INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 7, 1998

• 0904

[English]

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

As part of the committee's report a few years ago, “Taking Care of Small Business”, it was agreed that we would meet with the banking community on a quarterly basis. This is our next quarterly meeting. They don't always happen to be quarterly. But we do have your credit statistics and we're more than pleased to welcome the representatives we have today from the different banks.

I will let Kelly Shaughnessy introduce everyone who's with him today. It's our pleasure. I turn it over to you, Mr. Shaughnessy.

Mr. Kelly Shaughnessy (Senior Vice-President, Small Business Banking, Canadian Imperial Bank of Commerce; Canadian Bankers Association): Thank you very much, Madam Chair and members of the committee. Good morning.

I'm Kelly Shaughnessy of the CIBC. I'm also the chair of the independent business committee of the Canadian Bankers Association.

• 0905

With me today are Maurice Hudon from the Bank of Montreal, Dieter Jentsch from the Bank of Nova Scotia, John Leckie from the TD Bank, Charlie Coffey from the Royal Bank of Canada, Jean-Pierre Guindon from the National Bank of Canada, and Jim Howden from Hongkong Bank of Canada.

On April 7, Madam Chair, the Canadian Bankers Association received a letter from you outlining the parameters for this hearing and a number of the committee members' bank-related concerns as possible topics for discussion today. In reviewing the letter, the CBA identified certain issues that were not specific to small business banking and therefore would not be part of the day-to-day responsibilities of the members of this panel before you today. The CBA has addressed those subjects in a detailed letter to the chair, and a copy of that correspondence has been tabled with the clerk this morning.

Today we welcome the opportunity to discuss with you a subject of mutual interest, the small and medium-sized business community in Canada. This sector should be of interest to all Canadians as its health and viability are key to our economic and social prosperity. For the past number of years the banking industry has appeared before this committee to discuss the banks' efforts to service small and medium-sized business across Canada. In working with you we have engaged in a number of initiatives that have improved the understanding of the small business community and have given new insight into how we, both the banks and the government, can meet the needs of our small business clients.

In consultations with this committee, the banking industry has developed a reporting mechanism for quarterly statistics on bank credit extended to business. Since the fourth quarter of 1995, the seven major banks have reported their business lending data by eight dollar bands, eight regions, seventeen industries, and seven banks.

In 1996 the banking industry voluntarily established a two-tiered Canadian bank ombudsman system for our small business clients. This initiative was also achieved in cooperation with the industry committee and one year ago was extended to our consumer clients.

We have responded to the small business community's need for information on numerous aspects of business operations. The banking industry, for example, has partnered with many members of Parliament in holding seminars and workshops developed for small business owners as a means of helping them enhance their skill sets.

Our presentation this morning will focus on these three important aspects of our relationship with our small and medium-sized business clients: small business lending, complaint resolution, and education initiatives directed towards small business. Mr. Hudon from the Bank of Montreal will comment on our provision of loan capital to the sector, Mr. Leckie from the Toronto Dominion Bank will speak about the value of the bank ombudsman system, and Mr. Jentsch from the Bank of Nova Scotia will provide you with an update on our small business educational initiatives.

Monsieur Hudon.

[Translation]

Mr. Maurice Hudon (Executive Vice-President, Central, Eastern and Northern Ontario Division, Personal and Commercial Financial Services, Bank of Montreal, Canadian Bankers' Association): Thank you, Kelly. Good morning, Madam Chair and members of the Committee.

As Kelly Shaughnessy mentioned, the reporting mechanism for quarterly statistics on bank credit extended to businesses was developed in consultations between industry and this Committee. These statistics are currently published in a 120 page book and are broken out by 8 dollar bands, 8 regions, 17 industries and 7 banks.

Industry Canada receives an electronic version of the information and conducts an independent quarterly review of the data. Electronic versions of the data for the Business Credit Statistics are also sent to the Department of Finance and the Library of Parliament researchers and are available to others upon request. This information is also now available on the CBA Internet web site.

One reason why we are appearing today is to discuss the level of lending by the seven major banks to small and medium-sized businesses in Canada. When you examine the statistics you will find that 95% of the banks business-borrowing clients are small and medium-sized businesses. Without question, small business is big business for the banks.

• 0910

At the end of September 1997, the banks had authorized $ 67.9 billion to small and medium-sized business borrowing customers in Canada. This represents an increase of 3.2% over the third quarter of 1996. The average amount of credit used by small and medium-sized business customers is $ 64,000.

The banks' small and medium-sized business borrowing client base is expanding. Canada's seven largest banks have over 730,000 small and medium-sized business borrowing customers. This is a 4.1% increase over the third quarter of 1996. Steady growth and strong business spending in the third quarter of 1997 have supported growth in total credit authorizations and the number of small and medium-sized business borrowing customers in most industry sectors. The CBA estimates that bank lending to SMEs supports companies which provide approximately seven million jobs.

When we look at lending to small businesses who borrow less than $ 250,000, the seven largest banks authorized $ 32.4 billion in the third quarter of 1997. This amount represents an increase of 2.1% over the third quarter of 1996.

There are currently 654,000 business customers borrowing less than $ 250,000: a 4.1% increase over the third quarter of 1996. Eighty five per cent of all bank business-borrowing customers are small business borrowers.

Bank lending to micro-credit customers, those businesses borrowing less than $ 25,000, also experienced an increase over the third quarter of 1996. Forty per cent of bank business customers have authorizations of less than $ 25,000. This represents $ 2.5 billion in authorized credit, an increase of 3.5% over the third quarter of 1996. The number of bank small business customers who borrow less than $ 25,000 has also increased by 6.4% over the third quarter of 1996 to 305,000.

Businesses requiring very small loans have a unique challenge and that is why the banks are working with local community partners to test different ways of providing micro-credit. Several of the major banks provide funds to the Calmeadow Foundation, which provides loans to micro-enterprises in communities across Canada. Several banks are founding partners in the Canadian Youth Business Foundation, which is a micro-loan program that allows entrepreneurs to create their own businesses. Many banks have also introduced more diverse product lines to improve small business owners' ability to access smaller amounts of credit, particularly for amounts under $ 50,000.

The CBA is currently participating in a research project, coordinated by the Rural Secretariat of Agriculture Canada and Agri-Food Canada, examining financing for micro-businesses in rural Canada. Other participants include Industry Canada, Western Economic Diversification, the Atlantic Opportunities Agency and Indian and Northern Affairs.

[English]

It's important to stress that the figures in business credit statistics are based solely on data for bank lending by the seven major banks to small and medium-sized enterprises. Unfortunately, these data do not provide a complete picture of the SME debt financing market in Canada.

According to a 1997 Conference Board of Canada report, banks provide only 50% of the debt financing to SMEs in our country. Banks not only compete with one another for small business customers, they also compete with credit unions, caisses populaires, trust companies, government lending agencies, and other new players such as Newcourt Credit, GE Capital, and other leasing companies.

• 0915

The Conference Board report indicates that domestic bank debt financing to small and medium-sized enterprises increased by 25% between 1994 and 1996, but despite the increase the banks' market share actually decreased marginally from 50.8% to 50.3%. Specialized finance companies such as Newcourt and GE Capital, on the other hand, experienced a 5.4% increase in market share.

The small business community, providers of financing, and policy makers need more than simply the business credit statistics compiled and published by the Canadian Bankers Association to get a clear and accurate picture of debt financing in Canada. To fully assess the supply of credit in the marketplace it's necessary to have a complete set of information available that reveals the extent of lending by all sources.

