower interest rate from Canadian versus American assets as long as they assume the Canadian dollar will appreciate and offset the difference in interest rates they're being paid. Of course, as the Canadian dollar began to appreciate, that confidence disappeared and interest rates began to move above U.S. rates.

In the longer term, you can see from the forecast that we expect that positive difference—the higher-than-U.S.-rate situation in Canada—by the end of next year, at least for short-term rates, will again have become a so-called negative spread where interest rates will begin to move below U.S. ones again. A big part of the reason for that is because Canada will continue to perform much better than the U.S. on inflation. Secondly, you'll see from our forecast there's some improvement in the Canadian dollar over current levels.

Let me finally talk about what has happened in the past year and the implications for credit. If you look at the chart on the next page on the growth in household credit, you can see that from about the second half of 1995 through to the early part of 1998, credit was clearly growing, especially consumer credit. Mortgage credit was growing, but not quite as sharply, and I'll come back to that in a second. But you can see that as the economy began to show signs of slowing in 1998, demand for credit by households and demand for credit for mortgages began to taper off. That reflects a slowing of the growth in consumer spending and the beginning of a slowing in housing starts in residential construction, which is shown at the bottom of the page.

The point here is that in an economy that was growing reasonably strongly and where interest rates were low and staying low, the demand for credit was increasing. As the economy began to slacken off and the confidence about future jobs prospects began to weaken somewhat through 1998— Income growth has been very weak anyway over the decade in Canada, and interest rates have moved up. You remember that the Bank of Canada increased rates in December and in January by a total of a percentage point and another percentage point in August. As that first round began to feed into the economy, it also adversely affected the demand for credit.

The slowing in economic growth is also showing up in business credit, with demand easing off in recent quarters. Again, the economy's weakening pace of growth is having what would be a very widely anticipated and predictable impact on short-term credit, and you can see that in the bottom part of the page. I think Mr. McCallum may have explained to you last year that when you're looking at short-term business credit, one type of use that's highly correlated with it is inventories. And you can see that inventory investment in the first half of 1998 began to weaken and the demand for short-term business credit began to reflect that.

• 0930

So what we're seeing in 1998 is the result of a slowing in Canadian economic growth due to two primary factors: first, the Asian crisis playing its way through to the Canadian economy, both directly and through the U.S. economy slowing down; and secondly, the impact of higher interest rates as a result of the Bank of Canada's decision to try to protect the Canadian dollar by raising short-term rates.

As I indicated, where I think some people are now even beginning to talk about a recession in Canada in 1999, our expectation is that will not happen. Growth will remain in that 2.5% territory. But I should point out through 1999 there will be a very interesting change in the pattern of growth because of the recent easing in interest rates we've seen both north and south of the border. Because the Asian crisis will also begin to dissipate, we're expecting that in the first half of the year growth will be slightly below 2%, but in the second half of the year growth will be just under 3%. So growth will increase by a full percentage point between the first and second half of the year, from say 2% to 3%, something in that territory, and that's a very positive outlook for both the Canadian economy and the small business sector of the Canadian economy for 1999. But we may have to wait a couple of quarters to see that begin to emerge.

Thank you, Madam Chairman.

The Chair: Thank you very much, Mr. O'Neill.

Before I turn to questions I just want to remind members you've been distributed copies of the draft regulations for the Canada Small Business Loans Act, so please take them with you. They were to have been in your offices yesterday, but it is faster to give them to you this morning. I just don't want you to forget.

We'll now go to questions and Madam Lalonde. I'll probably do it in ten-minute rounds just to make it a little easier, because there are a number of people who may wish to respond.

[Translation]

Mrs. Francine Lalonde: Thank you. Let me say that I find it difficult to understand that a large organization such as yours cannot get this document translated when, really, it does not have so many words.

However, this will not stop me from asking questions. My first question deals with the general trend. Of course, many figures only cover the first two quarters of 1998. I suppose it would be difficult to have very accurate figures for the present time. However, when you look at the trend in a number of industries, it is difficult to imagine that the increase in the rate of growth that you predict will actually take place.

You are saying the situation in Asia is improving, but this is not very obvious. In the United States, there are persisting signs of a slowdown. Magazines like The Economist and Business Week are concerned about a global recession. I am not convinced that we will see what you are predicting. Of course, I would be very pleased if there was growth but I just cannot believe it will happen.

[English]

Mr. Tim O'Neill: I can appreciate that, especially given the newspaper and newsmagazine headlines and the coverage on television and so on of what has been happening over the last several weeks. You have hedge funds announcing they're about to go under and the Federal Reserve coming in to try to—

[Translation]

Mrs. Francine Lalonde:

[Editor's Note: Inaudible]

[English]

Mr. Tim O'Neill: Obviously there's a risk that the North American economy could tip into recession. I'm not saying that's impossible, but I get asked what I think is most likely to happen.

• 0935

The U.S. economy is a key to this. The U.S. economy has shown itself over the last several years to be amazingly, surprisingly strong and resilient. The Federal Reserve aggressively tightened interest rates or increased interest rates in 1994. The U.S. economy slowed, and everybody thought that's where it's going to be; it's going to be a slower-growth economy. Then it suddenly started to take off again.

If you look even in the early part of this year, international trade was starting to weaken the U.S. economy. Trade growth was actually negative; their trade deficit was getting dramatically larger and larger. In spite of that, and the fact that in the second quarter of this year U.S. growth was only 2% or less, if you looked at what consumers were spending, their growth rate in spending was 6%. The final demand for domestic production within the domestic economy in the U.S. was 6.5% in the second quarter.

So what you have is an economy that has a weak external side and a very strong domestic component. Now that's important, because the U.S. economy is far less dependent on trade and far more immune to these global crises than the Canadian economy. And it's our largest trading partner. So what I'm suggesting is that the combination of an already strong underlying economy with a very low unemployment rate, very strong income growth, and high consumer confidence is going to benefit further from the lowering of interest rates the Federal Reserve just recently announced and will do a bit more of.

Secondly, I think we're already beginning to see in the Asia-Pacific region some signs of stabilization. Japan has announced its bank reforms and looks ready to implement them, finally. It only took them nine years to do it, but better late than never, I guess. They have put in a stimulus package, which looks like it will begin to show impact on the Japanese economy early next year. There's no guarantee, but at least there's a reason for hope.

If you look at the rest of southeast Asia, in Korea for example, which has a very large economy, interest rates are already coming down in that economy, below levels that they were before the crisis hit. Stock markets are rebounding. The currency values are increasing. That's true as well in Thailand and other parts of east Asia. China had a stronger growth in the second quarter than people had been forecasting, so it's showing signs of stabilizing and actually improving slightly.

The other risky area was Brazil. Brazil has now gone through its elections and will finalize the second phase of those this week. After that the Brazilian government will, I'm confident, be announcing significant fiscal reforms, which will take pressure off their currency. In addition to the already negotiated package of support for Brazil, I think that takes another risk out of the global system.

Rather than anticipating there will be deflation and recession next year, my expectation is growth will be slow in the first half in the U.S. There's no question about that. But it will begin to bounce back in the second half, and we will benefit from that as a major trading partner with the U.S. We'll benefit as well domestically from the lower interest rates that have already started to move back into Canada. In other words, the Bank of Canada has moved with the Federal Reserve in reducing rates and they will reduce them again when the Federal Reserve does. That's going to be fairly helpful if you combine that with what will be a still fairly weak Canadian dollar, which will help stimulate trade as well.

There is no guarantee that will happen. Obviously, no forecaster would ever offer that kind of argument. But the fact is, I think there's reason to be moderately optimistic about 1999—not the first half, but the second half of the year.

[Translation]

Mrs. Francine Lalonde: I have two further questions.

The Chair: Just one question now, please, Madam Lalonde.

Mrs. Francine Lalonde: Just one question? Will there be another round?

