FINA Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Tuesday, January 28, 2003

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1535

The Chair (Mrs. Sue Barnes (London West, Lib.))

Ms. Catherine Swift (President, Chief Executive Officer and Chairperson, Canadian Federation of Independent Business)

¹

1540

¹

1545

¹

1550

The Chair

Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance)

Ms. Catherine Swift

Mr. Richard Harris

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1555

Ms. Catherine Swift

Mr. Richard Harris

The Chair

Mr. Brien G. Gray (Senior Vice-President, Policy and Provincial Affairs, Canadian Federation of Independent Business)

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1600

The Chair

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ)

Mr. Brien Gray

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1605

Mr. Paul Crête

Mr. Brien Gray

Mr. Paul Crête

Mr. Brien Gray

Mr. Paul Crête

Mr. Brien Gray

Mr. Paul Crête

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

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1610

Ms. Catherine Swift

Mr. Shawn Murphy

Ms. Catherine Swift

Mr. Shawn Murphy

Ms. Catherine Swift

The Chair

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1615

Mr. Gary Pillitteri (Niagara Falls, Lib.)

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1620

The Chair

Mr. Brien Gray

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1625

Ms. Catherine Swift

The Chair

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP)

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1630

Mr. Brien Gray

Mr. Lorne Nystrom

Mr. Brien Gray

Mr. Lorne Nystrom

Mr. Brien Gray

Mr. Lorne Nystrom

Ms. Catherine Swift

Mr. Lorne Nystrom

Ms. Catherine Swift

Mr. Lorne Nystrom

Ms. Catherine Swift

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1635

Mr. Lorne Nystrom

Ms. Catherine Swift

Mr. Scott Brison (Kings—Hants, PC)

Ms. Catherine Swift

Mr. Lorne Nystrom

Ms. Catherine Swift

Mr. Lorne Nystrom

Ms. Catherine Swift

Mr. Brien Gray

Mr. Lorne Nystrom

Ms. Catherine Swift

Mr. Lorne Nystrom

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

Mr. Brien Gray

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1640

Mr. Roy Cullen

Ms. Catherine Swift

Mr. Roy Cullen

Mr. Brien Gray

Mr. Roy Cullen

Mr. Brien Gray

Mr. Roy Cullen

Ms. Catherine Swift

Mr. Roy Cullen

Mr. Brien Gray

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1645

Mr. Roy Cullen

Mr. Brien Gray

Mr. Roy Cullen

Mr. Brien Gray

Mr. Roy Cullen

Mr. Brien Gray

Mr. Roy Cullen

Mr. Brien Gray

The Chair

Mr. Scott Brison

º

1650

Ms. Catherine Swift

Mr. Scott Brison

Ms. Catherine Swift

Mr. Brien Gray

Mr. Scott Brison

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1655

Ms. Catherine Swift

Mr. Scott Brison

Ms. Catherine Swift

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1700

Mr. Scott Brison

Mr. Brien Gray

Mr. Scott Brison

Mr. Brien Gray

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

Mr. Brien Gray

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1705

Ms. Catherine Swift

Mr. Bryon Wilfert

Ms. Catherine Swift

Mr. Brien Gray

Mr. Bryon Wilfert

Ms. Catherine Swift

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. Brien Gray

Mr. Larry Bagnell

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1710

Mr. Brien Gray

Mr. Larry Bagnell

Ms. Catherine Swift

Mr. Brien Gray

Ms. Catherine Swift

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 033

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Tuesday, January 28, 2003

[Recorded by Electronic Apparatus]

¹  (1535)  

[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Good afternoon, everyone.

[Translation]

    Welcome everyone.

[English]

    The order of the day is, pursuant to Standing Order 108(2), a study on the public interest implications of large bank mergers. We'll continue with our witnesses from where we left off before Christmas. This slot of time was originally for two sets of witnesses, but we only have one with us today. So we will take the time for this set of witnesses to approximately 4:45, and then go into our in camera session on future business, to look at some of the questions with respect to other decisions the committee has to make today.

    I would welcome Catherine Swift, André Piché, and Brien Gray. You can have 10-12 minutes, if you would like, to start us off, before we go to our rounds of questioning.

    Ms. Catherine Swift (President, Chief Executive Officer and Chairperson, Canadian Federation of Independent Business): Thank you very much, Madam Chair.

    Thank you very much, as always, for the opportunity to come and speak with you today. We've provided you with a package of materials, which I'll be referring to briefly in the course of the statement.

    Not surprisingly, the whole issue of bank mergers and where the public interest lies is of considerable importance to the small business community in Canada. We recall when this issue first arose, at least arose most recently, in 1998. We found through surveys of our small business members at that time that they were quite strongly opposed to these mergers taking place. For example, we found in May 1998 that about two-thirds of respondents to a survey were opposed to the proposed mergers, just under a quarter in favour, and the remainder undecided. At that time the major reason for their opposition was the belief, in fact the assertion, that since there was already excessive concentration of the market in the Canadian financial services area, and therefore insufficient competition among financial institutions, the notion of permitting further concentration through mergers really wasn't in the public interest.

[Translation]

    Since that time, we have seen the adoption of many recommendations of the MacKay task force report and corresponding changes in financial institutions legislation to facilitate, among other things, the entry of new players into the market and better data availability to monitor market trends.

    Despite these positive changes in the regulatory climate, increased competition has failed to materialize. Indeed, as a result of such factors as continuing bank branch closures and the TD Bank takeover of Canada Trust, there are even fewer major players in the mix than there were in 1998. AS a result, given that it was determined that big bank mergers were not in the public interest in 1998, it is hard to see what has changed for the better that would suggest they are now acceptable from a public interest perspective. In fact, in 1998 CFIB put together a list of issues for Canadians to consider on the bank merger issue, and this list is still very relevant today. The list is in your folders and is entitled: “Mega-banks: issues for all Canadians to consider on bank mergers”.

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[English]

    One of the major reasons mergers were rejected in 1998, as you undoubtedly recall, was the expected negative impact on small and medium-sized businesses. In light of the growing and very important role that small firms play in the Canadian economy, we certainly believe this was a well-founded conclusion. We've included a set of charts in your kit, and I would just refer to a few of them briefly.

    Page 3, for example, has a pie chart about the structure of the business sector in Canada based on Statistics Canada data, and of course, the dominant portion of our economy is made up of small and medium-sized businesses.

    Page 4 of the charts refers to the 1990-98 period, which comprises the most recent data we have in this area. You can see that the portion of overall employment represented by the small and medium-sized business sector has grown steadily and does continue to grow. Given that small firms now represent roughly half of the economy in Canada, what's happening in that sector has a major impact on the overall fortunes of our economy. We found this demonstrated pretty conclusively over the last 18 months or so, as a lot of our survey data showed the small business sector remaining optimistic, while the stock market and the large corporate sector basically languished. Despite this problem in the large corporate sector, our economy had a very good year last year. We created over half a million new jobs, as I'm sure you are aware, which was a record year, and most of these arose from the small business community. So the health of the economic climate in small business bailed us out of the troubles we were seeing in the large corporate sector. As a result, we've come to call our sector the non-stock market economy. On page 6 there's a pretty graphic representation of how we've seen our CFIB index of small business fortunes vary quite dramatically from what was going on in the stock market, represented here by the TSX.

    We participated in a recent study, interestingly enough co-authored with the Royal Bank, comparing Canadian and U.S. small businesses. This study was quite interesting. It found that Canadian firms were just as innovative and entrepreneurial as their U.S. counterparts, we ranked very strongly with respect to how entrepreneurial we were as an economy, but the barriers faced by Canadian small businesses were deemed to be more important impediments to growth than barriers faced by their U.S. counterparts. There's a chart on page 9 that shows some of these data. The two columns on the left referring to barriers show that in Canada 41% of the small firms polled found that barriers to growth external to their business were a major reason they did not grow.