We continue to encourage all credit providers to supply similar statistics for their small business credit activities. We have supported, and will continue to support, the efforts of other financial institutions and government lending agencies to report their own data by providing them with a CBA template as a reference.

However, without detailed information from other sources of financing it is impossible to tell whether the credit needs of small and medium-sized businesses are being met. What's becoming abundantly clear is that there's a growing amount of capital, debt, and equity from a variety of sources for small and medium-sized enterprises in Canada.

According to the Conference Board of Canada, the total growth in SME debt financing experienced a 20.2% overall increase between 1994 and 1996. Leasing saw the most dramatic increase, showing growth of 97.8%. We also know that labour-sponsored investment funds have an abundance of cash available for equity investment. The largest fund, Working Ventures, has more than $ 800 million in assets and has only invested 34% of its assets in small companies.

It's important to stress that successful financing of small business is more than an issue of access to debt financing. It's a matter of access to debt and equity capital. A 1996 study by Statistics Canada entitled “Successful Entrants” studied what factors firms that survived ten years had in common as well as the what factors firms that grew faster than the average had in common.

The conclusions of the study revealed that there is a significant amount of permanent capital in the form of equity backing successful entrants. Moreover, half the capital of successful entrants is derived from internal sources, while banks and trust companies contribute another third. With a wider variety of financing sources and a larger proportion of permanent capital, firms are better able to contend with economic downturns and market volatility and have less dependence on any one financing source.

In today's increasingly competitive capital marketplace our responsiveness to the needs of the small business sector is important. Given the importance of the small business sector, the banks are continuing to implement initiatives that will attract new business and better serve our existing small business customers.

We welcome the opportunity to discuss with you our data on the banks' support for small and medium-sized business in Canada. As always, we look forward to responding to your questions at the conclusion of our presentations.

John.

Mr. John Leckie (Senior Vice-President, Business Banking Services, Toronto Dominion Bank; Canadian Bankers Association): Thank you, Maurice, and good morning, Madam Chair and members of the committee.

I would like to take this opportunity to update committee members on the complaint resolution mechanism voluntarily established by the banking industry to provide clients with fair and impartial resolution to customer complaints.

In its 1994 report Taking Care of Small Business, in which several of the members of Parliament participated, the industry committee recommended at the time, in 1994, that government establish an independent ombudsman to investigate complaints of breach of duty or maladministration by banks.

To address this request, on November 7, 1995, the creation of the Canadian banking ombudsman service was announced at a hearing of the Standing Committee on Industry, where the issue of small business lending was being discussed by committee members with representatives of all of Canada's major banks.

The creation of the Canadian banking ombudsman or CBO was the result of extensive positive dialogue between the Canadian banking industry, government officials, parliamentarians and, specifically, the industry committee. The CBO was designed to meet the needs of Canadian small businesses and was the culmination of several banking industry initiatives aimed at improving the relationship between banks and their small business customers.

• 0920

In March 1997 the CBO extended its mandate to include personal customers. This extension to personal customers would appear to have been a very good decision. I know that in my own company, TD, there are about four or five times more complaints handled on the personal side than on the small business side.

The 12 participating banks have also implemented their own internal bank ombudsman to deal with small business and consumer complaints. Canada's banks have established codes of conduct for bank relationships with small business. These were put in place at the end of March 1996.

Michael Lauber is the industry ombudsman. He's here today in the bleachers somewhere. He's waving his hand back there.

The Canadian Banking Ombudsman is a self-regulated organization that's funded by the industry and run by an independent board of directors. In addition, each member bank has its own internal bank ombudsman who is independent of the operating bank and has a mandate to conduct an objective review of customer complaints to ensure that the customers are being treated fairly.

Several aspects of the Canadian Banking Ombudsman's structure and function ensure its independence. The CBO is independent of the banking industry. It reports to an eleven-person board of directors, consisting of six independent directors and five banking industry representatives. The chair must be selected from among the independent directors. The current chair of the CBO board is Dr. Peggy-Anne Brown, a small business owner from Vancouver.

In Canada, the budget for the CBO structure is reviewed and recommended by the independent directors and approved by the full CBO board of directors, and member banks fund their respective share of the cost. It's also important to note that the Canadian Banking Ombudsman can only be relieved of his duties with the unanimous consent of the six independent non-bank directors.

Independent directors who sit on the CBO board of directors represent every region of Canada and bring with them a wealth of experience from diverse professional backgrounds. The independent directors are as follows.

Dr. Peggy-Anne Brown, the chair, is a psychologist from British Columbia who owns and operates her own company.

Beverley Brennan is vice-president of finance and corporate secretary with Philom Bios Inc., an ag biotech company from Saskatoon. Ms. Brenna is currently the first chair of the Canadian Institute of Chartered Accountants.

Dr. Fraser Mustard is the creator of the Canadian Institute for Advanced Research in Ontario.

The Hon. Lincoln Alexander is the former Lieutenant Governor of Ontario, current chancellor of the University of Guelph, and the chairman of the Canadian Race Relations Foundation.

Daniel Gallivan is a partner with the law firm of Cox Downie. He's the current vice-chair of the Nova Scotia Securities Commission.

Jean-Marie Toulouse is the director of École des Hautes Études Commerciales de Montréal. He teaches courses in entrepreneurship and business strategy.

Michael Lauber tells me that Jim Savary, past president of the Consumers' Association of Canada, will be joining the board in June. Jim Savory has an extensive amount of experience in electronics and privacy issues.

Some critics are calling for the implementation of binding powers. Under our present system, if the banks do not follow the CBO's recommendations, the CBO is required to publicize the non-compliance and to name the bank.

The CBO has confirmed that, to date, the banks have implemented his recommendations in every case. The CBO's power in reviewing complaints relating to credit decisions of the banks is enhanced by the proactive and expeditious manner of the intervention. This is a very important feature of the ombudsman's office, since more than 60% of the small business complaints submitted to the CBO have been credit-related.

Alternatively, the U.K. system seldom enables the ombudsman to review the banks' actions involving credit decisions until after all is said and done, which is usually too late for the client.

Canada's banks have been working to increase the awareness by the SMEs of the two-tier ombudsman system by taking steps to inform their own customers of this service. Some banks have included an information circular on the ombudsman system in current account statements sent to their customers. Banks display complaint-process brochures in their branches, and many banks provide the brochure to all customers who now open a new account.

The process is also set out in a wide range of other bank brochures. The CBA is also providing information about the banking ombudsmen to business associations in order that the associations may inform their members about this valuable service.

• 0925

Associations that have agreed to partner with the CBA in this project include the Canadian Chamber of Commerce, the Canadian Construction Association, and the Retail Council of Canada. Approximately 60 associations have been contacted, and more than 30 associations have already agreed to participate in this campaign, while others are considering how best to inform their members of this service.

The CBA has developed an advertisement, brochure, and article on the ombudsman process. Associations may include it in their newsletters or distribute to their members.

The ombudsman also recently sent copies of the CBO brochure to every member of Parliament's constituency office. The CBO has also informed us that the Canadian Federation of Independent Business is distributing a copy of this brochure to every one of its members.

The Canadian Bankers Association has released, as part of our “Building a Better Understanding” campaign, a brochure entitled “Safeguarding Your Interests”, which contains information about all of the ombudsman process. This brochure is available nationally and on the CBA web site or it can be obtained by calling a toll-free number. The contact numbers for the bank ombudsman and the CBO are listed on the CBO web site, the CBA web site, and Industry Canada's Strategis web site.

The Internet is becoming an increasingly important tool in communicating with small businesses as their use of this technology increases.

It is interesting to note, however, that while the CBO has been in place for almost two years, the British banking ombudsman has been in place since 1986, yet only has an awareness level of 46% in that country. This is likely because people only become aware of such a service when they need it.