• 0940

Similarly, there seems to be a lot of volatility in that situation you are talking about. One thing that strikes me is that US consumption has been fuelled in the past few years by the fact that about 49% of all Americans were directly or indirectly affected by rising stock prices.

But with the highs and lows of the market and the problem of long term credit, which were the subject of advice from two Nobel Prize winners of last year— I thought it was very funny when I heard that. Thus there is an element of that consumption that is less reliable than the figures would suggest.

I recently attended a number of international meetings and I am always surprised when I get back here, in North America, to see that developments elsewhere are not perceived as strongly as they are in the rest of the world. Of course, both the European Union and the United States hope that things will settle down, although it is believed that the Japanese economy will go even deeper in recession in spite of the new Bank Act that they finally passed.

[English]

Mr. Tim O'Neill: The Japanese certainly haven't helped themselves over the last ten years. That's quite frankly true. They are beginning to do that. And you're quite right, I think this year the Japanese economy will end up shrinking by about 3%. That's not something any country wants to contemplate, especially one the size of Japan. Japan is important for the rest of the east Asian region as well.

From a North American perspective, one should never feel we are totally insulated from that, but I think it's important to note that North America, both Canada and the U.S., is not significantly dependent on trade with Asia. In spite of the fact it's a third of the global economy, we're not that closely linked to it. Now, British Columbia is closely linked to it, and they're clearly suffering the consequences.

[Translation]

Mrs. Francine Lalonde: Vancouver, yes.

[English]

Mr. Tim O'Neill: Yes, that's right. But the rest of Canada is not that closely linked. Where we've been hurt is not on the trade with east Asia, it's on the commodity price effect, as I was suggesting.

As far as the volatility in the stock market is concerned, there's no question that scares people and has done so and properly has done so. Unfortunately, I'm not a Nobel Prize winner in economics, so I'm not confident enough to build models that tell me I can guarantee success.

One thing to note about the U.S. stock market at least is if you look at where it was at the beginning of this year, it is actually now up; that is, the value of stocks on average are higher than they were in January. They're lower than they were when they hit their peak in July, that's true. There was a correction in July, but it was one everyone had been predicting for six months anyway. It is now higher than it was at the beginning of the year by about 10%. While it is true it hasn't been growing as quickly, and therefore hasn't been feeding consumption spending quite as much—

[Translation]

Mrs. Francine Lalonde: This is a matter of trust.

[English]

Mr. Tim O'Neill: —it's not going to be significantly negative, and you have very strong income growth. Income growth in the U.S. has been strong for the last several years, and confidence about jobs, of course, is a lot higher than it is in Canada because they are at 4.5% unemployment rate. So it's true consumers won't be quite as exuberant, maybe irrationally exuberant, but at least they will be confident enough to continue spending, I think.

[Translation]

Mrs. Francine Lalonde: Then we will meet again next year.

[English]

The Chair: Mr. Lastewka, please.

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

First of all, I want to apologize to the witnesses, but I must leave shortly to go to the House. I'm involved in a bill in the House. I do have a concern that I wanted to express with you and I would like to hear your reaction.

I'm pleased that the amount of money has risen a bit and more and more customers are involved. What I want to concentrate on—I ask for your indulgence during my ten minutes—is when we hear from the CFIB and when we hear from small businesses, we of hear the difficulty in getting loans and working with the banks. We hear it continuously. We heard it yesterday, so it's fresh in our memory. On the other side, we see the results you brought forward on credit authorized, increases, and so forth.

• 0945

My concern is that after being here for five years as a member of Parliament and hearing the same thing, I wonder when we're going to get the CFIB, other organizations who represent small business, and the financial institutions together. We're into “he said, she said, she said, he said” on a continuous basis, and I don't understand why we can't once and for all get together and resolve that difference. I'd ask for your comments.

Mr. Kelly Shaughnessy: With your permission, Madam Chair, I'll kick off. Then we have representatives from six other banks here.

I can understand your frustration, Mr. Lastewka, that you do hear complaints. We hear them too, frankly, through our complaint resolution process, our ombudsman process, and the industry ombudsman. But I have been working with this committee and with organizations of the CFIB over the last three to four years, and I personally and sincerely think the situation has improved. I look at things such as the Thompson Lightstone study about which we were here speaking to this committee on October 1. I look at things such as the CFIB's own research on loan approvals. The numbers are all trending up.

I also look at the credit offers. Look back three or four years ago when the range of products that were available to small business borrowers was limited. There were demand loans and term loans, etc. Virtually every bank at the table has new credit offers and products that are specifically targeted. Ease of access is specifically targeted at small business.

I don't think we're there yet, but I think we've come a long way. I think one of the reasons we've come a long way is through the partnership with this committee and working with it and also working with organizations like the CFIB. I know the CFIB was here yesterday. I know Mr. Gray was here testifying yesterday. I want to assure you that all the banks maintain a relationship with the CFIB. We listen to them very carefully and sincerely.

I don't know if any of my other colleagues have a comment to make in that respect.

Ms. Anne Sutherland: Madam Chair, if I may—

Mr. Lastewka, I think you made an extremely astute comment, because I think all of us around this table share the frustration that things aren't improving fast enough. We're all collectively investing time, energy, and money to improve and build bridges between the banking community, financial institutions—frankly, it should be all of them—and small business. There are other associations besides the CFIB that are diligently working and representing their members and actually spending more time on education and building those bridges.

With all due respect to the CFIB, while they provide extremely valuable input in terms of public policy, the number of times in which they actively intervene to bring their members and banks together is probably less than ideal. That would probably be a great opportunity for improvement.

But I can list 15 to 20 associations on a national scope, as well as literally dozens of small-business associations across the country, with which many of us around this table are working because we have to keep at it. We have to keep finding ways to improve.

But I absolutely share your frustration with the fact that it just doesn't seem to be fast enough and significant enough. Perhaps we need to keep asking different questions and finding other alternatives.

Mr. Walt Lastewka: I want to make it clear that I personally think there are responsibilities on both sides. I mentioned that in private yesterday with the CFIB. There are many situations in which their members need counselling, communication, and understanding in dealing with banks or financial institutions.

• 0950

I think there's equal responsibility on either side. Those representing small business and those representing the financial institutions need to get closer together so that we stop hearing of the problem. I think there's an opportunity in that problem. There will be many opportunities and a lot of wins for business, financial institutions, and associations if we attack it head on.

Ms. Anne Sutherland: Absolutely. I agree.

Mr. Lastewka, just for the benefit of this committee, I have a specific example that was directly involved with you, sir. You heard through a colleague of yours about some small business customers in Moncton who weren't too happy with the Royal Bank. I just want to publicly thank you for bringing that to my attention immediately. As a result of that, we will be having a focus group in Moncton with exactly those customers to work very hard at building those bridges. That will be happening forthwith. So thank you, sir.

The Chair: Mr. Shaughnessy?

Mr. Kelly Shaughnessy: One of the bridges and one of the ways of building understanding not only with industry organizations like the CFIB, but with members of Parliament in this committee, could be fulfilled by that proposal that Mr. Young tabled with the committee on October 1. As for the seminar programs we've held to date on things like Y2K, these have incredible value and build incredible understanding among the parties involved. I know a number of members of this committee have participated in those. I think that's an excellent example of an opportunity we have to work all together in a partnership to enhance the relationship.

The Chair: Mr. Jentsch.

Mr. Dieter Jentsch (Senior Vice-President, Canadian Commercial Banking, Bank of Nova Scotia): I echo what my fellow members in the banking community said. I do agree with what the Royal Bank said, in that we need to go a lot further and continue to make progress on that. I certainly speak for our organization and other members. We have endeavoured to put together publications such as “answer books” to take the mystery out of lending, involve our customers in Y2K seminars, and have seminars for the aboriginal community.

Consultants have actually sat down with the CFIB to see how we can improve on what we have. They've come back with very constructive advice on how to improve our publications and what we should do in terms of communicating and taking the mystery out of the lending process and the service side.