    We have tracked, as an organization, the level of concern among our members about the general availability of financing for many years. Our most recent data, shown on page 10 in a chart, demonstrate that. The last bar on that represents the third quarter of 2002. This chart covers almost 20 years. Concern over availability of financing has reached an all-time high among our small business members after a number of years of relative calm, I would say, in this area. There's quite definitely something going on that is constraining credit for the small business community.

    We've also heard quite a bit of anecdotal evidence from our members over the recent past about a tightening of credit in response to things such as bank losses in the technology-telecommunications sector and so on. We also know from Bank of Canada data that over the last decade bank lending to large businesses has continued to grow, while it has more or less flat-lined to small and medium-sized firms, and we've summarized those data on page 13 of the charts. So even without the prospect of bank mergers, we would be concerned about a looming credit crunch at this time having a negative impact on small businesses.

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    In recent years we also have seen a number of Canadian banks show quite significant losses in market share in the small business area. On page 15 the chart shows in three representative years, 1989, 2000, and 2002, what has happened with market shares of some of the major players in the Canadian market. We would contend that such a significant drop in market share, notably for the Royal Bank and CIBC, simply does not happen by accident, but is part of a deliberate corporate strategy to withdraw from the small business market. So even under current market conditions, credit availability to small businesses is shrinking from traditional sources.

    This, of course, is even more pronounced in certain regional and rural markets. We've just included a couple here, Ontario and the Atlantic provinces. For example, with the rumours of a merger between Bank of Montreal and Scotiabank we heard about a little while ago, if that merger had actually happened, the new merged bank would have ended up with a 60% share of the market in Newfoundland--one institution with a 60% share of that market. That's a pretty dominant market position.

    There has been some limited entry of other players into the Canadian marketplace in recent years, but from a small business standpoint, these alternative players have not been able to supply the range of financial services required by the average small business. On page 18 you can see the extent to which small firms actually use some of these other institutions. It is, overall, pretty limited.

    We have seen some recent surveys to suggest that views of Canadians have changed and there is a little more acceptance of big bank mergers than there may have been a few years ago. We very recently updated our research among our members to see what, if anything, had changed from their perspective. We just did the survey last week. We did it electronically, so that we could get some quick feedback. To date we've received just under 2,000 responses, and we've included in your kit a sheet that shows the result of the survey. As you can see, we have just under 60% saying they believe the additional competition should be present in the market before allowing any of the current large banks to merge. Just under 30% believe there should not be mergers under any condition, and just under 10% felt banks should be allowed to merge with no conditions, no matter what the situation. Generally speaking, we have a more or less similar point of view to that we got on our survey back in 1998.

    We have heard, notably in the Senate committee testimony, some bankers suggest that undertaking things such as promising to retain rural branches for a few years, maintaining levels of credit to small business, restricting layoffs or postponing layoffs to some extent, selling surplus branches to other players should mitigate any opposition to mergers. We would suggest that some measures would not be easy to enforce, or perhaps even very effective, and would probably just end up postponing the inevitable.

    We continue to believe the only means of ensuring that small businesses, and other Canadians, for that matter, are adequately served by financial institutions in the long run is to increase the level of competition in the industry before mergers are contemplated. The banks clearly believe large scale mergers are in their interest, and they may well be right, but we believe the role of this committee is to establish what is good for all Canadians.

    Thank you very much. We'd be delighted to try to answer any questions you have.

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    The Chair: Thank you very much.

    We will start with Mr. Harris.

    Mr. Richard Harris (Prince George—Bulkley Valley, Canadian Alliance): Thank you, Ms. Swift. As usual, your presentation was very well prepared. I always enjoy hearing from CFIB. Having spent many years in small business, I do have a lot of appreciation for your organization. I remember your presentation when we had this go-around on bank mergers and the overall look at the banking and financial services sector back in 1998.

    If I understand you correctly, your organization is not simply opposed to the idea of bank mergers, but rather is concerned that there should be steps taken to mitigate the impact of any mergers and a perceived lessening of competition in the banking industry, from the viewpoint of your members. In other words, some rules should be laid out, so that the concerns of small business in Canada can be recognized.

    Ms. Catherine Swift: Yes, that's correct. There's no automatic predisposition against mergers by any stretch. However, it was clear back in 1998 that there was already pretty limited competition, at least in the small business marketplace, for the usual array of financial services. If anything, that level of competition has worsened today through the TD-Canada Trust merger, when another player was effectively taken out of the marketplace. So if the public interest in 1998 was such that it was deemed that mergers were not permissible, from our standpoint, it's hard to see how things are really any different today. In fact, if anything, they are worse. This is why we believe, and the vast majority of small firms we canvassed recently believe, the presence of established competitors that already have a foothold in the market should be a prerequisite for mergers down the road. So we would like to look at how we facilitate that, as a country, over the next period of time, whatever it be. Then let's revisit the whole merger issue with a better competitive market structure.

    Mr. Richard Harris: There were a number of changes, as you know, made to the bank legislation that, in most opinions, opened up the market to players who wanted to get in. I know it hasn't been as robust an entry as we had hoped, but short of going out and dragging people in by the scruff of the neck, I think we made some major steps in opening up the rules for competition. But they simply haven't come, and I understand what you're saying.

    I do want to address a study that was done recently that CFIB was part of, with the Royal Bank and Canadian manufacturers. In fact, there are a couple of pretty good statements in there that your organization supported.

One of the growing strengths of the financial services industry, however, is that there exists a broad array of providers within Canada, such as banks, credit unions, leasing companies, insurance companies, pension funds and government-sponsored lenders.

The report went on to say:

The industry is a world leader on multiple measures of access to business financing and pricing. The hard evidence of this matter speaks for itself despite misperceptions that have been created.

Those sound like pretty glowing statements, and yet your members don't seem to agree. I'm just trying to put those two together.

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    Ms. Catherine Swift: I think they agree that we do have a stable banking system in Canada; I don't think anyone can deny that. And depending on who you're comparing it to, as well, we do compare favourably. We usually, naturally, compare ourselves with the U.S., because that's the most relevant comparison. We did find in that study that access to financing was a greater barrier to the Canadian small firms that were canvassed than it was to the American small businesses that were part of that particular study. I think too over the last number of years we have seen a reduction more in rural areas than in urban areas, but there has been quite an increasing problem, we found, among our rural members, because of branch closures and more centralization of our system in Canada. And of course, the U.S. experience is quite different because of their very diversified banking structure.

    So it's not to say that we don't have a stable banking system and, relative to some countries, preferable, but again, that study compared Canada with the U.S., where it appeared from the results that Canadian firms face greater barriers on the financing front than their U.S. counterparts and competitors.

    Mr. Richard Harris: I've had conversations with some senior bankers over the last 14 or 15 weeks, talking about access to financing, with these hearings coming up. One of them in particular, just out of interest, two weeks ago, as we were talking about small and medium-sized business loans, said the competition for those loans was really aggressive out there. And I said , what do you mean? And he said, we hold a good share of the market, but if we weren't aggressive on a daily basis, going out and looking for that business, we would soon lose the edge we have. And he said, it's only because we've had to bring in some very creative business financing that we're able to get the market share we have, but within days one of our competitors has got their version of creativity as well and is after the business we've got. So it appears to me that while there may be a small number of banks by comparison with the U.S., the lending sources are really in a very competitive mode out there for the business you're representing.

    The Chair: Mr. Gray.

    Mr. Brien G. Gray (Senior Vice-President, Policy and Provincial Affairs, Canadian Federation of Independent Business): I think there are a lot of things in your question that can be responded to. I've been following this dossier on behalf of small business now for the better part of 25 years, and I can remember back when the Blenkarn committee was looking at opening up financial services with the promise of more open markets, more competition, more this, more that. At that time we had a whole lot of trust companies, many of which were doing small business lending. We now have virtually no trust companies serving our market. Yes, we do have banks that bring out new products from time to time that are aimed at the small business market, but as to real innovation, I would submit that there isn't a lot of innovation in financing of small business in this country on an ongoing basis. I would submit also that it's partly because there are a bunch of competitors, but they all kind of move like this, they don't move like this, and that, and so on.