As with most personal and business customers, quality relationships are about building and understanding through strong communication. That is why we are teaching our staff about how to better manage their relationships with clients, manage conflict, and how to build and retain quality relationships.

The banks take the concerns and complaints of their clients very seriously. I can assure you that the banking industry takes the ombudsman process seriously. We take the office of the CBO seriously.

Thank you for your time and we look forward to your questions.

Mr. Dieter Jentsch (Senior Vice-President, Canadian Commercial Banking, Bank of Nova Scotia; Canadian Bankers Association): Good morning, Madam Chair, and members of the committee.

Banks value their small business customers. However, the relationship goes beyond the provision of lending and banking services.

Banks are actively pursuing new initiatives to support small business on a number of fronts. From marketing, forecasting, and financing, to production, administration, and employee management, we know that small business owners wear many hats in their efforts to build a successful business.

The challenges are multi-dimensional, as are the required resources to meet those challenges. The banking industry is continually developing new products and initiatives for the small business sector. It's a unique challenge and an ongoing process because the small business sector in Canada is incredibly diverse.

Canadian small businesses represent a variety of enterprises at different stages of development, with different long-term goals and with different experiences, interests, needs, and resources. As banks have direct contact with a large segment of Canada's small business community, they are very cognizant of their ability to deliver information to assist customers on many aspects of small business operations. That's why banks are contributing to small business skills development on many fronts.

One might wonder, for example, why the banking industry would produce information on the importance of marketing for small businesses. We know that a good marketing strategy is a key component of a successful and viable business. As research shows, many firms fail because of insufficient marketing skills. It is important that we communicate this information to our customers.

Banks provide information on how to prepare business plans. We know that with thorough preparation and sound planning, businesses are better able to make the case that their enterprise is well managed and a good risk. Business plans also help owners outline their overall strategies and long-term objectives.

The banks deliver small business educational seminars in communities across Canada to provide information to existing and prospective entrepreneurs on banking-related topics, including preparing business plans and obtaining financing.

Banks are also supporting support to youth through a number of initiatives, including Career Edge. The eight largest banks are charter members of Career Edge, a private sector internship program designed for those who are currently unemployed or underemployed who have had difficulty in making the transition to full-time employment.

• 0930

The program's goal is to enhance youth employability by providing valuable career-related experience in successful Canadian companies. The program offers work experience, learning, coaching, and networking as well as an annual stipend of $ 15,000. Career Edge is financed entirely by the participating companies. No government funding is involved.

In 1997, in cooperation with educational institutions and industry leaders, a course entitled The Entrepreneurial Spirit was developed for aboriginal youth and piloted in Toronto and Barry. In 1998 the course will be delivered to urban and on-territory aboriginal youth across the province of Ontario.

Other seminars targeting small business entrepreneurs include Partners in Your Success. This program is a seminar series designed to assist entrepreneurs improve their business planning and financial management skills, gain insight into federal and provincial support programs, and be export ready through sharing of real, live entrepreneurial experiences. Bankers have also participated in a series of small business seminars entitled Financing Your Success, designed to assist aboriginal entrepreneurs improve their business planning and financial management skills.

Small business owners and would-be small business owners can access a myriad of information from Canada's banks. The banks and the CBA have produced more than 125 different educational tools for small and medium-sized business owners on many issues, including export services, market trends, financing sources, year 2000, business planning, and marketing. The banking industry is working in partnership with others in the private sector, associations, and government to enhance the skill set of Canadian small businesses.

Recently a seminar was launched entitled Access to Capital for the tourism industry. It was developed in partnership with the Ontario Ministry of Economic Development, Trade and Commerce, the Canadian Bankers Association, and the Tourism Federation of Ontario. The seminar is an educational tool specifically designed to help business owners in the tourism industry obtain information on accessing capital sources.

The pilot project provided the 60 eastern Ontario tourism operators who participated in the seminar with substantive information. As a result of its success, the program will be delivered in partnership with other tourism centres across Ontario in the future.

At the banking industry's appearance before this committee in February to discuss the year 2000 challenge, we expressed our commitment to make customers and businesses across the country aware of the year 2000 issue. We also stated our desire to work in partnership with government to help small businesses be successful in the management of year 2000. In keeping with this commitment, the Canadian Bankers Association has produced a brochure entitled “Preparing Business for the Year 2000”, a copy of which is in your packages.

In the process as well, in developing a series of seminars for small business owners across Canada to learn more about how to deal with the year 2000 issue, we'll be inviting members of Parliament to join our partners, Industry Canada, the local chambers of commerce, and the Canadian Institute of Chartered Accountants to remind businesses that the year 2000 challenge extends beyond the business operations to the entire supply chain. We know that chain is only as strong as its weakest link and that a failure at any point in the chain could have serious repercussions of a company's ability to conduct business and therefore jeopardize the firm's financial viability.

I know a number of members of this committee will be contacted about this initiative. I hope you'll be able to participate.

The CBA has also produced and distributed to members of Parliament this photo-ready piece for use in your householders and ten percenters. This is in your package as well. As the chair of this committee said on February 19, in encouraging her colleagues to get the message out about year 2000, the householder may be an effective way to increase awareness among small business owners in your constituencies.

As you can see, support to small business is not restricted to simply financing a business. As I indicated, we know small business represents diverse enterprises with diverse needs. With many of these new tools and resources, bank staff are better equipped to meet the needs of their small business customers.

Thank you.

Mr. Kelly Shaughnessy: Thank you very much, Dieter.

Building a solid structure, whether it be a relationship or a business, starts with acquiring the appropriate tools. Initiatives like the ombudsman system provide us with the tools we need to help us build better relationships with our business customers. We are also helping our small business clients acquire the tools they need to build better businesses. Our debt financing of the small business sector has increased to where we are now lending $ 46.5 billion to our small business clients.

We also know that businesses need knowledge as well as capital to run successful enterprises. Through skill development initiatives we are providing small business owners with the knowledge they need to compete in an increasingly competitive market.

• 0935

In closing, Madam Chair, we would like to thank this committee for its efforts in helping us build better relationships with our small and medium-sized business clients. Our cooperative efforts will go a long way to ensuring the health and viability of our small business community in Canada.

Thank you, and we'd be pleased to take any questions the committee members may have.

The Chair: Thank you very much, Mr. Shaughnessy, and I want to thank all the members who are with you from the different banks for their presentation and for being here this morning.

We are going to begin questions. This meeting is scheduled to go until 12 noon. I will remind members to be brief in their questions, if possible, because I am sure there will be several people who will want to answer. If you do want to answer, please indicate so to the chair and I will try to recognize you, or if I don't, just jump in.

I will ask members to ask one question at a time. I will not allow two or three questions to be asked in a row. Thank you.

Mr. Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you, Madam Chair, and may I thank you especially for the single questions. I was going to give you three questions, because I noticed at several of our past meetings some members were doing that.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Excuse me, Madam Chair. Can you give us a time limit of three minutes, two minutes, or whatever you want to give us?

The Chair: I'll give everyone a regular time limit of five minutes, or we can go on for ten if we want to in the first round. I can do it in ten-minute intervals if people prefer. Right now we're on five minutes, back and forth.

Mr. Tony Ianno: Thank you.

The Chair: Mr. Schmidt.

Mr. Werner Schmidt: Thank you, Madam Chair, and thank you, gentlemen, for appearing here again on a quarterly basis. It's good to see you again. We've seen several of you several times, and the relationship I think—I don't know if it's getting better; it's certainly becoming more familiar. We understand what you're doing.