Quite clearly, from our perspective, if we don't move in the right direction by becoming simpler to understand and taking the mystery out, then I guess it's at our own peril, because it is the fastest-growing segment for us in the organization. Quite frankly, it's up to us to take advantage of it and provide the right materials and forums of communication.

We have made progress in some way. We sat down with Brien Gray and Catherine Swift. They have been very cooperative in providing us with their advice and direction as to where we should go.

Do we need to improve? Absolutely. Are we making the right steps to go that way? Absolutely. It does take some time, but I wish we could move a lot faster. I agree with your comment on that regard.

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

Mr. Jones, please.

Mr. Jim Jones (Markham, PC): On your chart here, Tim, you said that if we get unemployment under 7%, then that's an inflationary concern. Why is that a concern? Is Canada never going to get under 7% unemployment? Compare that with why it's not a concern in the U.S. when they're at 4%.

Mr. Tim O'Neill: There are two things. One, I don't want to get overly technical about it, but just in the way we measure unemployment rates in Canada and the U.S., it's worth about a difference of 1%. So if you were comparing apples to apples, you would have to take 6.5% in Canada to start with to compare it with the U.S. number.

The second point I would make is that the U.S. number is actually going to end up being too low. That's to say that although the U.S. has done remarkably well on inflation over the last year and a half, that's been because of transitory factors like low commodity prices—these are a problem for us, but they're a benefit for the U.S.—and because of a very strong U.S. dollar, which has lowered import prices. Our weak dollar raises them in Canada, while their strong dollar lowers import prices. My expectation is that the U.S. is going to have to end up with an unemployment rate of closer to 5.5% to 6% to keep inflation from accelerating.

Now your comparison is really why we can't get down to 5.5%, comparing apples with apples, from 6.5%. I think the difference of that 1% is a difference that economists refer to as a structural problem. Our labour force doesn't tend to be quite as mobile as it is in the United States. People don't move as readily. They do move; there's no question about that. But in looking at this particular issue, economists have come to the conclusion that this, among other factors, will keep the unemployment from getting down as low as the U.S. rate, unless we make structural changes.

• 0955

I should also point out that a number of countries—in fact most countries—have unemployment rates, this so-called inflation-safe unemployment rate, that are quite a bit higher than ours. If you look at Germany, for example, or France, or some of the European economies, when the unemployment rate gets down into the 8.5% territory, which is where we are now, by then they're already starting to suffer inflation pressures. So it's the different structures of the economies and how the labour market functions that makes a difference in looking at what rates are appropriate in one country versus another.

Mr. Jim Jones: Thank you. Last summer, when we had the Asian flu and the flight to quality, all the dollars that were in those countries wanted to find a safe haven. They went to the U.S. dollar, not the Canadian dollar. In fact our dollar went down. Why is that?

Mr. Tim O'Neill: I think there are two things. First, when you are looking at the U.S. economy, you're looking at the largest economy in the world, first of all, and the strongest, and really, among all of the industrialized or developed economies over this decade, the one that has consistently performed extremely well. It had the least problematic recession in the early 1990s, it had the quickest recovery from it, and it had the strongest sustained growth.

Naturally, if you're looking for a safe harbour, you pick the big one with the great walls protecting you from the storms on the sea. The U.S. economy is a natural in that regard, notably even with respect to some European economies like Germany, which were growing reasonably well over the last year and might have normally been a safe haven. I think that's part of it. Naturally they'd pick the U.S. rather than Canada.

The second part of it is that the U.S., as I mentioned earlier, is a beneficiary when commodity prices are low, because they are an importer for the purposes of manufacturing and industrial production. In Canada we are more dependent on commodities for export, so we rely on those commodity prices to be high, not low. When they fall, as they did through 1998 because of the global crisis, that hurts the Canadian dollar directly.

All the research suggests that the single biggest influence on the Canadian dollar in the long run, after you take out the effect of different inflation rates, is the average level of commodity prices. If they're going down, the dollar tends to weaken; if they're going up, the dollar tends to strengthen.

We were unfortunately in a situation in 1998 when those commodity prices were coming down. What I was indicating in my chart was that in 1999 those commodity prices will probably bottom out and start to move up slightly, particularly energy prices, and that will help the Canadian dollar.

Mr. Jim Jones: Do you anticipate the Canadian dollar dropping lower, and is it good in the long-term for Canada to have a low Canadian dollar?

Mr. Tim O'Neill: If you're asking could it get weaker, obviously it could. If, let's say for example, something like October of last year happened over again, if the Japanese just don't get it right and China devalues and Brazil collapses, and so on, if that sort of crisis environment were re-created and commodity prices were to weaken again, the Canadian dollar would certainly be hurt by that. So it is possible.

The second part of your question was whether that is good. No, it's not, in the long run. But I think it's important to note that in that sense the dollar is like a thermometer: it's reflecting the temperature. So if the temperature is cold, the thermometer will be falling. The global economy has been cold, getting colder through the past year or so. It's directly influencing the Canadian economy in the way I described, so the thermometer is reflecting that. There's no point in trying to light a match under the thermometer and show a higher value for it if the room itself isn't warming up. If the room is warming up, if the Canadian and global economy is warming, that will show up in a stronger Canadian dollar.

• 1000

That will be a benefit for Canadians, because we're not only exporters, we're importers. We want to be able to buy as well as sell, and I think it's always better for an economy to have an improving purchasing power globally than a declining purchasing power.

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

Mr. Jim Jones: Just one last question, yes.

This has a lot to do with small business, but it could also relate to big business. On the personal side and on the side of the brain drain of our best and our brightest to the U.S., what is the impact of Canada's high taxes? Sooner or later, this is going to impact this country.

Mr. Tim O'Neill: There has been a lot of discussion about the impact of the personal tax rate structure, particularly on the brain drain. There is some evidence for that. There is a recent study that was done by an academic from Simon Fraser University and was published by the C.D. Howe Institute. It suggests that there is some brain drain occurring. The direct link to tax rates is a little bit harder to draw, though.

Let me suggest that one of the key reasons for why we probably have seen an increase in the rate of movement of Canadians into the U.S., particularly over the last several years, has less to do with the tax structure and far more to do with the different performances of the economy. The U.S. economy is performing extremely well, as I was saying earlier. In that context, you have an economy in which the unemployment rate is coming down very sharply, and you have a Canadian economy in which, if anything, it was going up even into 1995 and 1996. If you're looking for a job, which one are you going to be trying to make a bet on, especially if you have the skills that allow you to go anywhere in the world to find one? That has been a factor.

I would admit, though, that it would be far better over the long run if we had a lower average tax burden for Canadians. In the long run, whether it affects the brain drain significantly or not, it certainly affects the capacity of Canadians to make expenditures. If you look at the income growth figures both before and after taxes, there's clearly some impact from the tax burden in that regard. So, on balance, I'm certainly in favour of eventually lowering the personal income tax burden. As a former academic, though, let me suggest that whether it will have a dramatic impact on the brain drain or not is a matter requiring more study.

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

Mr. Shepherd, please.

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

Let me ask two questions. One may not be so bright, but it's something I can't get my head around.

If the United States is a net importer—historically, it seems the Americans always have been—with lower pricing in Southeast Asia, why isn't that a major asset to the American economy in component parts? The values of those currencies have been depressed, so why isn't that seen as beneficial to the U.S. economy?

Mr. Tim O'Neill: In fact, it is. It's probably not obvious in some of the discussion that one reads, but I'll go back to a comment I made earlier about unemployment rates. In response to an earlier question, I suggested that the unemployment rate in the U.S. is arguably too low right now to be safe, from an inflation perspective. This hasn't created a problem precisely because of what you're describing, though. It's that stronger dollar and a lower import price impact on inflation in the U.S. Those have been very significant positives not only for containing inflation, but actually lowering it in the U.S.

Commodity prices have played an important part of that, and I just want to make one more point in that regard. I don't want to get too technical about this, but if you look at the inflation rate without energy prices and without food prices—those are two very volatile elements—the inflation rate in the U.S. has actually gone up in the last year. It has gone from about 2.2% to about 2.5%. When you include those commodity-type prices, inflation has stayed at about 1.5%.