    I recall that at the beginning of the last recession, in the early 1990s, the Bank of Montreal floated out an approach to balloon financing, whereby you'd be forgiven on the first part of your loan, because interest rates and the availability of capital were so tough, so you wouldn't have to spend as much at the front of your loan, but then you'd spend quite a bit later, presumably when the economy came back. I saw that as quite an innovation, but it was only one bank that did it. And I haven't seen too much of that since then.

    Another example would be--and this would have happened in the mid-1990s--when Wells Fargo decided to ride into town. I can recall the major charter banks in Canada all screaming and yelling, foreign competition is coming in here, it's going to kill us, we must have the right to go out there and compete, and on and on. Actually, Wells Fargo hasn't penetrated the market much. You can see from our own data that very few of our members ever touch Wells Fargo. The good news about it, though, was that a new cowboy coming into town brought a new product and all the Canadians banks started to replicate it. Had Wells Fargo not come into town, I doubt we would have seen that new financing device in the market.

    So as to where the competition is and where the competition is going, our observation, over a period of years, is that the number of players in the market had started to go like this. It continues to go like that. TD-Canada Trust, by any definition, is a bank merger. And you will find that in some parts of the country more than others, notably Atlantic Canada and Ontario, of all provinces, there is no effective second tier. So if you start to consolidate and contract even more in that marketplace, you're going to have fewer options, you're going to have fewer opportunities for small businesses in those communities. And it starts to be reflected in branch closures, restricted hours, and a higher incidence of turnover. There are lots of ways to make access more difficult, and a lot of these things are going on in the market right now, as there have been for a number of years.

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    The Chair: Thank you very much.

    Monsieur Crête.

[Translation]

    Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): Thank you for your presentation. I was particularly interested in your survey. You say that 57 p. 100 of your people, which is the majority, say that increased competition must be a condition for approval for bank mergers. Do you have any suggestions as to how you can ensure increased competition before the mergers occur? I can certainly understand your members' reaction. I live in a region where banks no longer exist. You hardly see them anymore. There are only savings and credit unions that have now become much more conservative when it comes to investing in small businesses because there are fewer banks.

    Your members say that if there were increased competition prior to the mergers, that could prove interesting. Your members seem to want to give the players a chance. How can you guarantee the increased competition prior to announcing the mergers?

    Mr. Brien Gray: It is indeed a major challenge for everyone and that is why our members have voted that way. It is one thing to make promises, but it is another to deliver the goods. There is at least one thing that would be of interest to you, Mr. Crête: the Desjardins network is currently active everywhere in Quebec. There is also a major regional bank, the National Bank of Canada, that is in Quebec.

    Over the years, Quebec has been viewed as being nearly the perfect model. There are two fairly large financial institutions in that province. What has been the result of that? Most of our members in Quebec are more satisfied with the financial institutions than people elsewhere in the country. That is why we insist that there be more competition and more choices available before consolidating.

    How can that be done? In Quebec, savings and credit unions have been encouraged, but in other provinces, that has not happened. In Alberta, there are the Alberta Treasury Branches, which are a type of competitor on the market, but in the Atlantic Provinces and in the Ontario, those do not exist. That is why small business feels that merging big chartered banks must not be done before something else is put in place.

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    Mr. Paul Crête: Is there some way of ensuring that American, European or other banks enter the market before the mergers can take effect? That might be an interesting idea that we could raise right away in order to get some reaction.

    Could the BDC be given a more significant role that might eventually help foster renewed competition?

    Mr. Brien Gray: As far as foreign financial institutions are concerned, you could say that to some extent, HSBC Bank Canada has entered the Canadian market, but gradually. Even the large foreign banks are wary about entering the Canadian market because this market is dominated by the large chartered banks. They are a recognized presence in the market and can count on market loyalty. Market entry costs are high, and the competition is quite stiff. So, that is a problem.

    Second, the TD Canada Trust case was a missed opportunity. There was an operating network with all kinds of branches across Canada that could have supported something that would compete with the major chartered banks. But instead of doing that, the go-ahead was given to a merger between a major chartered bank and this company with its huge network. And people missed their chance.

    We hope that others will not hesitate to enter the market because it is prohibitively expensive.

    Mr. Paul Crête: You say that 57.6 p. 100 of your members would like mergers to be subject to conditions before they can go ahead and that 29.8 p. 100 of them want there to be no mergers at all. And may I conclude from this that 87 p. 100 of your members prefer the status quo to a change that would pave the way for mergers between major Canadian banks?

    Mr. Brien Gray: Well, when the heads of the major banks come here, they tell us that it is difficult, that they do not know what to think when it comes to mergers, and that they have doubts about such a proposition. Canadians are just as concerned and unsure as small and medium business of the effects of a bank merger that is not preceded by increased competition in the market.

    Mr. Paul Crête: On the other hand, without mergers—people in favour of mergers say the situation is detrimental to existing banks at any rate—if the status quo is maintained, aren't you afraid that your businesses will end up in situations where, in the medium term, despite your members' express wishes, they will lose out anyway?

    Mr. Brien Gray: Let's hope not. It has been five years now since the last merger attempt. Back then, all of the chartered banks were saying that it would be chaos if there were no mergers, but the banks continue to post healthy profits, in my opinion.

    Mr. Paul Crête: Thank you.

[English]

    The Chair: Thank you.

    Shawn Murphy.

    Mr. Shawn Murphy (Hillsborough, Lib.): There are two issues I want to pursue and make a few preliminary comments on. They deal with availability from a location point of view and a product-mix point of view.

    I come from Atlantic Canada, and I practised commercial law for about 25 years before I got elected, so I have personal experience with a lot of the problems you elaborated on, such as the recession of the early eighties. At times the banks have withdrawn from certain sectors entirely. They withdrew entirely from the agricultural sector in the late eighties, and they withdrew entirely from the hospitality industry from the early nineties right up until the mid-nineties. That caused tremendous problems for those industries, as you can appreciate. It wasn't only one bank, but most banks. These were strategic decisions that didn't just happen, they were mostly made in Toronto, that they would withdraw from these particular industries in these regions. It caused a lot of problems for the industries and the people who were in the industries.

    But my understanding of this hearing--and this is where I'm having difficulty with your submission--is that we're mandated by the Minister of Finance to come forward with recommendations as to the criteria on bank mergers. As you people well know, the Bank Act allows mergers. There's a three-stage process to go through, the competition, the prudential issues, which are determined by OSFI, and the public interest, which is determined by the Senate committee, the House of Commons committee, and the Minister of Finance. Our mandate, as I understand it, is to determine the criteria that are to be followed in determining whether the Minister of Finance, and through him the Government of Canada, will allow two major banks to merge. If I read your submission, it basically says we shouldn't allow mergers of major banks under any circumstances. So I'd like you to elaborate. We're here to try to set criteria, and you're saying they shouldn't be allowed under any circumstances. I think that field has already been ploughed, and I'm having difficulty.

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    Ms. Catherine Swift: That isn't exactly what we're saying, though I can understand how it might be interpreted that way. The existing public interest impact assessment has been laid out in a number of documents. I'm looking at an addendum to the Senate committee report, but it was originally included as a response to the MacKay report from the Department of Finance. There are a number of points looking at such things as the business case objectives of the merger, costs and benefits to customers, including small businesses, the impact of branch closures, and so on and so forth. We wonder what needs to be done in addition to the public interest impact assessment that has already been laid out, because we feel it would be an adequate series of tests for any proposed merger. We thought it important to explain our members' position under the current circumstances, but we feel that if we use this public interest impact assessment under current circumstances, we won't see mergers go forward, as we did not in 1998.

    Mr. Shawn Murphy: So you're basically saying this committee really doesn't have to do anything, it can just leave the existing theory as it is.