I noticed in particular, when the statistics were being compared, that the reference was to the last quarter of 1996 and what happened in 1997. I'd like to take you back a little further than that and go to 1995. I did some comparison here, and it's very interesting what comes through.

It comes through that in the small business lending, in loans less than $ 25,000, there was a marked decrease in the amount of money lent to businesses in that category. The number of customers increased. In September 1997 there were more customers than there were in 1995, but the amount of money available to these people in 1995 was larger than the amount that's available in 1997. This means very clearly that each of those small people is borrowing less, if there are more of them. Can you explain this shift?

Mr. Kelly Shaughnessy: I can't explain it on any empirical data I have. I would imagine two things are happening, though. The $ 25,000 band is quite small, so as some of our borrowers progress and expand, they move very quickly up out of that $ 25,000 band.

The second thing I'd suggest to you is that in 1995, a lot of the systems the banks had were having difficulty capturing some of the smaller end of the market. You might be seeing a better capture of that, especially the numbers of clients.

Mr. John Leckie: A couple of quick points—not empirical, just sort of gut. I think what's going on is that the economy is improving, customers are generating cash, and there's less need to draw down their lines. In fact, I am generating authorized levels, but they're not drawing them down. I wish they would. I can't make any money if they don't draw them. We would encourage them to draw them, but they don't seem to need it. There is evidence that deposits, on the other hand, are growing, so that supports the generating-cash argument.

There is lots of empirical evidence, particularly out of the U.S., that as we switch from an industrial economy to a service-based economy, numbers, such as there's a 40% drop in the need for capital, are being used. In other words, you don't have to buy a lathe, for example, as you would in the industrialized economy. In the service economy you need to buy airplane tickets to go and make a presentation on the other side of the country, if you're a consultant and so on. The nature of capital needs is changing a lot.

Mr. Werner Schmidt: You're obviously speaking from the TD Bank, for which what you've just said is correct. In all the other banks, it's the other way around. In the other banks, the percentage of utilization or the actual accepting of a loan that has been authorized has increased. In your bank it has gone down, that's true, but in all the other banks it's up.

• 0940

For example, in the Bank of Montreal, the amount authorized in 1995 was $ 524 million and the amount in 1997 was $ 396 million. The utilization rate was $ 320 million in 1995 and $ 322 million in 1997, and the rate here is a minuscule amount coming down.

If we go to the CIBC, the utilization hasn't changed—it's 0.64%—and at the Hongkong Bank, the utilization has gone from 0.78% in 1995 to 0.86% in 1997, which is the exact reverse of what your explanation suggests. I would simply like to ask you, if you're the exception, what about the other bankers?

Mr. Maurice Hudon: I'd just like to point out that this is data we are gathering quarter after quarter, and we're finding better ways to ensure the accuracy of that data. There's some validity to the fact that we're probably coming to a point where the stability of that is going to help us move forward.

The other thing we have to remember is that borrowings below $ 25,000 for commercial purposes are very often actually.... Individuals will use their personal borrowings in order to finance ventures when the requirements are of that particular level.

There's all kinds of difficulty, if you will, in trying to identify what really is the purpose of the loan and what are all of the loans that actually are used for business purposes at that level.

So what we have resolved to do as an industry—and we are pretty much there—is ensure the integrity of the information we provide and get our systems to provide you with information that's consistent, period over period, allowing us to make sure we're dealing with facts that are absolutely solid. We're probably there now. I'm not sure that two years ago, when we compared those numbers, it was as easy to deal with relevant numbers, if you will, as it is today.

Mr. Dieter Jentsch: I don't have anything different to add.

Mr. Werner Schmidt: Okay.

May I move into another area then, which has to do with the significance of the small business enterprise to your overall operation. Throughout you have indicated this is a pretty significant part of your operation and you really care about small business. So is small business then defined as those that are over $ 25,000 in lending?

Mr. Kelly Shaughnessy: When attempting to define small business, certainly within our organizations, each bank would have its own definition as part of the competitive landscape. You have to keep in mind that in the case of the CIBC, at any given point in time, between 33% and 40% of our clients are borrowing. Our non-borrowing small business clients, who are actually the majority of our clients, are also very important to us.

So in our case, we define it on a customer behavioural need. We look at it as an owner-operator. We look at it as a company with little formal management structure. We look at it as a company where the personal and commercial financial affairs of the customer are interwoven. We look at it as a company that normally has fewer than 10 employees. And we look at it as a company that normally operates from a single location, perhaps serving a niche market. We don't put a quantitative definition to it. If it fits those behavioural characteristics of the client, that is a small business client of the CIBC.

In answer to your question as to whether it is important to the bank, I can emphatically state that when you look at the personal and commercial needs of our small business clients, the CIBC has certainly been the champion of small business. It is the most important customer segment in the bank. If you could isolate a customer segment, I can't think of any other one within the personal and commercial bank that is more important than small business.

Mr. Werner Schmidt: I'm very excited about the emphasis I've heard here this morning on developing the entrepreneurship program, especially for young people, because this is our future: they are the ones who will be the entrepreneurs who will drive our economy. A small business becomes a medium business and a medium business becomes a large business. So that's why I'm emphasizing this zero to $ 25,000 this morning, at least at this stage in the questioning, because it's these young people who are going to borrow moneys of somewhere between $ 3,000 and $ 6,000. The average, I think, works out now to less than $ 5,000, as of September 1997.

• 0945

If this now goes from, say, zero to $ 10,000, these people will develop businesses, and if they can be successful, they will become the entrepreneurs. That's really what we need to drive the economy.

I really want to emphasize this and ask you why, then, this sector, this zero to $ 25,000, has actually dropped? That is a major concern. We've had three years, and it has actually dropped. That bothers me. Less money is available to more customers. It tells me that, on the one hand, you argue that there's a qualitative emphasis here that you really want to encourage, and I really support that, but the behaviour, the lending patterns, don't support the qualitative statement.

How do we get these two together?

Mr. Kelly Shaughnessy: Madam Chair, I propose that we ask the CBA staff who compile these statistics to see if there is some empirical evidence we can find to answer the member's question. We could submit that to the clerk.

Once again, without anything empirical, I would perhaps see it from your point of view, Mr. Schmidt, that the number of clients has actually gone up and the amount has gone down. That means within that band, the average loan is going down, which means we are getting down into that micro market.

Mr. Werner Schmidt: Yes, but the total money is less.

Mr. Kelly Shaughnessy: But as I said earlier, there might be two things occurring. As businesses are expanding and moving up—

Mr. Werner Schmidt: That could be. I don't know.

Mr. Kelly Shaughnessy: —into the other bands and new businesses have been created, the banks are lending more and more money down in that smaller section.

Mr. Werner Schmidt: Thank you.

The Chair: Mr. Ianno.

Mr. Tony Ianno: Well, we've been at it for four-plus years. You all believe small business is important, and you all have stated the loan-loss ratio over the years is the same between large and small business, yet the numbers stink. The numbers are getting worse and not better on a percentage basis.

I guess if we look over the numbers for two years, aside from quarter to quarter, the Royal Bank has gone from 32.92% on December 31, 1995, to 29.64% at December 30, 1997, a drop of approximately 10%.

BMO went from 32.39% to 29.62%, a drop of approximately 9%.

National Bank, from 32.04% of all corporate commercial loans, went to 28.64%, a drop of about 12%.

CIBC, TD, and Scotiabank were relatively the same, give or take. The TD went up from 22.25% to 22.41%.

Hongkong Bank, the one that's going to bring us competition in the SMEs as a schedule II bank, has gone from 19.71% to 16.14%, a drop of approximately 22%. It's the worst of all the banks in terms of small business lending.