The point is that if energy prices start to move in the other direction, and if commodity prices generally both bottom-out and then start to rise, there is going to be a negative effect on U.S. inflation rates. They will start to move up again, because they've got this strong domestic economy held in check on the inflation side by this weak international economy, weak commodity prices, and a strong dollar. But the dollar is starting to show signs of weakening now; commodity prices may start to move up. And both of those will then, I think, push inflation rates up in the U.S.

• 1005

So yes, it's been a very real positive, but it's not a positive that can last forever. It's not a fundamental change. It's a temporary change.

Mr. Alex Shepherd: Getting into the domestic economy and your graph showing the rise of credit, to what extent— We talk about taxation, but also most of us know that disposable income has been relatively flat if not actually negative in Canada. To what extent is the growth in credit directly related to the stagnation of disposable income? In other words, to what extent are people putting themselves in more personal debt and using the banking system and so forth to do that?

Mr. Tim O'Neill: Certainly there's an element of that. Let me answer it in two parts.

First of all, it is true, income growth not only has been stagnant, if you look at it over the 1990s to date, it's been negative. Real per capita disposable income has actually declined. Of course part of that is that you've got a population that's growing. But if the levels of growth in absolute income are not keeping up with the population growth, then the average is going to decline. And that's what we've seen.

It has had an impact, I think, in moderating spending growth. It's most obvious, I think, in the housing starts numbers. When we looked at this about six months ago, we concluded if growth and income had kept pace with productivity growth of the sort we normally see, housing starts would have been about 25,000 a year larger than they actually were in the 1990s to date.

The second point, which is the more important one you're driving at, is that credit has still been growing in spite of the fact that income growth has been weak. A big part of the reason for that has been while income growth has been very moderate, asset growth has been reasonably strong in Canada. That is, the wealth of Canadians, the net assets of Canadians, has been growing, and growing reasonably well. What's happened is Canadians have been benefiting. Underpinning their spending has been the benefit of that wealth growth.

Now of course in 1998 we've seen that wealth growth, at least, begin to taper off as the stock market has done less well. It will be, I think, one of the reasons we're seeing some tapering off then in consumer credit demand—some slowing in the growth—because of that factor as well as the continued weakness in income growth. But Canadians have been able to in effect borrow against their wealth, as opposed to their current income. I suppose that's the simplest way of putting it.

Mr. Alex Shepherd: So in a sense they're really trading against their equity, or in some small ways living off their savings. They're financing future consumption off savings, not off income growth.

Mr. Tim O'Neill: That's partly true. Although I think the other point to make is that the form in which people are holding their savings has changed very significantly in the past decade or so. I think you've talked about it here in the past with this group, the shift from traditional deposits as a way in which people hold savings to the use of mutual funds as way of holding savings, because you can get a better return over time if you put money into equities.

People discovered the equity market, especially as they got to be current baby-boomer age. Now people are shifting from borrowing to investing for their retirement. So we've seen that adjustment take place. What it's meant is that just the way in which people hold their savings has created an increase in the wealth they have and allowed them then to spend out of that. It's not that they're spending away their future, it's just that the rate at which they're future was improving, if I can put it that way, was much more significant than it had been in, let's say, the 1980s or 1970s. So they could spend part of that.

But you're quite right, I think, by implying that in the longer term, to sustain spending you need actually to have reasonable real income growth. That's why the weakening profile of the Canadian economy is a problem right now. Some may view it as overly optimistic, but if my optimistic outlook for the second half of next year and beyond plays out, we can see some improvement in that.

• 1010

The Chair: Thank you very much.

Mr. Obhrai.

Mr. Deepak Obhrai (Calgary East, Ref.): Thank you.

I'm sorry I was a little late and wasn't here for your presentation, but that doesn't stop me from asking questions because members of your association have come to my office and given presentations and talked to me.

I've just heard the gentleman here talk about the need for your bank to address small-business loans. My experience is that what you people say and what in reality happens out in the field are two separate things. My constituency is made up of small-business people. I have had a lot of experience with banking and financing of small businesses.

My experience indicates that you have serious problems: one, credibility, and two, the way you operate. First, the high turnover rate of your loan officers does not allow a human relationship to be built between a business and a business owner. Secondly, currently the way I see it is when you go to your bank your business loans officers these days work within a shorter parameter of what is available to them on the computer. If it doesn't fit in they don't have the leverage to go ahead.

The level of collateral is extremely high. In one of the places, when I was sitting there a couple of years ago, I honestly thought I should get up and bring in my dog and say “Here, take even the dog as collateral” because of the level required. This is despite the fact that businesses, your old customers, have track records. For some reason your loan officers do not go to the track record. You don't take the human element into account—the drive, the energy the businessman has to make a success of his business.

Perhaps that is why even the provincial governments have come along and created other agencies—in Alberta's case it's the Alberta Opportunity Company. They felt there was a need. Your banking industry was not fulfilling that need so they created this organization for high-risk organizations.

So I have two questions. From your statistics, what is the default rate of people you are giving loans to of under $100,000, compared to the default rate of businesses to which you have given over $500,000 loans?

The Chair: Mr. Shaughnessy.

Mr. Kelly Shaughnessy: We don't have it quite broken down, but I think we can answer your question. The loan loss ratio for under $25,000 overall was 1.4% of outstandings. This was for the fiscal year that ended October 31, 1997, because these things are done on a fiscal year basis. For $25,000 to $50,000 it was 0.9%; $50,000 to $100,000 was 0.8%; $100,000 to $249,000 was 0.7%; $250,000 to $5 million, which admittedly is a rather broad band, was 0.2%.

Mr. Deepak Obhrai: So you have a higher ratio of loan default under $25,000. Is that right?

Mr. Kelly Shaughnessy: Yes.

Mr. Deepak Obhrai: Why would that be?

Mr. Kelly Shaughnessy: I think the larger loans go to larger companies or medium-sized companies and you look at the skill sets of the entrepreneurs. A medium-sized company would probably have a formal financial officer—a vice-president of finance, something like that. A small-business person, an entrepreneur, tends to be the decision maker, and as you said, frequently goes on—I'm not quoting you directly—their gut feeling or entrepreneurial skills, and sometimes the default rate is higher.

There are different ways. You mentioned collateral, for instance, and all the banks here now have, for that end of the market, loan products where we don't ask for collateral. The only collateral asked for is the personal guarantee of the entrepreneur. So if something goes wrong with that loan there is no hard collateral.

• 1015

There's been an evolution. You made reference to a few years ago; I'd say that there's been an incredible evolution on the lower end of the market in how we're lending to that market over the last three or four years. There are products in the marketplace today some of which didn't even exist three to five years ago.

Mr. Deepak Obhrai: Let me give an example—and this was not too long ago, it was just about two months ago. The vice-president for Alberta region came to my office, we talked about the issues addressing small businesses, many of the points I raised, and they said the same thing you're saying, that there's been evolution and all these things. Then I go home and I receive a letter from the bank saying that for my business overdraft I now have to pay $25—out of nowhere. So the cost of doing business with you guys is rising so rapidly for small business that it's one of the major complaints coming through.

Mr. Kelly Shaughnessy: I can't comment on your example.

Mr. Deepak Obhrai: I'm just giving an example. The cost of doing business with banking for small business is rising rapidly. Is that one of the areas you're going to address?

Mr. Kelly Shaughnessy: We came here to discuss business credit statistics this morning.

Mr. Deepak Obhrai: I thought it was small-business loans.

Mr. Kelly Shaughnessy: I don't have any material that I can table for you. I can get it on things such as services charges and that. I think in general, as I recall from our colleagues, and certainly from the bank I represent, we have not increased service charges to small business in years and years. What makes the cost go up though is that what we have had is a very steady growth in the economy, as Mr. O'Neill has referenced, and we've seen a growth in sales of our small-business clients too, and as their level of transactions goes up service charges go up, because in a number of cases the service charges are attached to unit pricing. But by the same token, most of the banks too have come out with flat service charge offers.