    Ms. Catherine Swift: I think it's always worthwhile updating data, updating the current state of the industry, and so on, because this was done now a number of years ago. Endorsing it and revitalizing it, I suppose, from a basis of current market conditions, would be something this committee could consider. From our standpoint, we think the major points were covered off in this previous public interest impact assessment.

    Mr. Shawn Murphy: What is your organization's opinion on legislating or regulating banks to stay in certain regions, certain communities for a certain period of time, and also attempting some kind of mandate or regulation where they have to continue to offer credit to small businesses in all sectors? Again, I can appreciate the difficulty, and this would be mind-boggling, but do you have any thoughts on that?

    Ms. Catherine Swift: Our constituency is traditionally very market-oriented, and we never advocate regulation of any sector beyond what is necessary. The banking area is already a very heavily regulated sector. I know some groups have come forward and said a certain portion of assets in a given community should be invested back into the community, an approach such as they have in some parts of the United States; there should be thresholds that guarantee a certain portion of lending going to, say, small business or whatever. We don't believe that would be effective.

    Some points were brought up earlier by Mr. Harris about the fact that banks say there's a lot of competition. Well, there is competition for the established small business that has a long track record. It's like wealth management: everybody want's the rich people to be their clients, so they can invest their money and so on. So we do have all the institutions competing for that particular customer base. However, the relatively young business that maybe doesn't have the ten-year track record in the marketplace, but nevertheless has a good business proposition, ability to grow, and so on and needs some financing help is the one that is often out of luck in the current Canadian context. Naturally, such businesses are riskier, so there are reasons to see their credit conditions as different, but we don't believe they should be denied credit.

    I guess that's the challenge. We don't say, yes, impose onerous regulation that would insist upon x per cent of lending going to a certain constituency or a certain region or whatever, because we feel what'll happen is that those preferred clients who don't have any trouble getting credit in the first place will be over-serviced and everybody else will be pretty much as they are now, not well serviced. We've seen that happen in the past, and so it's not an approach we recommend. Again, we're not underestimating the difficulty of injecting some better competition into the Canadian marketplace. It is challenging. There are huge barriers to entry, as we know, in financial services. The financial services industry is unlike perhaps all others. It has to be heavily regulated. Somebody can't tomorrow decide to just start up a bank as they could more or less decide to start up some other kind of business--at least it would not be anywhere near as easy.

    As I say, we do not underestimate the challenge of getting more competition into the Canadian marketplace, but we do believe that is the best way we're going to achieve a proper lending climate for the small and medium-sized business sector. We feel that's the question we should be asking ourselves, not so much whether banks should merge, but how we get a better competitive environment. Then let's look at whether or not institutions should merge. Maybe it's not just big banks, maybe insurance companies and banks, maybe other players in the marketplace as well. I guess we're feeling the debate is maybe passing over the true question, which is how to have a better competitive marketplace in Canada.

    The Chair: Thank you.

    Mr. Pillitteri.

º  (1615)  

    Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Madam Chair.

    Having been here back in 1998, when we had a task force, I've been part of this hearing for so long, and I've come to a conclusion. I'm a businessman also, sometimes on both sides of the border. We always compare ourselves to the United States. I find the banks' position quite difficult. We're being served fairly well by the large banks, contrary to what some people might believe. If they've had to cross to the other side of the border, in the United States they are not served as well as we are served here in Canada. A lot of the charges we've taken for granted here, and there are charges we think are exorbitant. They have much higher charges in some American banks. Interest rate charges are a little higher than most in Canada. But in the United States there are tens of thousands of banks, so the daily routine is in mergers, and of course, our charter banks here in Canada want to do the same.

    Our Canadian banks have lost a lot of money, especially in the last few years--the large investment they made in Enron and so on--but 40% of their profits are coming from outside Canada. So they're quite up-to-date and very innovative. And in the marketplace here in Canada, when anyone tries to come in, they basically take them out of the marketplace very fast, because they're knowledgeable about their marketplace, and anyone coming in has almost a non-opportunity. No matter how much we have opened up, competing and getting other people started is almost impossible, because they're so big and they're able to cherry-pick and force out the competition.

    We have to address the issue. As Canadians, do we want mergers? Do we want to maintain the status quo? Should we be putting in place how they can merge? The Competition Act says what they should do and not do, but we need a little more information from you business people. What can we present to the minister and what could we advise him on? Realistically, the best thing for them to do is make their services deteriorate, in order for them to create the idea of mergers. But we, as Canadians, have excellent service from these banks. Would you conside mergers with other financial institutions, like insurance companies, trust companies, or do you want to see no mergers at all? Just give some kind of idea how we could make presentations to the minister on the future of financial institutions in Canada.

º  (1620)  

    The Chair: Mr. Gray.

    Mr. Brien Gray: To some extent, comparing the United States banking system with ours is like comparing apples and oranges. Our banking history is totally different. Theirs is predicated on no crossing state boundaries, no interstate banking, and as a result of that, they created a huge diversity of community banks and so on over a period of 200 years. In Canada the deal over time has been, as a point of public policy, in a country that's vast and has a small population, not to go the same route. We went to a route that touched every part of the country and allowed certain consolidations that maybe wouldn't have been allowed in the American market, simply because we had to get to a certain public policy objective of serving Canadians in every part of the country with adequate and supportable banking services. There was a form of social and economic compact, if you will, between the banking industry and the public, and that's how we've constructed our industry. For example, the RRSP legislation in this country is hugely favourable to our banks; they do very well by it. That's part of the deal, one would presume.

    So when we're looking to the future, we can't all of a sudden say, the old rules and understandings we govern this vast country with simply are no longer on, we want to move on to something else. When you're talking about differences in the countries, there may be more service charges in the United States market, but there's a lot more lending against risk. You don't see too much of that in this country, because the banks have chosen not to do it. So you can't always accurately compare one system with another system.

    You folks in this room, not all of you, but many of you, are urban-based. The situation in urban Canada isn't what it is in rural Canada. In September of 2001 we wrote to Andy Mitchell sharing our concerns about a withdrawal of the banking system from many small parts of Canada, including Perth, Ontario, just down the road here, where many of our members are finding that for example, in commercial mortgages the banks are simply getting out of the game, that there are not alternatives that used to be there in the banking system any longer. If you have a historic building, such as in downtown Perth, forget about trying to get any commercial lending and mortgage lending in that community.

    So moving into what Mr. Murphy was saying a minute ago, can you go to a quota system? We had Mr. Bailey before this committee four years ago saying, don't put quotas on us, we just don't want to deal with that, and nor would our members probably like a quota system. That's why we and our members keep coming back to bringing into the market, as much as we can, other forms of competition, and we would congratulate this committee and the government for trying to facilitate the move towards, say, the entry of credit unions in a more substantial way into the marketplace. The unfortunate thing is that the very strength of the credit union movement in areas outside Quebec, which is their independence, their local identity, and so on, prevents them, in a funny way, from getting together on anything in order to have economies of scale. When you are paying 70¢ on the dollar for your cost of operations, compared to 50¢ and dropping for the chartered banks, how can you get in and compete in that marketplace? It's very difficult.

    The other thing about quotas is that the bar keeps going up: profitability of a branch, what it was four years ago, what it is today. And as the bar keeps going up, you get more branch closures. So in a country of vast geography and small population we have to be incredibly innovative, to bring in more forms of competition, to give more choice to our men and women and entrepreneurs across this country. Is one of those solutions the business of insurance companies and banks? We have not asked that direct question of our membership, but I can tell you from our past dealings with our members that they are very wary of what I call significant concentrations of economic power in the hands of any entity. I can't tell you what they would vote, but I suspect they would be somewhat fearful, along the same lines as they are with huge consolidations of bank powers.

º  (1625)  

    Ms. Catherine Swift: Also, we've seen the banks over the last 20 years take over successively the securities industry in this country, effectively, the trust industry. There used to be four pillars of the financial industry, now there are two, banks and insurance. Are we going to permit them to become one? I think that's a real concentration of power.