We don't want to go quarter to quarter, because the story doesn't really change much. Over the two-year period, SME lending went from $ 45.43 billion to $ 46.53 billion, and large business from $ 123.7 billion to $ 139.3 billion. That's a total increase of $ 16.6 billion to the corporate commercial lending, with 6.6% to SMEs and 93.4% to large businesses.

I know, Kelly, you were saying to Werner that they may have moved up the band from below $ 25,000 to the other level, but it still stinks. What are we going to finally do with the banks to lend more to small business? Is that a possibility, or is it just lip service? When are we going to change?

Mr. Kelly Shaughnessy: I think I'll answer, Madam Chair, on behalf of the CIBC, and I encourage our other members to also answer.

• 0950

I respect the honourable member's passion for small business and the passion he has for the ratio he has articulated. What I have attempted to say in the past, and certainly in my organization, is that there is no lack of debt capital to lend to small businesses. We do not have a system in our organization where if we make a $ 10 million loan to a large corporation, we have to take away money from the small businesses. Frankly, there is no relationship in our organization between small business lending and large corporate lending. They're done in two different units of the bank entirely. Nobody tells me I have to ratchet down my small business loans because somebody over in CIBC world markets is out there giving large corporate loans.

Mr. Tony Ianno: Does anybody come to you and ask you to ratchet up the small business loans?

Mr. Kelly Shaughnessy: Yes, they do.

Mr. Tony Ianno: Then why don't you?

Mr. Kelly Shaughnessy: I was going to address that as the second thing.

Mr. Tony Ianno: Sorry.

Mr. Kelly Shaughnessy: The market is competitive. There is a hell of a lot of competition out there—excuse my English—both from the other banks and from other players in the market. If you look at the Conference Board study, when Mr. Hudon was talking about the business credit statistics, he suggested that what is classified as the other lenders—and frankly, they're the Newcourts and the GE Capitals of the world—went up 5% in market share. Well, that was almost a 100% increase in market share that these people have. My competitors are out there introducing new products almost on a daily basis, as we've just introduced a new product, targeting small businesses. There's a lot of competition out there.

When I look at the CIBC numbers, which are basically flat over the years, I'm not very proud of them. We're going to encourage our sales staff to get out there and make more loans. I know I've said that in the past, but we have new products, we have new innovations, and we're going to go after it.

Mr. Tony Ianno: The question I have is on the competition. Why is it that there's so much competition to prompt your industry to lend roughly $ 1 billion more to small business, whereas with the large business it's $ 15.6 billion more? Is there no competition in that end?

Mr. Kelly Shaughnessy: I think there's a lot of competition on that level too, and it might be a matter of where some of the dollar expansion is going on.

Just to give you an idea of competition out there, if a small business owner, no matter what bank he or she deals with, goes out tomorrow morning to buy a Dell computer, for instance, if I'm permitted to say that—

Mr. Tony Ianno: Are they a client of yours?

Mr. Kelly Shaughnessy: They're certainly not a small business client of ours, no. I just wanted to give you an example because I know of this example.

Even if you as a member of Parliament phone up to buy that computer, it's all done by telephone. As they are inputting that information into the computer to process your order, one of the other providers of capital business lending in this country to small and medium-sized businesses will give an offer of credit to that client within seven seconds. So you say, “I want to buy that computer. I'll take it.” They'll say, “You can have it. If you want to pay cash, you can pay cash, but here are some financing offers.” Even before our account manager knows that the client is out there to buy a computer, that client has a very favourable offer of financing in front of him or her.

Mr. Tony Ianno: At what rate?

Mr. Kelly Shaughnessy: At rates that are driven off a credit score. These things are all scored.

Mr. Tony Ianno: To your line of credit rates?

Mr. Kelly Shaughnessy: Most of these deals are leasing deals. The rate is one function and the fiscal appetite of the client is another function of whether to take a lease or to take a straight loan.

I'm just using that as an illustration of the competition we face out there. We face a heck of a lot of competition both from other players in the market and from within the industry.

Mr. Tony Ianno: Thank you.

[Translation]

The Chair: Ms. Lalonde, please.

Ms. Francine Lalonde (Mercier, BQ): Thank you. I will rephrase my question. I was wondering how things work at the branch level. The numbers you gave us are the results of what is happening in various branches. When a bank manager tells us that someone starting a business is a credit risk and that he wants to help him, he will want to proceed as safely as possible. The bankruptcy of a new entrepreneur would impact directly on his performance objective, which he would not be able to reach, which is not good for his branch.

• 0955

I think it is a very serious problem that can manifest itself differently in different branches. Large businesses apparently don't carry the same risks even though we know they have caused bigger losses to the banks. But for a manager of a given region or part of town, any business asking for credit can represent a risk. There is a level he cannot go beyond and that can explain the statistics about thousands of customers or billions. I would like to have your views on that.

Mr. Maurice Hudon: Ms. Lalonde, if you will allow me, I can try to explain how things work at the Bank of Montreal though it may not necessarily be the same for the other banks represented here today. I think that you gave an excellent example. If you put yourself in the shoes of an account manager given the opportunity to accept a new transaction or to make an offer to a new client, your question would be: is it in his or her interest to do so if there is a risk of loss involved which could cause a problem?

First, I would say that the loans this person is responsible for carry the same risks. Someone may be responsible for a hundred loans, either new or already extended, and there is always a risk of loss like you said.

Second, our account managers—once more, I'm speaking on behalf of the Bank of Montreal—have very aggressive objectives regarding entering into new transactions and seeking good business opportunities for the Bank of Montreal. It's in their interest to meet their objectives. In the end, their performance is measured against that.

I wanted to speak more specifically to the question of potential losses because it happens sometimes. It is not the bank manager or the account manager as such who must account for it. Typically, it is accounted for at the level of a community of branches which can include 12 to 15 branches. In 12 to 15 branches, thousands of loans can be managed. Therefore, losses will happen. It is like managing a portfolio. It is not a risk the bank manager or the account manager will worry about because, in the end, the loss won't reflect on his or her branch or portfolio.

Ms. Francine Lalonde: I would also like to hear what the other witnesses have to say. The person I was talking about was recommending that we change the rules on bankruptcy so people could be more open about loans whilst being cautious. That person told me that there has been a credit tightening in the last few years.

[English]

Mr. Kelly Shaughnessy: I will speak for the CIBC once again, and I think Mr. Leckie wants to say something as well.

I don't believe the bankruptcy laws as such are at the root of the problem. Start-up businesses are more risky than a mature business. We as a bank have recognized that, and that is why we have also participated in many youth-related initiatives for start-up businesses, such as the Canadian Youth Business Foundation, programs such as that. We have a number of sponsorships and we just announced another one last night for youth at risk in Canada.

I think those types of programs recognize the risk but also recognize what we feel is our obligation to assist young Canadians in start-up businesses.

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So it's a risky market, but I think we're addressing it to some extent. The number of start-up small businesses that fail are a dramatic multiple of the number of small businesses that fail that have been in business for, say, five years.

The Chair: Mr. Leckie.

Mr. John Leckie: Madam Lalonde, I think that's the most important question this committee ought to be addressing, that new is risky. There's just no question about it. There's no getting around it. We all ought to be spending more time looking at that issue.

Having said that, to alleviate some of your concerns, and to tie it in to Mr. Ianno's question, at TD we in fact “incent” our branches to grow product, and a small business loan is a product. I in fact pay them to make small business loans in a branch, and neither do I hold them accountable for it if it goes bad, because we're moving toward centrally adjudicated processes.