I don't want to get any deeper in than that. I'd be more than pleased, through the offices of the CBA, or each bank I'm sure would be more than pleased to give you their existing fan of rates and what the history of that has been over the last number of years.

Mr. Deepak Obhrai: I would appreciate that. But I would like to see the whole package. I don't think just holding an account by itself is the complete package for business services; other related ones that are tied to it make the cost for small business pretty expensive.

Lastly, has your portfolio increased? By portfolio I mean clients to whom you're giving less than $50,000. Has there been a dramatic increase in that, or has it been steady as usual?

Mr. Kelly Shaughnessy: Once again, I represent the CIBC, but I'm chair of the CBA committee, and what I will do is give you the numbers as soon as I get them for all the banks and then the individual banks can talk to it.

In terms of 0 to $49,000 authorizations, from Q3 1997 to Q2 1998 the number of clients grew from 421,000 to 452,000. The outstandings grew from $4.2 billion to $4,375,000. So there has been growth in that.

The Chair: Thank you very much.

Mr. Obhrai, I'd also like to let you know that on the Strategis site for Industry Canada there is a calculator that is available on service charges. You may want to take a look at the site. With that being said, I'll now turn to Mr. Ianno please.

Mr. Tony Ianno: Thank you very much.

• 1020

First of all, I'd like to follow up on what the hononourable member on the other side was getting at with regard to the loan loss ratio you were reporting. Is there a reason you went from $250,000 straight to $5 million in terms of the loan loss ratio?

Mr. Kelly Shaughnessy: As I recall, Mr. Ianno, this is the report I was referring to. It's a public number. We made an agreement with this committee on those bands. And the reason is we have broken it down by industry and by region—

Mr. Tony Ianno: Is this on the loan loss ratio?

Mr. Kelly Shaughnessy: On the loan loss ratio, yes.

Mr. Tony Ianno: And did we stop at $250,000?

Mr. Kelly Shaughnessy: No, we have a band of $250,000 to $5 million. In that $250,000 to $5 million, let me quote just the top. For agriculture there were only 90 clients, so we'd break the Statistics Canada barrier of 13 or 14 if we tried to get—

Mr. Tony Ianno: Fine. So don't do it by industry. Just do it by the amount lent and do it up to the $1 million, which is an SME according to the definition you determined. So what we need is the loan loss ratio. When I asked at a meeting of this same committee three years ago about the loan loss ratio regarding small and large business, I was told there was no difference. In fact, large business was at a larger loan loss ratio than small business.

Mr. Kelly Shaughnessy: Let me give you the statistic, Mr. Ianno. I do have that.

Mr. Tony Ianno: Good.

Mr. Kelly Shaughnessy: The numbers I was quoting were by industry. I can give you that for all of Canada. The loan loss ratio for 0 to 999 is 0.6%, and the loan loss ratio for $1 million and over is 0.1%.

Mr. Tony Ianno: So we have a difference of 0.5%.

Mr. Kelly Shaughnessy: That's an incredible difference.

Mr. Tony Ianno: I guess also it was better for the small business numbers, especially when you had companies that had a lot of accountants, etc. When the Olympia and Yorks went down and the loan loss ratios were a lot higher for large business, that issue was not brought forward, and it was because of the accountants. Is that correct?

Mr. Kelly Shaughnessy: No, I'm not going to comment on Olympia and York. That's an individual client to the bank.

Mr. Tony Ianno: I don't know whose clients they are. All I'm dealing with is basically the overall industry. When large business had a higher loan loss ratio than small business, you didn't bring the accountant factor into the equation. That's all I'm asking about.

Mr. Kelly Shaughnessy: Are you making reference to the answer to the other—

Mr. Tony Ianno: Yes, I am.

Mr. Kelly Shaughnessy: I don't have statistical evidence with me today. Once again, we can get that. I think you will find over time the loan loss ratio has always been higher for small business, so over an economic cycle—

Mr. Tony Ianno: Can the CBA give us by year the loan loss ratio for the last seven years for less than $1 million and higher than $1 million?

Mr. Kelly Shaughnessy: I don't know if the CBA has been collecting that. I'll have to look into it for you.

Mr. Tony Ianno: If they didn't collect it, is it possible to collect it? It should be easily available considering they had it three or four years ago and you have it today. I would doubt there are gaps in between.

Mr. Kelly Shaughnessy: Let me check.

Mr. Tony Ianno: Thank you.

Let's deal with some of the new numbers in terms of the stats. In some absolute numbers we might be slightly ahead in terms of the almost $47.3 billion that was lent to small business by the seven banks. But the amount for large business has increased tremendously from $123 billion to $154 billion, which is a $31 billion increase. If you did it by percentage increase, that's roughly 25%, I would assume, as compared to a minuscule 45.4% to 47.3%. Is that correct?

Mr. Kelly Shaughnessy: Are you asking me?

Mr. Tony Ianno: Yes.

Mr. Kelly Shaughnessy: I assume we're reading from the same statistics.

Mr. Tony Ianno: Yes, I'm dealing with your numbers.

Mr. Kelly Shaughnessy: I'm not going to refute the statistics—

Mr. Tony Ianno: Since the banking industry has said in effect they're going to lend more to small business and to try to improve the lot of small business overall, why has the increase to small business been minuscule compared to the amount lent to large business, when we still hear access to capital is the number one issue?

Mr. O'Neill, Thompson Lightstone, which made a presentation here three or four weeks ago, said that according to your own stats you got two years ago compared to today, there was a 40% increase in the number who indicated access to capital was an important issue to them. You're shaking your head, Mr. O'Neill. Is there something different from what is stated by the Thompson Lightstone report?

Mr. Tim O'Neill: I referred to the CFIB, which has—

Mr. Tony Ianno: I wasn't dealing with the CFIB. I dealt with the bank-paid study.

Mr. Kelly Shaughnessy: I think to be fair to Mr. O'Neill, he's here as the chief economist of one of the banks.

• 1025

Mr. Tony Ianno: I understand that.

Considering he is the chief economist and he was shaking his head on my statement, I thought it was pertinent that I ask him his opinion as to why he was shaking his head.

Mr. Kelly Shaughnessy: I don't know if he's aware of the Thompson Lightstone—

Mr. Tim O'Neill: I know of it, but I don't have the actual data in front of me. So I'll—

Mr. Tony Ianno: So you thought I was referring to CFIB when you were shaking your head?

Mr. Tim O'Neill: Frankly, I can't remember why I was shaking my head.

Mr. Tony Ianno: Okay. We won't get into that.

Mr. Tim O'Neill: There are a number of reasons, though.

Mr. Tony Ianno: Okay.

On the question I have, if each bank can comment— Unfortunately, we've been getting these reports late, Madam Chair, and also we've asked if they could report on the last page the numbers that I always have to sit here and calculate 20 minutes beforehand to figure out their percentages.

I think if you can present it to us in the report, then no one has to do any calculations, and everyone can see the easy numbers and we can see a trend.

So I guess that's the concern the new member was referring to. He's still getting concerns in his constituency, yet we still get the CBA and the bankers coming forward and saying that they're doing more for small business.

Yes, you may change your product line; yes, some of the banks have adapted well on credit scoring and with character lending, and so on—no doubt. Unfortunately, Canadians and small business do not receive the additional moneys they're asking for in the small-business side of the equation. When you take into account the percentage that they do receive on the large businesses, it's overwhelming, and I can't see how we're ever going to improve the percentage for small-business lending in this country to ensure economic growth is shared by all.

The Chair: Mr. Shaughnessy.

Mr. Kelly Shaughnessy: I will commence, and then I'm going to encourage my colleagues in the other banks.

As I said in previous meetings, one, I respect the honourable member for his passion for small business and the passion he has for his ratio. But certainly in our bank—and I checked this before leaving the office yesterday—there is no policy or practice within our organization where we attach our ability to lend to small business to our lending to large businesses.