    I would also argue with the point that our banks are that innovative and efficient. We've actually seen time after time that as long as you want plain vanilla banking services, you can probably receive them from the Canadian chartered banks. The Wells Fargo example was one. That was in the U.S. marketplace for years; the banks could have emulated it, but they didn't until Wells Fargo actually came into Canada. And that's a very specific product targeted at a niche of the small business market. We figure, the more, the merrier when it comes to that kind of thing, so it was a perfectly fine innovation, but none of our banks did that, although they all were aware of it, until Wells Fargo actually entered the market. Many of you might remember, before we had competition in the telephone equipment we could put in our house, we all had black phones. That's like the banking service in many respects.

    The Chair: Thank you.

    Mr. Nystrom.

    Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you very much, Madam Chair.

    Ms. Swift, others, once again thank you for coming and for being thorough and thoughtful and well prepared in your research.

    You're talking about the four pillars in the banking industry, and we're now down to two, the need for more competition in regard to small business before we have bank mergers. Maybe you can elaborate a bit more on where that competition may come from. Is there any of that to come from Canadian sources, is it foreign? I come from a province in Saskatchewan where the credit union movement is large, as in Quebec and British Columbia; you make a point here that in Ontario it's very tiny. So if you can elaborate a bit more as to where that competition may come from, it may be useful for the committee, because it's gone the opposite way just in the last few years, down from four pillars to two, and it's getting worse, instead of better, from a competitive point of view. And you've already mentioned the problem of the credit unions in respect of their getting together outside the province of Quebec.

º  (1630)  

    Mr. Brien Gray: I think in some provinces more than others, notably Saskatchewan, Alberta, Manitoba, and Quebec, where the credit union movement has got a much greater foothold, that's part of the history of these various provinces. Most credit unions provide largely personal banking services. Some in western Canada and partly in Quebec certainly have got more and more into commercial lending. I would submit that it's still a relatively new domain for them. They haven't become very sophisticated in syndicating their own operations. I know that CUCORP out of Saskatchewan does tend to help some of its partners in other provinces more and more now, and that's a good development. But even in Quebec, where we have a very well established credit union movement, we find that our members, once they get to a size category where they need more sophisticated banking services--the same would be true in Prince Edward Island--they have to graduate up to the chartered banks network, because they can't get those sorts of services, as the core business of these credit unions and their core specialty so far is not small business lending. I hope they can develop that. You are fortunate in Saskatchewan, because you have a base from which to develop, but in parts of Canada, such as the Atlantic provinces and Ontario, it is simply not there right now.

    Mr. Lorne Nystrom: Is there any role for the Business Development Bank with small and medium-sized business? Could there be an expanded role for the Business Development Bank?

    Mr. Brien Gray: I think our members would say the role for the BDC would be pretty tight and limited. As we pointed out in our presentation, the CIBC's losing a third market share in our membership since 1989, for example, is a huge amount of capacity, because of the size of that bank. There is no way the BDC can fill that capacity loss. You simply here in Ottawa don't have enough money to cover off all of that, and I wouldn't encourage you to go there at all.

    Mr. Lorne Nystrom: In Regina, for example, maybe it's anecdotal only, but certainly on the street there seems to be more word among small business folks that it's harder to get some of the banks to lend them money, to do a small business loan with them, and so on. There seems to be more of a movement towards the credit unions, at least in Regina and Saskatoon. That's certainly the story I'm getting as a member of Parliament.

    Mr. Brien Gray: It certainly is happening, Mr. Nystrom, and that's partly because of the withdrawal, notably, of the Bank of Montreal in Saskatchewan; they basically sold many of their branches to the credit union system. I think, as natives of Saskatchewan see banks withdrawing more and more, they are left with going to those financial institutions they know are going to be more permanent in their neighbourhood.

    Mr. Lorne Nystrom: I think Ms. Swift wanted to add something.

    Ms. Catherine Swift: On page 15 you can see market share. These are national data, but we could disaggregate them regionally if there were any interest in that. But you do see the roles of the credit union-caisse populaire movement increase quite dramatically over these 13 years or so.

    Mr. Lorne Nystrom: There is a lot of very useful information here. You have one chart here about employment in the small business and medium business sectors going from 1990 to 1998 from 54% to 56%. Do you have any updated data? That's now about four years or five years out of date. Is the trend continuing, with more and more people employed in the SME sector, or is it static? What are the trends, if you don't have the data?

    Ms. Catherine Swift: We believe it has increased. Those are Statistics Canada data, so we're waiting for them to update them, which they ultimately will. But other trends in gross domestic product and what we've seen in job creation, where we have some more recent data, would indicate that those trends have continued.

    Mr. Lorne Nystrom: In respect of the size of small business communities in our country, can you make comparisons with what's happening in western Europe, Australia, New Zealand, the United States, other western countries? Are we roughly the same as them, do we have a smaller small business sector, a larger one?

    Ms. Catherine Swift: We have a slightly larger small business sector than the U.S. relative to the size of our economy. We represent about half, whereas in the U.S. it's about 40%. The structure of the economies in continental Europe is quite different. You have almost a micro-enterprise sector, and because there's much more public ownership in the large corporate sector, you're really comparing apples and oranges. But in countries like Australia, for example, which are in many ways similar to Canada, you see a pretty analogous role for the small business sector. In developed economies generally you see a pretty important role for small business. There are a lot of trends that have driven it. Technology changes have definitely been a major factor in assisting the growth of small firms, large corporate downsizing has happened around the world, and so on. All these things have contributed to the growth of small business in developed economies.

º  (1635)  

    Mr. Lorne Nystrom: Finally, I'm curious about your very first chart, the one where you have the big red pie, where 75% of the firms have fewer than five employees. Roughly how many would that be? Would that be half of the small business sector? I think small and medium-sized business now has, or in 1998 had, 56% of the employees in the country. That's an awful lot of firms, 75% with less than five employees. Does that represent roughly a quarter of the small and medium-sized business sector? Scott may have had a business where he had one employee years ago--how many Scott Brisons are there out there?

    Ms. Catherine Swift: Too many to count.

    Mr. Scott Brison (Kings—Hants, PC): I think we need more.

    Some hon. members: Oh, oh!

    Ms. Catherine Swift: I'm not sure exactly what you're asking, I'm sorry.

    Mr. Lorne Nystrom: Neither am I.

    Some hon. members: Oh, oh!

    Mr. Lorne Nystrom: These small, small businesses, the ones with less than five employees, how many do they employ in the country?

    Ms. Catherine Swift: They would represent about a quarter of total employment in the country. Is that what you're asking?

    Mr. Lorne Nystrom: Yes. So you have about 25% of the people working in very small firms.

    Ms. Catherine Swift: Yes, that's right. Of course, what we all hope is that those firms will grow, because obviously, you don't start out with 200 employees as a rule; you start out small and, ideally, grow and hire more people.

    Mr. Brien Gray: I think it's very important to realize that in this economy it's easy to go at the glamour industries, the ones that are high-tech knowledge-based, exporters, all these folks who do all the wonderful things for the growth of this economy, but if you forget the worker bees, you're going to have a real problem in this economy. One of the themes we're developing right now, and I think all of you have to be alerted to it, is that we're going to have a major intergenerational transfer of businesses in this country in the next 10 to 15 years, and we'd better get ready for it, because it's going to cost a ton of money. We'd better get our banking, our tax, and all the other structures in place for that, so the worker bees can survive and pass on their firms.

    Mr. Lorne Nystrom: Are there any changes in respect of gender? Are there more and more women in small business? I would assume that by what I see, but am I accurate?

    Ms. Catherine Swift: Yes. In the mid-seventies women-owned businesses represented about 10% or 12% of the overall business community, now it's over a third, moving up towards about 40%. The growth has been quite phenomenal. It's still growing, but it has levelled off somewhat, which is not surprising, because we saw quite a rapid ascent over mostly the late seventies through the eighties. I might add that they tend to be more successful than men in business--I just couldn't resist saying that.