We have a processing unit in Markham, Ontario, that will gradually, for loans under $ 250,000, underwrite those loans in a very efficient manner, à la Wells Fargo processing. All North American banks are at various stages of doing this.

Again, back to Mr. Ianno's question on the ratio, to tie this argument together, we incent our people to grow market share. I'm driven off of that personally, and I drive the branches with that.

[Translation]

Ms. Francine Lalonde: I had prepared my last question well.

Would you be willing to recommend that we follow up on the request of the Canadian Coalition for Community Reinvestment who suggested that we agree on the definition of loan application so that when they are being accounted for or talked about we know for sure how many loan applications were presented, rejected or accepted, and for what reasons? In these circumstances, we would be better equipped to let you know if you do your job well or to ask you what is happening or what else needs doing.

[English]

Mr. Dieter Jentsch: Perhaps I can address that.

Through various surveys—and very shortly we'll be releasing the third Thompson Lightstone survey of customer acceptances of applications made to the bank—customers have told us, for the last two years in a row, that authorizations or requests for credit are accepted in whole or in part between 85% and 95% of the time.

This isn't from the banks. This is from the customers saying, “We applied to the bank, and this is the authorization we received in return.”

I think that's a very good number, that 85% to 95% of all applications made are approved whole or in part. I think that in fact pays some tribute to some of the things that are being made available through various programs that have allowed us to lend in various start-up operations.

The Chair: Mr. Shaughnessy.

Mr. Kelly Shaughnessy: Madam Chair, I think it's very important, when considering the honourable member's question, that we go back in history. Some members of this committee were there when we discussed this particular subject.

That is why we brought out the Thompson Lightstone survey. We didn't want to get caught, either this committee or the bankers, in a situation where we were measuring loan approval rates and loan turn-down rates by a physical piece of paper or something of that nature. We thought what we should do—and as I recall, both the committee members and the bankers at the table thought this—is to look at it in the eyes of the beholder, or the eyes of the client, which means it's when the client thinks an application has been made.

That was one of the core theses around why we went down the road of doing the Thompson Lightstone survey.

The Chair: Thank you, Mr. Shaughnessy.

Mr. Coffey.

Mr. Charles Coffey (Executive Vice-President, Business Banking, Royal Bank of Canada; Canadian Bankers Association): Thank you, Madam Chair.

With respect to your question, and also as a follow-up to the statement from the honourable member from Trinity—Spadina, I would like clarity on the ratio that the honourable member refers to. I also would say that I object very strongly to the suggestion that Royal Bank's record in small business “stinks”. I object very strongly to that.

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A review of the facts, Madam Chair, would suggest that is not the case. I take great pride in managing my business based on fact. We were up year over year in the SME market, small business market—10%-plus in loans outstanding, and the ag small business market 19%, for a combined increase of 12.8%.

I think the honourable member suggested there has been a decrease in support to small business. Again, a review of the facts would not support that. The ratio he is referring to I think I am familiar with, and while I don't necessarily agree with that ratio, I have great respect for the fact that that is the ratio that the honourable member has chosen to use, and I think Mr. Ianno wanted clarity on something.

Mr. Tony Ianno: Sure. First of all, I know that you were stewing for quite a while, and it took a bit of time for you to answer, so I appreciate that, Mr. Coffey.

The Chair: Would you please try to avoid these kinds of comments and just deal with the facts?

Mr. Tony Ianno: Well, it was on the question of another member that he decided to answer, as compared to when I asked the question—

The Chair: Based on a comment you made earlier.

Mr. Tony Ianno: —and what I was referring to was the overall industry.

Of course, you know that I gave accolades to the Royal Bank for going from 27% to 32% when it did move in the right direction. So I just deal with the same ratio. At the times when you take the positive, you also must take the negative, even though you don't agree with the ratio.

What I deal with are the CBA numbers, and the numbers are consistent for the last three and a half years you've supplied the numbers.

Unfortunately, in terms of the numbers of a two-year process with the Royal Bank, in terms of the overall numbers that you gave to small business, on December 31, 1995 it was $ 12.71 billion, and now it is $ 13.237 billion, which is in effect an increase overall.

On a percentage increase of what you lent to large business, it went from $ 25.9 billion up to $ 31.4 billion, which is a substantial increase.

So on a percentage basis you went down, and that was exactly my point—that it has been consistent the last three and a half years.

All I'm saying is that as you increase loans to large business, if we're trying to do more for small business, if we go on the same basis, the ratio will remain consistent. Unfortunately, your increase to small business was $ 500 million, compared to the increase to large business, which is approximately $ 6 billion. So I'm sorry, but $ 500 over $ 6 billion is a smaller percentage that you lend to small business. That's what I'm referring to.

On the overall industry we have the same concept—$ 1 billion increase to small business, and $ 15.6 billion to large business. If you take your numbers, your almost $ 500 million or $ 400 million plus is a good percentage of that increase. Unfortunately, it's also a good percentage of the increase to large business.

What I'm trying to do here, and what we've been trying to do as this committee over the years, is to try to encourage the banks, without legislating or doing something of that nature, so that you'll lend more to small business.

I know, from speaking individually over the last four years with many of you, that you try very hard, but unfortunately it's not happening. So where do we finally draw the line? That is the question here.

Yesterday when we had a discussion with Mr. Schmidt—

The Chair:

[Editor's Note: Inaudible]

Mr. Tony Ianno: Thank you, Madam Chair.

The Chair: Mr. Coffey, did you wish to reply to that?

Mr. Charles Coffey: Well, we're getting into a debate on the relevance of the ratio. I don't propose to do that. I think the honourable member knows that the Royal Bank and I think all of these banks are all-purpose providers of financial support to the economic growth of this country.

It is clear that the economic and monetary policies in existence have contributed to that growth, and we have large businesses in our portfolio, and yes, there has been significant growth there. But for anyone to suggest that our track record stinks—yes, I did stew a bit, Tony. The point is, the facts speak for themselves.

The issue goes beyond access to capital. I've said this before here, and the honourable member from Kelowna is well aware of this. The issue is not so much access to capital. It is the issue of transfer of knowledge. There's no shortage of capital in Canada. What entrepreneurs need are management skills, marketing skills, and governance skills. Along with those skills comes an abundance of capital that exists in this country, and the Canadian chartered banks are providing the vast majority of it.

Thank you, Madam Chair.

The Chair: Thank you, Mr. Coffey.

If I could ask members to try to leave adjectives out of their questions, it may help things. They are very important questions, but I think they'd be much better put without adjectives.

• 1010

Mr. Peric, please.

Mr. Janko Peric (Cambridge, Lib.): Thank you, Madam Chair.

Recent initiatives and proposed changes in banking—can anybody expand a little bit? We know that new technology is on the horizon, and that a new way of banking is coming. How are you going to serve the business community a year or two years from now, especially in the smaller communities?

Mr. Kelly Shaughnessy: Perhaps I'll lead off, and once again speak on behalf of the CIBC, and then the other members can speak to it.

I think, Madam Chair, that what you're seeing in the industry is a transformation of the branches—not a disappearance of the branches, but a transformation of the branches. When I started in the bank a short three decades ago—it seems short, anyway—the branch was really a transaction platform in those days. The branch was somewhere people came to make deposits and withdrawals.

I was saying to somebody last night that I personally went to a teller this week for the first time in a year. My employer deposits my pay to the account, I do my banking electronically, I pay my bills by computer, and things of that nature. That is fairly consistent. The overwhelming majority of transactions today are done outside the branch.