As I said before, they're completely separate strategic business units, and there is no rationing of capital to the small-business unit as a result of activities in the large corporate lending area. So at our bank we are trying to improve our track record through new product offers and things of that nature. We're still committed to small business.

I think also the thing that the committee has to look at is the overall lending to small business by all the banks, and as the MacKay task force pointed out, not only by all the banks but by the other participants in this market. The banks are 50% of the equation. There's another 50% out there right now who are lending to small business who are not being captured in these statistics, and that was specifically cited by the MacKay task force as a problem for people such as yourselves in dealing with this. So I would ask any—

Mr. Tony Ianno: Before we finish, Mr. Shaughnessy, you indicated to me two years ago that you would be improving the numbers, that you had to put some systems in place. Two years have passed, and unfortunately you haven't improved the percentage. We talked about the percentage—yes, I know no one likes the percentage, but it's there. Somehow or other, it's not improving, and your systems have had a chance to be implemented. What's the problem?

Mr. Kelly Shaughnessy: Mr. Ianno, I don't think I ever undertook on behalf of the CIBC to improve the ratio.

Mr. Tony Ianno: No, what I said was improve the amount of money given to small businesses, which in effect would improve the ratio.

Mr. Kelly Shaughnessy: That may or may not be the case. That's only one part of the equation.

At the CIBC, we're committed to small business. We think we can do a much better job than we have been doing in small business, and we're going to undertake to do that.

The Chair: Thank you.

Ms. Sutherland, did you have any comments in response to Mr. Ianno?

Ms. Anne Sutherland: No, Madam Chair—

The Chair: Does anyone else have any comments?

Ms. Anne Sutherland: —unless the honourable member would like to address any specifically.

Mr. Tony Ianno: Just more generally, if anyone has any comments—

Unfortunately, the numbers, if I can read them off—

The Chair: No, there are some people from other banks who wish to respond.

Ms. Brochu.

Ms. Lynda Brochu (Vice-President, Small and Medium Sized Enterprises, Bank of Montreal): I want to make a comment that before we start to truly analyze the small-business performance as compared to the large-business performance, statistically I think we have to get a real good understanding of what that number represents in large businesses.

• 1030

What we're talking about here—and somebody please correct me if I'm wrong—is direct loan advances to large corporations. Large corporations deal in a number of ways, a lot of them off balance sheets that may not show any of these numbers. If they decide to change the way they're financing their balance sheet, it can move in and out very quickly. So there are a lot of big swings, in outstandings as well. So what we have to do, before we start pointing fingers or whatever, is really understand what that category represents.

Mr. Tony Ianno: I think we've—

The Chair: Please. We have several witnesses who wish to respond.

Ms. Lynda Brochu: I guess that's my point. We've done a heck of an amount of analysis on $1 million and under, but very little on the $1 million and above. Before we start having to defend or comment on the performance of each bank in that sector, we should have the people from those sectors representing the banks here as well if we want a comment on that. They can probably shed some light on it.

Mr. Tony Ianno: That isn't the issue. You're with the Bank of Montreal?

The Chair: Thank you very much.

I would just like to let members know we only have about 20 to 25 minutes left. There's another committee coming in here at eleven. So I'll be going to very short rounds, very short questions and hopefully very short answers.

[Translation]

Madam Lalonde, please.

Mrs. Francine Lalonde: You will understand, Madam Chair, that the matter is important.

I have juggled with some figures on my computer about the increase in the number of customers. I would have expected to find this data somewhere in your document, but people have to use their own calculators to figure things out. Anyhow, I note that for loans from zero to $50,000, there was a 7% increase; from zero to $500,000, there was a 5.6% increase; and for loans $500,000 and over, the increase was also 7%.

So, in spite of the SBLA and the fact that many new small and medium-sized businesses are being created, there is no increase in the number of loans made to small businesses. The conclusion, therefore, is that without the SBLA, you would not lend any money to small business.

[English]

The Chair: Ms. Sutherland.

Ms. Anne Sutherland: On the analysis, we have to understand, if you look at the last couple of years and particularly over the last six months, the number of bankruptcies has increased as well in Canada, and business bankruptcies. The greatest proportion, unfortunately, is particularly in the small-business market. Most of the lending that is done is not through the SBLs. Most of the bank lending is done through regularly operating financing. As Mr. Shaughnessy just mentioned, most of the innovation in bank financing, where we have been providing unsecured lines of credit and so forth, is in that under-50 number.

The truth is that the total number of incorporated small businesses in Canada hasn't grown that much over the last several years because there is this churn factor in the market. However, the implication is can we always do a better job? Absolutely. There's no question about it. Do we have to continue to be more innovative? Absolutely. But I would not make the connection that with the SBLA there would be no lending, because if you look at the overall bank financing that is available, the majority of it is not under that act.

[Translation]

The Chair: Mr. Guindon.

Mr. Jean-Pierre Guindon (Manager, Corporate Credit Services, National Bank of Canada): There is another important matter to take into account. This is an extremely competitive market, including in Quebec, where the Caisses populaires play a very significant role in business financing. You should also keep in mind that leasing is another form of financing. In order to get a realistic view of the market as a whole, you should also consider financing arrangements supported by other financial institutions that are granted through many different mechanisms.

The Chair: Thank you.

One last question, Madam Lalonde?

• 1035

Mrs. Francine Lalonde: Yes, I would like to ask a question on a different matter to the Chief Economist, Mr. O'Neill.

Last summer, Mr. Martin reimbursed $9 billion of the debt in one shot. Do you agree with him when he says that that reimbursement speeded up the fall of the Canadian dollar? Is it not a problem now to reduce the debt when the Canadian dollar is on a downward trend?

[English]

The Chair: Briefly please, Mr. O'Neill.

Mr. Tim O'Neill: I have to apologize. I'm not sure I quite got the question she asked.

Mr. Kelly Shaughnessy: She asked whether or not large moves of strategy have reduced the debt.

Mr. Tim O'Neill: It's a good one. Sorry, I thought that's what you're asking but I wanted to make sure.

I think the strategy of reducing the debt is a critical one and it's made more obviously critical if you look at the kind of volatile economic environment we've seen, where financial markets can move interest rates significantly in one direction or another. You don't want to be vulnerable in a high debt situation, especially a high international component of it—

[Translation]

Mrs. Francine Lalonde: I do not think you understood my question. This summer, the Canadian dollar was falling down. Do you think reducing the debt made the downward slide steeper?

[English]

Mr. Tim O'Neill: No. If anything, the lowering of the debt levels would normally be a plus for the Canadian dollar. The problem was that there were too many other factors, especially commodity price factors, that were pushing the dollar down.

[Translation]

The Chair: Thank you, Madam Lalonde.

[English]

Mr. Murray.

[Translation]

Mrs. Francine Lalonde: Mr. Martin has—

[Editor's Note: Inaudible]

Mr. Tim O'Neill: This is it.

[English]

Mr. Ian Murray (Lanark—Carleton, Lib.): Thanks, Madam Chair.

I'd like to ask a question about the nature of small-business borrowing. There's been increasing concern about Canada's productivity level as it relates to the value of the dollar, for example. That was something that came out this summer.

If you look at the relative cost of borrowing now compared to five or ten years ago, with interest rates much lower, are you finding that small businesses—and these could be large or small businesses, more medium-sized businesses—are actually borrowing to increase the efficiency of their operations, and therefore perhaps contributing to higher productivity levels? Is that something you're able to comment on, or do you even know if that's happening?

Ms. Anne Sutherland: That's a really tough question to answer, not to say there isn't a lot of term financing going on, and certainly in terms of the various sectors in general I would say there's no question there's an extraordinary amount of innovation in SMEs.

It is extraordinary how people are transforming their businesses through more effective use of technology, and they're definitely investing in that. But whether that is actually improving their productivity, I would not be knowledgeable enough to competently say whether that is the case.