    Mr. Lorne Nystrom: Really?

    The Chair: With that happy note, we'll move over to Mr. Cullen.

    Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair, and thank you, Ms. Swift, Mr. Gray, Mr. Piché.

    I would like to come back to a point my colleague Mr. Murphy made. It seems to me this committee needs to stay focused on our terms of reference, to define, at least from the perspective of the House of Commons finance committee, what the public interest criteria should be for any possible bank mergers. Ms. Swift, you quoted some criteria. To my knowledge, this committee has not pronounced on any public interest test. Is that from the MacKay report, or the Senate report recently? I wonder if you could table that for the committee.

    Mr. Brien Gray: The particular citation she gave, though you can find it in a variety of places, is from the Senate committee's December 2002 report, and it's in the appendix.

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    Mr. Roy Cullen: Who wrote it is what I'm trying to get at.

    Ms. Catherine Swift: The Department of Finance, responding to MacKay.

    Mr. Roy Cullen: So as far as you're concerned, those are good public interest protectors.

    There are some questions you pose here. I presume some of them could be recast in the form of public interest tests or criteria, but if you take the Department of Finance response to the MacKay task force report and some of these questions, would that be your all-inclusive list of the public interest tests that would surround any possible bank mergers?

    Mr. Brien Gray: When we were before the Senate, we quoted directly from our presentation to you in 2001 about the public interest test, where we essentially supported the position of the finance department. We thought the process of having OSFI, the Competition Bureau, and what I call the public interest tests accountable to our elected members of Parliament was important. We also added, however, when we spoke before the Senate--and I apologize for not having included it up until this point--the implication for growth of new entrants to provide more competition and core banking services, and the implications for SME growth, innovation, productivity, and regional economic development. Finally, we would reiterate, as we told this committee in 1998, don't permit mergers until the competition is in place. But also, one of the things we mentioned in the Senate committee was that now that we have the Industry Canada data on financing coming in, and we have many more sources of information than we previously had, although I would still argue we don't know clearly what's happening to the numbers of branches in this country, there should be some look at how many full-service banking outlets there are in this country by region, so as to understand the implications of the existence or non-existence in those locations.

    Mr. Roy Cullen: I want to get onto market share, Wells Fargo, etc. You would understand, though, that for the finance committee to come up with a slightly different set of criteria from those of the Department of Finance wouldn't be totally out of the question, obviously.

    Mr. Brien Gray: That's why you're here.

    Mr. Roy Cullen: That's why we're here.

    For example, though you probably dispute whether there's any merit in it, do you think having a sound and competitive banking sector in Canada is a legitimate public interest test? If you read the recent Senate report, they seem to imply that to be competitive, the banks need to merge, and that is a public interest question. If I'm paraphrasing, I'm sorry, but would you agree with that?

    Ms. Catherine Swift: I think those considerations have to be taken into account. Obviously, we all benefit from having a sound financial system in this country. I do think, however, the banks often do protest too much, because they seem to have done very well over the last number of years, despite their not being able to merge. Some of the biggest banks in the world can be found in Japan right now, for example, and I don't think we want to emulate what's going on in the Japanese economy right now. Bigness, in and of itself, we don't believe is a precursor to success. I think we have to go a little beyond that argument and look at what really does determine success. We have an immensely stable banking system in this country. The banks have been very protected, been permitted to build up those bank branches and competitive advantages over competitors, to the point where the barriers to entry are pretty darned intense right now, and I believe there is some quid pro quo. This isn't really a competitive industry.

    Mr. Roy Cullen: Thank you.

    One of the things I was looking at was the credit unions. The credit unions getting together nationally is a bit of a challenge, but your data show some fairly sizable growth. Is that because of the Bank of Montreal offloading and the credit unions picking up some of their branches?

    Mr. Brien Gray: There are a lot of factors, Mr. Cullen. One is that in a market like Quebec it remains strong, in markets such as western Canada some of the banks are closing branches, be it the Bank of Montreal actually vending them to a competitor, such as the credit union movement, or some of the major chartered banks simply being determined to get out of the market, notably in Manitoba. I think, when we were here on the bank merger presentation in 1998, we were able to demonstrate that over a period of 10 years the Royal Bank pretty much decided to get out of our market in Manitoba. As that happens, those businesses that are left without the Royal Bank are going to look to alternatives, and probably will, as I said to Mr. Nystrom, go towards somebody they think will still be there in three years, as opposed to somebody who may also vacate.

º  (1645)  

    Mr. Roy Cullen: Thank you.

    It was the finance committee--maybe not the players here today, but I think Gary and a few others--that supported the Wells Fargo entry into Canada, for the very reason you cited, to create more competition. Their business model, I think you called it loaning against risk, was something that was attractive to many of us on the committee--I think Albina was probably there as well--but when they've come into the market, it sounds as if they do a lot of cherry-picking and don't do start-ups. Yet I thought I heard you say that with Wells Fargo coming into the market, the Canadian chartered banks got into loaning against risk, in other words, instead of limiting the exposure, saying, this is a higher-risk loan and we'll go the prime plus six or seven, as opposed to saying, you just don't meet our cut-off point. Is that actually happening?

    Mr. Brien Gray: It's starting, but on a very limited basis. When Catherine and I were talking to the head of one of our major chartered banks in 1998 about this very issue of lending against risk, we tried to challenge him. Why aren't you doing more of this? It seems to me it would take some of the risk out of the way you perceive our market--because anything over P-plus-two was considered risk and they just wouldn't book it. The answer was, we simply have lost that skill within our bank. What an admission, for one of Canada's chartered banks to admit that they've lost the ability to adjudicate risk for the purposes of this type of enterprise. He went on to say, if he were to do it in the future, and he wasn't rejecting it, he'd probably have to subcontract it to an entity like Newcourt.

    Mr. Roy Cullen: I hear what you're saying.

    Mr. Brien Gray: As an industry in the core business of banking, when you let go of those competencies, it doesn't happen overnight that you get them back.

    Mr. Roy Cullen: It's a cultural thing, I think, as well. When I went to the small businesses in my riding and said, how about, instead of going to adventure capitalists and losing 30% to 40% of your firms, if you had someone who would lend against risk, prime plus six or seven, they loved the idea. There was a question whether their business plan would have supported that. Some of them crunched the numbers and said it would, but until they actually play it out.... I think that's an attractive product, but it seems to be very limited here in Canada.

    Mr. Brien Gray: It's starting. I don't know how many of you are aware that the credit scoring models many of the banks are starting to introduce are coming to address that issue. We have, however, felt an obligation to inform our members with this piece, which is eight pages long, about what credit scoring means to their business, because this new tool was put in place, but most consumers in Canada have no clue what it's about. It's based largely on your personal credit rating.

    Mr. Roy Cullen: With GE Capital, Newcourt, and so on, the numbers of SMEs using them seem reasonably healthy. I presume they would come into the mix of other institutions that make up the 3.4 on page 17. It's still pretty small, isn't it?

    Mr. Brien Gray: The other thing you have to keep in mind is that the question was, have you ever used that institution? So that kind of lending, with GE Capital for example, is usually a one-off. It certainly isn't full-service banking on a day-to-day basis, the way most of your constituents would expect.

    The Chair: Thank you very much, both of you.

    Mr. Brison.

    Mr. Scott Brison: Thank you, Madam Chairman.

    Thank you very much for appearing before us today.

    On the question of the interest rate spreads and the comparison between Canada and the U.S., the report you did with the Royal Bank and Canadian Manufacturers and Exporters indicated that Canadian small business clients were treated to far lower spreads than were their counterparts in the U.S. from American banks. I heard what you just said, that you would like to see a more aggressive position from Canadian banks, more lending, with commensurately higher rates. My prediction would be that you'll be back in front of this committee in a couple of years complaining that the Canadian banks are taking advantage of small businesses in Canada, charging exorbitant rates, pillaging the small businesses, and taking all of their money from them, and you would complain because they're treating small businesses unfairly--if they were to do that. Would you make a firm commitment that if the Canadian banks were to undertake your suggestion and provide U.S.-style massive spreads in lending to higher-risk small businesses, you will not return to this committee complaining that Canadian banks are doing exactly what you say they ought to?