What the branch is becoming is a sales and advice platform. There's a fundamental shift there, and I don't see that changing. We are investing, as a bank, in our branch network. Our board of directors has just approved a $ 400 million expenditure in the branches, not for computers and things like that but for the branches—for transformation of the branches to that sales platform. I think that is what we're going to see. There will always be some transactions in the branches, but the emphasis will change to a sales and advice platform.

Mr. John Leckie: I have two quick points on that. Likewise, at TD bank, we have 900 branches now, and no matter what happens, we fully expect that five years from now we'll have 900 branches. They will be doing different things, as Kelly says. We want to reverse the fact that 70% of the activity in there now is transactional and 30% is sales and advice. That's one point.

To Charlie's point on the transfer of knowledge, one of the exciting things with new technology is that with those 900 branches, many of which are in remote areas with central adjudication, as I alluded to earlier, we can provide the best expertise up against the most remote branch in, shall we say, “Cross Canoe”, in whatever province, which can get access to the best minds in lending and so on through new technology. So it's very exciting, very positive. It should work a lot better.

Mr. Janko Peric: You're saying the 900 branches are going to remain. Are they going to be combined or single branches two years from now?

Mr. John Leckie: I think we are going to have a lot of branches, no matter what happens. We need branches, but we need branches to do sales and advice, not to do transactional stuff. We don't need bricks and mortar for that. That's our handicap. That's a big weight around our neck, and it's not helping the customer the way we operate today. We're in that transition no matter what happens vis-à-vis mergers.

Mr. Janko Peric: Thank you.

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

Mr. Solomon.

Mr. John Solomon (Regina—Lumsden—Lake Centre, NDP): I have a few questions. I'll go one at a time.

This information you've provided to us on business credit statistics dated September 30, 1997—can you tell me how old this information is and when it was released?

Mr. Kelly Shaughnessy: The information is as of September 30, 1997. What happens is, each one of the banks has different systems. If there are seven banks reporting, there are probably eight different systems to compile it.

What the banks do is after compiling.... I'll go back one step. It is drawn from many systems within the banks. It takes a while just for the individual banks to assemble that information. The information is then submitted to the CBA, and the CBA consolidates it and slices it and dices it in the matrices that you see there.

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I think the September 30 statistics were released only March 16, Madam Chair. I also believe there is a concern with committee members about the timing of the release. This information should be in your hands within approximately 90 days. There have been some system difficulties in getting it to you.

We as members of the independent business committee of the CBA, as do most of the members here today, recognize these statistics should be in your hands earlier, and we've undertaken as individual banks to get that information to the CBA on a more timely basis.

Mr. John Solomon: The reason I asked the question is that in the House of Commons yesterday the Minister of Finance, in response to a question, said this information was over two years old. What do you have to say about that?

Mr. Kelly Shaughnessy: I saw that exchange on the parliamentary channel. I believe what he was referring to is that the banking industry and the industry committee of the House of Commons agreed over two years ago on the composition of that information and the banks undertook over two years ago to submit this information to the industry committee on a quarterly basis. That is what I read into that reply.

Mr. John Solomon: I read something different in his response, but I appreciate your comment.

I'm from Saskatchewan, and I personally feel quite offended by the fact the banks can't provide statistics at least on a Saskatchewan basis. You may recall that in 1905 Saskatchewan entered Confederation. We are an independent province of this confederation, and we feel a bit insulted. I'm wondering if it can be rectified in future compilations of information.

I think Manitoba members of Parliament feel the same way about the lumping in of statistics. I would ask you to please consider it and to clarify it.

Mr. Kelly Shaughnessy: Could I just offer an explanation to you, Madam Chair.

The composition and the matrices you see were agreed to two years ago or more by the industry committee and the banks. We couldn't report on more than the eight regions we're reporting on now because of confidentiality. If you note, we're reporting these on bands of authorization levels, bands of regional levels, and then bands of industry levels.

For some of these smaller provinces, if we reported it province by province, we'd be breaking the Statistics Canada confidentiality standards, which we as the industry committee and we as the banking industry agreed to.

If we were to do it, say, for the province of Saskatchewan, which is your home province, when we got up over the $ 500,000 band we'd have to have an awful lot of blank spaces on it to respect the confidentiality standards that have been established by Statistics Canada.

Mr. John Solomon: In that regard, could you not provide statistics for the smaller loans? To meet the criteria, I think 13 loans are required before they're confidentiality protected. Could you not do that for the smaller loans, and then lump the larger ones with the regions? Is that possible?

Mr. Kelly Shaughnessy: Personally, I do not know if it is possible. There are some members, such as the honourable member from Trinity—Spadina, who wants to make comparisons, so there might be some difficulties in it. I do have to stress that the matrices were done in full consultation with this committee and with expertise, both the statistical analysis expertise of industry and the expertise of the Government of Canada.

Mr. John Solomon: I'd like the CBA and the representative bank members to please review it and voluntarily provide the information. It would be helpful to the governments of those particular provinces. It would be helpful to the business community. It would be helpful to the members of Parliament who represent those two provinces. I suppose we could go around the committee and attempt to force you, but some cooperation would be a really refreshing change with respect to our province.

Mr. Dieter Jentsch: We did fully cooperate with the industry committee to compile the statistics, and we'd be more than willing to cooperate again. Cooperation is not the issue here. We will be more than pleased to sit down and discuss in conjunction with committee members what the requirements are, as we did the first time.

Mr. John Solomon: The CFIB undertook a survey prior to the announcement of the bank mergers last fall, in which 64% of their membership opposed the banks merging. About 97% in a survey of people in the southern part of Saskatchewan opposed the mergers after the announcement.

• 1020

The CFIB members and other small businesses I talked to are very concerned about the access to capital. In the survey they conducted, it was actually the 8th highest concern, and 27% of members believe the availability of financing for their businesses is a big problem. As a matter of fact, in a study done by the Federal Reserve Board in the United States, they found that large banking companies make very few commercial industrial loans to small business borrowers.

Mr. Walt Lastewka (St. Catharines, Lib.): Madam Chair, on a point of order, I don't think we're here to talk about the bank mergers.

Mr. John Solomon: We're here to talk about small business, Walt. Just pay attention and you'll find out what we're talking about. You've got two ears, so listen, please.

Mr. Walt Lastewka: Point of order, Madam Chair.

The Chair: Mr. Solomon and Mr. Lastewka, order, please.

Mr. Walt Lastewka: Mr. Solomon has finally attended the committee. Where's he been for the last three months?

Mr. John Solomon: I'm not a member of the committee, but I'm happy to be here.

Mr. Walt Lastewka: You're an associate member.

The Chair: Mr. Solomon, we are here to talk about the business credit statistics for small and medium-sized business.

Mr. John Solomon: I just listed the reference to small business.

The Chair: Business credit statistics for small and medium-sized business.

Mr. John Solomon: Let me finish, if I may, Madam Chair. If I'm out of order after I ask the question, please call me out of order.

The Chair: Certainly.

Mr. John Solomon: I'll proceed.

The study estimated that the larger banking corporations devoted a smaller percentage of their capital to loans to small borrowers. The study concluded the big banks provided very small business borrowers—and they defined small business as $ 1 million or less—with a very small fraction. I guess the final point is that the Wall Street Journal computer analysis of call report data last year indicated that five recently merged banks decreased their small business lending by 6%, while six big banks that had shunned the merger increased their small business lending by 7.5%.

My question is this. What benefits will small business have from the mergers of the banks, and what evidence can you provide to this committee to substantiate that it will be better for small business?

Mr. Kelly Shaughnessy: As a representative of one of the banks that have a merger proposal in place, I would like to say I personally believe, and our banks believe, that small business will benefit from the merger. Small business, especially in rural Canada, will benefit from the merger.