The Chair: Mr. Murray.

Mr. Dieter Jentsch: We've certainly seen a trend where three or four years ago we had a large increase in capital projects and capital investment to enhance productivity. Whether they were buying a new forklift, a new manufacturing line, or a computer system, it all focused on increasing their efficiency and productivity.

We're also seeing a slowdown in those capital infrastructure-type projects at this time, but certainly two or three years ago, small, medium-sized, and large businesses were making considerable investments in infrastructure to improve their efficiency.

Mr. Ian Murray: Thanks.

We were talking about—and this is for Mr. O'Neill—real per capita disposable income. Do we take into account lower interest rates? For example, if somebody has a huge mortgage and the mortgage rate goes down that's better than getting a pay raise at work. So when you're calculating the real disposable income, do you include that in the calculation?

Mr. Tim O'Neill: You don't include it in the disposable income because it's not part of it in that sense. It's how people utilize that disposable income that you can measure, and it shows up on the spending side.

What you can say is that lower interest rates have two effects. There's the one you described that it lowers the cost of the debt you already have and therefore encourages spending. Secondly, it encourages new debt to be added. So when interest rates fell from mid-1995 to the end of 1996, you could see that impact on spending was very powerful by early 1997.

• 1040

That's why 1997 was such a strong growth year, because it had that double effect. It put more money right in people's pocketbooks because they had less to use of their disposable income to pay the debt-servicing costs, and then on top of that it encouraged them to add more debt.

Mr. Ian Murray: I have one quick question on commodity prices. Again, Mr. O'Neill, when would we not be seen to be relatively dependent on commodity prices as a percentage? It's going down, but there's still a perception out there that we're perhaps more heavily dependent on commodities than we are. Also, is it such a bad thing in the long term to have a good chunk of your portfolio, if you will, in commodities? I'm not talking about as a country, I'm talking about individual investors here.

Mr. Tim O'Neill: Are you talking about individual investors?

Mr. Ian Murray: No, I'm talking about the country.

Mr. Tim O'Neill: Okay, the country. We have been reducing the relative dependence in exports on commodities, but when you're a large physical land mass and you have lots of resources to extract, it would be silly not to do that. So in effect, the Canadian economy is always going to be relatively more commodity dependent than say the U.S. or Germany or France, because we're so wealthy in resources.

In the longer term, the only concern would be that what's happened historically is commodity prices on a secular basis, over the long term, have been declining relatively because companies are using them less intensively. The offset of course is emerging economies, who are picking up that slack, if you will, and demanding more commodities, which is why the east Asian crisis was such a problem in the short term.

But I think economies have to continue to do what they do best and use the resources that are available to them. So we're always going to be relatively more commodity dependent. That's not a bad thing if we do it efficiently, and fortunately we have been doing it very efficiently. And that pays off in higher productivity in the long run.

To go back to your first question, whether you're a commodity producer or a dry cleaner, it doesn't matter: if you can be more productive, you and everybody else in the economy are going to benefit from that.

The Chair: Mr. Jones.

Mr. Jim Jones: Yes, I have a few more questions.

What is the turndown rate of all requests for financial assistance by SMEs, by each organization?

Mr. Kelly Shaughnessy: The Thompson Lightstone survey, Mr. Jones, which we tabled on October 1, has the approval rate—by memory—at 93% or 94%. Let me try— You do have this information before the committee. It's well over 90%, and all the banks are within the range.

Mr. Alan Young (Vice-President, Policy, Canadian Bankers Association): It was 93% for 1998.

Mr. Kelly Shaughnessy: It was 93%. Do you know what page? I have the rate here, Mr. Jones: the total SMEs 93%; total banks 93%, because of the other players in the market, and—

Mr. Jim Jones: Which one of you here represents a bank? What's the turndown rate in each bank?

Mr. Dieter Jentsch: Our approval rate in 1998, as represented by the Thompson Lightstone survey, was nine out of ten loans approved, and that's consistent with the year prior.

Mr. Kelly Shaughnessy: CIBC is 95%.

Ms. Anne Sutherland: TD is 95%.

A voice: 90%.

Ms. Lynda Brochu: Bank of Montreal is 98%, I think. Is it?

Mr. Jim Howden (Senior Vice-President, Risk Management and Credit Services, Hongkong Bank of Canada): I don't have the exact statistics, but it's well in the nineties for applicants who apply for money and eventually succeed in getting the money.

Mr. Jim Jones: The other thing is I hear a lot of the reasons for loans were for capital equipment and computer equipment, the type of stuff for productivity increases. A lot of companies have alternatives other than you, and they also could lease this stuff. And we're not getting those figures in, what the small businesses are doing through leasing versus bank loans, right?

Mr. Kelly Shaughnessy: Mr. Jones, you're hitting the nail right on the head. This is what we've been saying; this is what the MacKay task force has said. I've given the example before this and other committees of the House of the computer. It's an excellent example. The small-business person goes in to buy a computer today. Before we even know the small-business person is in there buying a computer, they're getting an offer of financing from a Newcourt, for instance, with Dell Computers. That's an example.

Now, as you're inputting the order, the offer for financing is coming the other way. And we really, really—if we sincerely want to get a picture of the total small and medium-size business financing picture here in Canada, if we're going to get an accurate picture—we have to somehow or other draw those numbers in.

• 1045

Mr. Jim Jones: Also, in your statistics, if I'm a small business and I ask for a $2.5 million loan and get it, am I classified in the small-business category, or am I classified in the big-business category?

Mr. Kelly Shaughnessy: I think each bank would have their own definition.

Mr. Jim Jones: But I meant in these reports here.

Mr. Kelly Shaughnessy: In these reports it's what we have agreed with this committee, because each bank has a different definition of small business we're using authorized loan levels.

Mr. Jim Jones: That's not really indicative of the industry, it's more indicative of the size of the loan, because I could be a large business and only ask for $200,000.

Ms. Anne Sutherland: Sure.

Mr. Kelly Shaughnessy: In this case it's like the 95% and 5% rule. We had to come to an agreement with the committee on how to report these figures. We spoke to the members of the committee over a considerable period of time, and the best proxy for it was authorized loan levels.

I think it's accurate to the nth degree.

Mr. Jim Jones: Wouldn't it be more relevant if we report it by size of organization, whether it's five employees, ten employees, a hundred employees, five hundred employees—which is how I know small, medium, and large size businesses—versus on the size of your loan?

Ms. Anne Sutherland: Mr. Jones, we could have again a subcommittee to ask how do we want to change the definition. This was just something that we set up for ease of reference.

Mr. Jim Jones: It's really liars' figures and figures lie, and it's really meaningless information when I look at the definitions of small, medium, and large businesses.

Mr. Kelly Shaughnessy: I think once again we needed a proxy. We're all competitors; we all have different systems, and we don't capture the information the same way, whether it's number of employees, or things of that nature. This is one parameter that we all have, authorized levels, and I do believe, as I said earlier, it's accurate to a considerable degree, well over 90% accurate. So if there is a trend going on here that you as a parliamentarian don't like, or a trend going on here that we as an industry don't like or that we do like, it's going to get picked up in these figures and it's going to be reflected in these figures.

It's just there are so many of them. If you look at the number of small businesses that are being reported here, there are over 700,000, as I recall. It's going to be very accurate.

Mr. Jim Jones: I just have one quick question.

The Chair: Thank you. No, Mr. Jones, you're done. Sorry.

Mr. Bellemare.

[Translation]

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): Mr. Jones is right.

I will follow up on this question that I—

[English]

The Chair: Before you start, I would ask the members to be judicious in their choice of words. The same rules apply here as in the House, and I don't appreciate the use of the word “liars” used by anyone, figuratively or however.

[Translation]

Mr. Eugène Bellemare: Jeez!

[English]

Why are you addressing that to me?