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    Ms. Catherine Swift: This issue has arisen before, and we have done some surveys of our members to ask them what their tolerance would be for prime-plus-six, which is a Wells Fargo rate. Mind you, that's a very limited product, so I hate to keep referring to it. You're right. We've actually done some comparative research with a U.S. counterpart of ours on U.S. and Canadian conditions, and there's no question that interest rate spreads on prime plus x, on average, tend to be higher in the U.S., but access is much better. There's no question there is more pricing for risk going on in that market, whereas we've had senior Canadian bankers tell us that their account managers are basically told, if it's over prime-plus-two, you don't do it at all, you don't even contemplate it, because it's deemed to be too risky at any price. Again, we do know some of the risk assessment capability just isn't there in the institutions any more.

    I do believe there's enough information out there that we should all be able to tell if it is gouging or if it's genuine pricing for risk. So I would say, as long as it was reasonable, given market circumstances, and I think we have enough knowledge to assess that, we will not come before this committee and complain about banks gouging.

    Mr. Scott Brison: With literally thousands of U.S. banks and a smaller number of chartered banks in Canada, and with Canadian small business clients receiving more competitive interest rates on lending products than in the U.S., doesn't that take some credence from your argument that more banks necessarily provide better value to Canadian small business?

    Ms. Catherine Swift: Again, the U.S. situation is so opposite to ours. I suppose, if you could have your perfect banking system, you would probably have something in the middle. The U.S. one is so diversified. These community banks may serve their very local community, but of course, their costs are high, because they don't have the economies of scale. Our banks are the reverse. They're huge, they have huge economies of scale, but they don't have the customization you can see perhaps in a smaller institution.

    There's also the access issue. With a firm that can't get any financing at all, and therefore either fails as a business or is greatly constrained with respect to its potential, the fact there's financing for another business out there at prime plus one is cold comfort to them.

    So I don't think it contradicts our thesis. I think, though, there's a lot more complexity to just throwing more institutions at it. There are economies of scale with larger institutions, but you also lose a fair bit in how you can customize to a regional market or a sectoral market.

    Mr. Brien Gray: I'd just add that the discussion isn't only about competition on price, it's competition on access. Let me take us back to the early eighties in Alberta, when our major chartered banks pulled right out. It was a good thing the ATB was there, because had they not been there, what happened to Alberta then, which was bad enough, would have been a whole lot worse. The issue of choice is fundamental and fundamentally important.

    Mr. Scott Brison: I think there's a real shortage of early-stage equity investment available and angel investing. When people hear of angel investors, they think of high tech companies. Mr. Nystrom mentioned my having been in small business. I started my first small business when I was 19. It wasn't a high tech company, I was renting bar fridges to students. I had two brochures. One was for parents, and it had orange juice and milk and yogurt and stuff like that, and the other was for students and it had beer in it. I couldn't get money from a Canadian bank to start that business until I found somebody who would invest in that business, gave me some start-up capital, and helped me get the bank financing. But I don't see that as necessarily a bad thing, the fact that as a small business person, I had to go to a more senior business person, who not only made an investment in my firm, but also gave me the advantage of his expertise and know-how to help make that business successful. So whereas Mr. Cullen may see it as a negative for a small business person to have to give up some equity to get that angel investment and capital to get started, I see that as a positive.

    One thing you could do as an organization that I think could play a very important role in helping small businesses across Canada is having some of your more successful members mentor and create an angel investor network for some of your emerging members who are getting started. I think that would be a very constructive role.

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    Ms. Catherine Swift: We do. We're here today to talk about banks, but you're absolutely right. We've made many recommendations and suggestions over the years on the equity side as well. Brien mentioned earlier that we're going to see a lot of succession situations happening because of the demographics. A lot of the baby boomers own businesses. They're going to be looking, over the next 15 to 20 years, at passing them on or selling them or somehow finding a successor for that business. It's in all of our interests that this happen in a successful way, and part of that is laws on who can make an equity investment--are there any tax advantages to doing so and so on? And we do provide some networking services to our members, just for the record, along the lines you're talking about.

    Mr. Scott Brison: For instance, I don't have a problem with the fact that a bank would not lend to me at the age of 19, because I had no previous business experience, but the bank forced me to go out and find somebody with that expertise. I don't blame the bank at all for having made that decision, because frankly, if I'd started my business without some backing and expertise, I don't think it would have been as successful as it ultimately became. So that would be an important role.

    How many of your members, on a percentage basis, would you think are using computers and the Internet.

    Ms. Catherine Swift: About 80%, according to our most recent survey. We've actually asked how much of their banking they do on-line, and it's a pretty significant portion. There are some types of transactions that lend themselves very nicely to electronic means, but there are others that don't, and there is still a judgment issue with respect to financing a small business, be it your business when you were 18 or whatever or any business, that is very difficult to accomplish simply via electronic networks. Technology is a very positive development, we don't deny that, but we also feel that the personal involvement, the judgment, is something that's very difficult to achieve automatically.

    And on your earlier point, we would never contend that every business should be financed by a bank. There should be diverse sources of financing out there.

»  (1700)  

    Mr. Scott Brison: The bricks and mortar argument against merger, I would argue, ought to mean less to you than lending to small businesses. If your membership, as you just confirmed, are using the Internet for banking services currently, bricks and mortar arguments don't hold quite as much weight. Increasingly, I think, small business lenders in Canadian banks are going to the businesses; it's not a bricks and mortar issue as much as it is a people issue.

    If you had two chartered banks offer to double small business lending, for instance, and perhaps set up a separate bank devoted solely to small business lending in Canada if they would be allowed to merge, would you support that kind of approach?

    Mr. Brien Gray: With respect, that's a pretty broad description of what the entity might look like.

    Mr. Scott Brison: That's what the Bank of Montreal and the Royal Bank offered to do in 1998 if they were allowed to merge. They agreed to double small business landing or set up a separate bank for small businesses.

    Mr. Brien Gray: Here is the question, Mr. Brison. For how long were they going to double it? Was it going to continue to expand? How long could the promises be maintained? If there was a change in economic conditions, would they fall off the promise? Promises are good for a period of time, but not indefinitely.

    I think what we've tried to reflect today is that there's no doubt our members understand that the market is moving, that technology is a fact of life. However, they do like to be treated with respect and on an appropriate basis. They feel that the banking industry is withdrawing from them more than approaching them, through bank branch closures, hour restrictions, being forced to go to telephone, ATM, or Internet, the fact that account managers are turned over rapidly, the fact that account managers often are glorified order takers, because they've only got an ability to approve something like $10,000--the list goes on. I think most Canadians and entrepreneurs would like to have a combination of high tech and high touch, not just high tech, in the provision of their banking services. So in answer to your question, I think whoever comes up with the smart approach to that and can convince the entrepreneur that they'll get good service, we'll probably have a winner.

    The Chair: Thank you.

    For our last ten minute slot, Mr. Wilfert has agreed to share his time with Mr. Bagnell, so it's five minutes each.

    Mr. Wilfert.

    Mr. Bryon Wilfert (Oak Ridges, Lib.): I'll do my best, Madam Chairman.

    Defining the public in this obviously depends on who is doing the defining and from what perspective. If I understand your central concern, it's that the banks need to increase their size and the pool of their resources to offer a broad range of banking services at very competitive prices, and this has not happened. It's an age-old issue that I continually hear. What I'm intrigued about is that 75% of your members, according to your survey, have not responded to the new specialized institutions that have come on, the new entrants into the market place. Maybe you can explain very briefly why you think that's occurred.

    You made some comment about HSBC starting to have an impact in the marketplace. Maybe you can explain the factors you see as to why that is.