The Chair: Because you're following up on Mr. Jones's comments and Mr. Jones used those words, so I just want to ensure that we—

[Translation]

Mr. Eugène Bellemare: No, no, no. I will have nothing to do with offensive comments made by others. This is not my way.

[English]

The Chair: Fine.

[Translation]

Mr. Eugène Bellemare: I do not like to be blamed for another member's offensive comments.

[English]

The Chair: Do you have a question, Mr. Bellemare?

Mr. Eugène Bellemare: Yes, I do have.

The Chair: I just wanted to stop you before you went on that same line of questioning.

Mr. Eugène Bellemare: My question is on definition and I've gotten to really like Tim O'Neill. He grew on me during this meeting. Maybe—

Mr. Tim O'Neill: Is that like a fungus?

Mr. Eugène Bellemare: No. Perhaps it's the academic background and I relate to that because of my own background.

I'm sure you like definitions, and what I want to pursue is what Mr. Jones had brought up, the question of definition. And if you would permit me a little preamble—

The Chair: Mr. Bellemare, we're running out of time. I'm telling you, I'm going to cut you off.

Mr. Eugène Bellemare: A small business, is it a number of employees in your mind or the amount of the annual sales or the amount of the assets, or the amount of the loan or the authorization level? People come to see me in my office, and I would presume all the other MPs. I'm sure the president of General Motors doesn't go and visit local MPs, but I get coming to my office the small groups of zero to five employees, the mom and pop shops, the cottage industry, the home-based industry, the exporter-importer in his basement with a computer, the translators, the communicators, the consultants, those with non-tangible assets like high-tech experts. They're the ones who come to see me and they say they're not getting loans.

So I'm wondering what is the definition of a small business in your mind. We in the industry committee are interested in developing jobs, getting jobs and creating employment, creating wealth at the low level.

• 1050

I'm not interested in the worries of GM. Maybe I should be, but I'm not. Maybe it's a natural instinct. I'm worried about the people in my riding. The people I just mentioned are the ones who come to see me. They say they cannot get a loan, and then they give me all these reasons.

If your definition—I'm going to finish there—is the authorization levels, then what if a huge company would ask for a small loan of $50,000 one day? Say you have a whole group of wealthy groups that would ask for quick loans, overnight loans for whatever reason. Are they considered small businesses in your statistics?

Could you define “small business”?

Mr. Kelly Shaughnessy: Madam Chair, each bank has its own definition.

The reason that we, in partnership and in agreement with you as a committee here, chose the definition that we've chosen, which is authorization levels, is because this committee had an interest in bank lending to small and medium-sized businesses. So we had to do that.

My bank has a definition of small business that's on the behavioural aspects of the business. I'm confident that these statistics are capturing my small-business portfolio. I'm sure the Royal Bank and the other banks all have their own definitions too, and I would assume they're confident that theirs has been captured here.

Keep in mind we're here with you discussing bank lending to small businesses. I would hate to think that you think that's the universe of the small businesses we serve. In our bank, 60% of our small-business clients aren't borrowing at any one point in time. So we're discussing a minority of our small-business clients when we only discuss lending statistics. We have chosen the definitions here because of this committee's interest in bank lending to small and medium-sized businesses.

Mr. Alan Young: I would just like to add to that, sir.

The actual definition we use in that document can be found on page 118. We indicate that you can define small and medium-sized business by the number of employees, gross annual sales, or the size of business loan secured. To ensure the consistency of reporting across the members we have, in agreement with the committee we've agreed to use the credit level authorized. You can see the definition on page 118.

The Chair: Do you have a last question, Mr. Bellemare?

Mr. Eugène Bellemare: Could you summarize the answer for me?

Mr. Alan Young: I got the copy just before the beginning of this meeting. I didn't get to page 118 because I was paying attention to the people asking questions.

The Chair: It's actually on page 120, Mr. Bellemare.

Mr. Eugène Bellemare: The answer that I'm being given, Madam Chairman, is small and medium-sized businesses. I'm talking about defining this once and for all.

Mr. Shaughnessy said that every bank has a different definition. So as an MP, I'm asking, what is the definition of a small business? Please tell me what the definition of a small business is. If it's divided, if there are different levels or categories of small businesses, I want to know. If they cannot give it to me today, could they provide the committee with some definitions that we as MPs, backbenchers, could understand? None of us is the finance minister.

The Chair: Mr. Bellemare, as chair, I will undertake to approach all the banks to get their definition of small business. As well, you should be aware of Industry Canada's definition of small business. We'll try to reconcile this in some fashion for you.

I want to thank the group for being with us today. I just wanted to clarify something for the committee. Mr. O'Neill, you said several times that you felt it was commodities that were affecting us. This was based on the Asian crisis. Can you identify which commodities Canada would be affected by particularly?

Mr. Tim O'Neill: In Canada, we are significant exporters of agricultural products. So that's grains in particular, but it would also be things like pork, beef, and so on. We are exporters of base metals. Copper, zinc, lead, and aluminum would be the key ones. We are exporters of energy. Oil and natural gas are the key ones there. We are exporters of forest products ranging from pulp and paper to lumber. Finally, of course, we export other kinds of food, like fish from Atlantic Canada, where I grew up.

• 1055

The Chair: How are we affected then by the Asian crisis—which commodities in particular?

Mr. Tim O'Neill: We would be affected in all of those. For example, British Columbia is a major producer of forest products, and 35% of their exports go to Asia, so they'd be directly hit by that. But all of the producers, whether they sell to Asia or not, are influenced, because as global demand has weakened, those prices have fallen.

The Chair: It's more than the Asian crisis. For the sake of the committee we make it very clear that our commodity pricing is affected by what's happening in many other countries, as I believe Madam Lalonde pointed out earlier. They're not our major buyers of most of those other commodities you mentioned. Asia is not our major trading partner on most of those other commodities.

There's another part I send back to you to take a look at. You talked about the United States and how strong it is. Earlier this week the President of the United States signed a $5.9 billion subsidy for agricultural products in the United States for pricing. So if we're basing it on this and we're protecting growth, and they're looking at difficulties they're having, I'm greatly concerned.

I'm also greatly concerned that in the credit statistics, the agricultural lending and other related services have increased from $10 billion to over $12 billion from 1995 to 1998. If there's any difficulty in that, I'm hoping the banks will have a different attitude this time around for small and medium-sized businesses for that particular lending from what they had during the last difficulties that industry had in Canada.

I send that out to you to take note. There's a debate going on right now in the House of Commons on these questions and issues that have come up in recent days. As we look at the difficulties and what the United States has just done, it's a new challenge to the banking industry. That sector is very different from a lot of other sectors.

So as you've been aggressive in pursuing those loans and attracting those clients, I hope you'll be just as aggressive in helping them through any difficult times, based on the fact that it's more than just the Asian situation that is affecting that industry, in particular those commodities, because they're not our trading partner by any means. We have a tendency to put everything on the Asian situation, and I think we will find there are a lot of other countries that are having just as great, if not greater, an impact on us.

Mr. Tim O'Neill: I'd like to clarify. What I meant was the Asian crisis obviously has influenced other economies; there's no question about that. But whether it has or not, if one-third of the world's economy is shrinking and commodity prices are falling, if you are a forest products producer or a fisherman or whatever in Atlantic Canada, if you don't sell a dime's worth of output to Asia those prices are lower if you're selling into Europe, Latin America, or the United States. You're adversely affected even though you've never exported and never intend to export to Asia. More than just our trade is influenced. The commodity prices are weaker, and everybody gets hit by that.

The Chair: I appreciate your overview, and I hope you're right in your predictions. I think I'm on the side of Madam Lalonde with a bit of a pessimistic view on how fast it's going to turn around over there, having been at the SME APEC conference in Malaysia. So I hope you are correct.

Mr. Tim O'Neill: So do I.

The Chair: I'm optimistic and I'll look forward to your predictions coming true.

I thank you all for being with us. I have to apologize, we have another committee coming into the room. It's been a very enlightening discussion and it could have gone on for a very long time.

The meeting is now adjourned.