    I'm fascinated at the response of the public in 1998 to bank mergers and on Canada Trust-TD. On Canada Trust-TD, though I received hundreds of calls the last time, I did not receive one call. I'm curious to know the impact of that merger on your members. And in general--and this is an issue I'm going to raise with them--what good things did they do in order to make the transition more effective? Because I didn't hear from your members, whereas I did the last time, when there was concern that there were going to be mergers in 1998.

    Mr. Brien Gray: Your first question had to do with new entrants to the market and why they didn't seem to be getting much uptake. Take ING, for example. That's largely an electronic consumer product. It really isn't for small business commercial lending. So ING comes into the market, and for consumers it may be an alternative, but for most small businesses it isn't. You get CIBC introducing BizSmart, which was introduced through Business Depot. It has since withdrawn from the market, because it couldn't convince entrepreneurs that was a legitimate alternative. Major American banks have told me, even before we've opened up the markets, it would be very unlikely that they would come in, other than in mezzanine financing levels in Toronto, Calgary, Montreal, and so on, because the costs of entry are prohibitive. The positioning and the power of the current chartered banks within the marketplace is such that the costs of entry are just prohibitive, and they probably will not come in any considerable way into Témiscamingue or Summerside.

»  (1705)  

    Ms. Catherine Swift: I think it comes down to the notion that your typical small firm needs a full array of services. They're unlikely to go to five different institutions to achieve that. If they can only get a slice here, a slice there, they're much more likely to go to the old-line chartered bank that can offer maybe four out of five of the services, or something along those lines.

    Mr. Bryon Wilfert: So the new entrants in the marketplace have not solved the problem.

    Ms. Catherine Swift: They're not diversified sufficiently, but we still see their presence as positive, because even in the niches they're active in, they are introducing more competition. That's not a bad thing, but they're not full-service providers.

    Mr. Brien Gray: You were talking about HSBC starting to move itself a bit. Our regret is that HSBC didn't step up around the time the Canada Trust-TD Bank merger was being looked at, because I think most of our members would have preferred to have a new entrant come in, grab that platform, and build on it, rather than the consolidation of two into one.

    As to the feedback you got, I would submit that the process happened so lickety-split with approvals and so on that with most Canadians having been exhausted by the 1998 exercise and having been somewhat finessed by their saying, it's not a major chartered bank, it's a trust company, so that's different and we're not going to have the same debate, that suspended the kind of examination we had in 1998. I think now is the time to get an impression of how the people who were made part of that fusion are feeling about the new higher rates for services. I'm sure those of you in Ontario are hearing that anybody who was with them before, including myself--I happen to bank there--is seeing charges much higher than they were prior to the merger.

    Mr. Bryon Wilfert: I certainly do want to see an assessment of that impact. I think it's very important.

    Ms. Catherine Swift: We got lots of complaints, by the way, when people saw their local branch closing and that kind of thing, because if there was a TD and a Canada Trust branch within a certain geographic distance, one got closed. We actually did get quite a bit of negative feedback from our small business people who were dealing with those institutions.

    The Chair: Mr. Bagnell gets the last five minutes.

    Mr. Larry Bagnell (Yukon, Lib.): Thank you.

    Mr. Gray, you say the government wouldn't have enough to fund BDC for the take-up, and we shouldn't even do that. I was just talking to a manager recently, and he said they have a quota system to try to force them to go out and get more business. They seem to have a hard time getting business.

    I'm from the Yukon, and I probably have one of the hardest possibilities of getting financing. Twenty years ago there were lots of complaints, especially in the rural areas, about getting financing, and there don't seem to be as many complaints today. Are you saying in the small business sector there is less loan financing from whatever source than there was a decade ago in Canada?

    Mr. Brien Gray: What I'm saying is that there is a narrowing of choice. There's no question about it. We basically don't have any trust companies left. They used to play, some of them more than others, in commercial lending. We had many more bank branches. We're trying to get up-to-date data that can compare now to 15 years ago, but we're still waiting for it, because the data aren't consistent. In some cases it will be a transfer number, as opposed to a branch, and to understand what's a branch and what's a transfer number is very difficult.

    As to my remark about BDC, at one time in Whitehorse you had a number of financial institutions to choose from, and it's collapsed to the point that now many businesses in Whitehorse are dependent on BDC. If in other communities, as the bar gets raised for the profitability of a local branch and more and more branches get shut down, that, by definition, means BDC has to move into all these territories to fill the gap. That's what I'm concerned about. I don't think the public purse has enough money to fill the kind of gap we're talking about.

    Mr. Larry Bagnell: That may be a bad example, because I don't think we've lost any institutions. But if you're saying there's just as much loan financing out there to small businesses, or more now than there was a decade ago, then they're getting it from different sources or more from a smaller number of sources. Is that correct?

»  (1710)  

    Mr. Brien Gray: I'm not sure how you want me to approach this question. One of the things we see as a troubling indicator is that over the past number of years during which we've done our major surveys of the banks we've seen the application rates for financing plummet, largely since the beginning of the 1990s. It's our contention that there's a combination of factors, it's not entirely the banks deciding not to offer credit. I think part of it was that many people who were lucky enough to hang on after the recession, which endured for a good long time, and credit restriction endured well past the end of the recession, decided they'd rather engage in opportunity lost than go in and try to approach a banker again. So how much of this is the unavailability of credit, how much of it is that people prefer not to take the business opportunity and finance themselves? I think a combination of factors has led to reduced applications, which, from our perspective, isn't a good thing. We think applications at a healthy rate are good for the economy, because it means more growth and opportunity for all firms.

    Mr. Larry Bagnell: I have two more quick questions. I'll say them both at once in case I don't get them in.

    First, have you done any study on the rejection of acceptable applications? Obviously, you need to have collateral etc., so if there's a bunch of good applications, are they getting rejected at a higher rate?

    Second, a number of the Canadian chartered banks in the Yukon seem to have decided they're not interested in the tourism industry much and are getting out of that. We're probably the only part of Canada where that's the number one private sector industry. Are you hearing similar complaints, and would mergers exacerbate that problem or reduce it?

    Ms. Catherine Swift: To answer the second question first, we have been hearing that. From the Atlantic region we've heard quite a bit of that from our tourism-related members. We know there's a fair bit of retrenchment going on through branch reduction in the Atlantic region as well. So yes, we have been hearing about that. We can't see how mergers would help that kind of situation, because if two banks are going to merge, there's no question they're going to consolidate their branch network to some extent. So I guess we would see that situation worsening under a merger scenario.

    Mr. Brien Gray: With respect to bankable loans, so-called, that get rejected, it's a very difficult number to grab hold of, because the definition of bankable in the eyes of the entrepreneur is going to be different from that in the eyes of the banker. Even though we have examined that, going through individual bank files and seeing whether they got accepted or rejected, it doesn't take into account all those applications that were not official, written down on an application. So if I come in and say, Mr. Bagnell, I'd like to extend my line of credit, and you kind of give me a look, that's an unofficial rejection, and I'm not going to pursue it any further, but it's not written down anywhere. So there is a lot of this you can't capture and it's a bit of an imperfect science.

    Ms. Catherine Swift: There's one interesting element to the rejection rate, though, that we found consistently through our research. The rejection rate of applications for financing increases dramatically with the number of account managers the business owner has faced through a several-year period. In other words, if one business is lucky enough to have the same account manager stay there for three years, for example, while another poor guy keeps having them flip over every nine months or so, the second guy gets a far higher rejection rate. We feel that's a bank-imposed element of risk that the borrower can do nothing about. So that's an interesting little detail on the rejection side.

    The Chair: Thank you very much. On behalf of the full committee,

[Translation]

    thank you for the evidence you have given today.

[English]

I'm sure in the future we'll see you again.

    We'll just suspend for a couple of minutes, so we can clear the rooms, and then we'll go into an in camera session for 15 minutes or so.

    [Proceedings continue in camera]