First, why would small business in general benefit from the merger? I think in a merged organization, the one we're proposing, we're going to have the ability to increase our spending on technology and to increase our development in new products and services for small business. I think it will all be a benefit to small business.

Mr. Charles Coffey: Madam Chair, I understood the purpose of this session this morning, the first session, was to review the business credit statistics and it was not to be a merger discussion.

The Chair: Mr. Coffey, we are not having a merger discussion. If you choose to answer Mr. Solomon's question.... I was allowing Mr. Shaughnessy to answer because he started to answer before I ruled on Mr. Solomon's question. However, if you do not wish to answer Mr. Solomon's question, we can move on; that is fine.

Mr. Charles Coffey: That would be my suggestion.

The Chair: Thank you.

Mr. Lastewka.

Mr. Walt Lastewka: Thank you, Madam Chair.

I want to pose two questions. A comment was made, I think by Mr. Shaughnessy, about the competition being tough out there in the SME loan area and that's one of the reasons the numbers haven't moved the way some of us would have liked. Is it because it's too expensive for the SMEs to borrow from the banks? Are you putting yourself out of the competition? Would you convince me you're competing strong enough in the SME area?

Mr. Kelly Shaughnessy: I'll open. I believe the average spread over prime for SME loans across all the banks is somewhere in the area of 1.7%. I think the price is quite competitive. I think most certainly it would not be a factor.

• 1025

Mr. John Leckie: I would add that in comparing the U.S. prime rate at 8.5% with the Canadian prime rate of 6.5%, plus the 1.7% add-on that Kelly referred to, we're still under their prime rates.

Furthermore, in the U.S. they typically add 3%, 4%, 5%, 6%, 7%, or 8%. So compared with the U.S. rates, on most banking products we tend to be on average about one-third less in cost in Canada relative to the U.S.

Mr. Walt Lastewka: You mentioned that GE Capital and others are in the marketplace competing with the banks and that's one of the reasons you said there was a lot of competition.

Are they able to compete better in that market better than you can? Is that what you're trying to tell us?

Mr. John Leckie: I think we need to add other factors such as leasing. It's very difficult for the banks to build a leasing portfolio if they're not allowed to do car leasing. We're probably the only industrialized country in the world that allows foreigners to do car leasing in our country, but we can't. That's a big product. If we can't do that, we can't build the necessary base from which to spring. It makes no sense.

Mr. Dieter Jentsch: I would like to add to that. The two lenders, GE Capital and Newcourt, are being very successful. They are good quality organizations. They are niche players. They've developed expertise in areas we traditionally have not emphasized and have been very successful at it.

Competition is alive and well out there. It's not a matter of price. We are not crying or whining about Newcourt or GE Capital. If we want to compete with them, we as an organization need to address the issues and come up with issues to compete with them on an ongoing basis.

Mr. Walt Lastewka: You made reference earlier in the report to doing some work with the chamber of commerce. Normally, when I get a complaint, it is from the chamber of commerce on loans.

My opinion has been—and Mr. Coffey and I have had some discussion and debate on this in the past—that there's not enough work being done at the lower level, at the regional level, to make sure that SMEs, some of which are with the chamber of commerce and many of which aren't, understand doing business with the banks.

In the last three or four cases with which I've been involved, when it got to the bottom line—why did this become a complaint?—it was because there wasn't a good understanding by the business person who had a home business and now was moving out of the home business into a small industrial mall. He wasn't learned enough, if I can put it that way, to understand how to approach the banks and work with the banks.

Can you tell me what you're doing to fix that problem? We've got so many home businesses now starting to move out of the homes and into these incubation areas.

Mr. Dieter Jentsch: The banks recognize that ongoing communication with and education of the business entrepreneur and small business customer are paramount. We agree we have to do a better job and move forward in the next short while.

I think we are doing everything we can at this point by creating seminars and materials. I talked about 125 different materials and tools. We're working with local chambers to give access to financing seminars in conjunction with local branch managers and local management.

There is a series of seminars designed to provide information on access to government programs, access to writing business plans, access to the year 2000 information. A whole myriad of programs are available, but that doesn't mean we can't do better. Certainly the programs are there, and we continue to move them out to the field every week.

Mr. Walt Lastewka: To me that is very much a key problem in small areas. Since I have to travel the country from time to time, when I hear a complaint, that's what it is. There's not enough dialogue. There's not enough helping.

• 1030

You mentioned management skills and so forth in the marketplace. I think it's the responsibility also of the banks individually or as a group to create those types of items across the country to help people understand how they could better get access to capital.

Mr. Charles Coffey: Perhaps I may make a comment in support of what the honourable member from St. Catharines is saying.

The premise we start with is seek first to understand. Everything in this business starts with and ends with a customer: understanding them as an entrepreneur, understanding the environment in which they operate, understanding the industry in which they operate. We have a huge obligation to ensure that understanding is there. This speaks to the educational initiatives announced earlier. It speaks to the things that are going on in Niagara led by the honourable member to ensure it's happening.

I would also say it's a two-way street. I think there's some obligation by the other party. Take, for example, the learnings through this committee. It's a great personal experience. It's the same for ensuring that small business people have access to capital. As I said earlier, however, the fundamental issue is access to knowledge. I believe we have lots to share in that regard, and the initiative specifically under way in the Niagara—St. Catharines area could be used as a role model for the rest of the country.

The Chair: Thank you, Mr. Coffey.

Mr. Schmidt.

Mr. Werner Schmidt: Thank you, Madam Chair.

There are two questions I'd like to ask.

The first one is a continuation—I'm sorry, I ran out of time before, Madam Chair. I would like to suggest that some of the information gets lost when it's compiled. The numbers I referred to earlier dealt with the aggregate statistics of all the banks. I'd like to look particularly at the specific banks, because there's been an interesting shift here.

In 1995 I think the banks that really contributed the most or seemed to have the most sympathy for small business were the Hongkong Bank and the National Bank. Those two were almost together.

When it comes to the 1997 statistics, the thing changes rather dramatically. Now, the Hongkong Bank has reduced its amount of authorizations and outstandings in the categories zero to $ 25,000, $ 100,000 to $ 250,000, and $ 250,000 to $ 499,000. This is rather an interesting change.

It's not exactly the same with the National Bank, but a similar trend has happened there.

The Royal Bank, on the other hand, has turned out to be dramatically in favour of supporting small business lending.

So while my honourable colleague across the way would make a big issue over the ratio, I would not do that. I don't think the ratio is the issue here. I think the issue is how much capital is available to small business so they can do the job that needs to be done. That's the issue, as well as the transfer of knowledge and all of those kinds of things.

I find myself on the one hand agreeing with the honourable member and on the other hand disagreeing rather completely with him.

I would like to ask these two banks, if they wouldn't mind telling us, what happened to cause the Hongkong Bank to be less sympathetic—well, maybe they're not any less sympathetic, but the numbers reflect differently than they did before—and to cause the Royal Bank to move in the other direction. I guess the National Bank should also speak.

Mr. Jim Howden (Senior Vice-President, Risk Management and Credit Services, Hongkong Bank of Canada; Canadian Bankers Association): Thank you.

I'm from the Hongkong Bank, and I can assure you that we have no less emphasis on small business today than we did two years ago. Perhaps two years ago our numbers were suspect. Within the last two years we've installed a new computer system. We've done a lot to clean up our numbers.

More importantly, our market niche is import-export trade. Those customers tend to be big users of capital. They're not in the service-intellectual business. Not too many of our customers in that market niche borrow less than $ 250,000. In fact, our customs have shifted or migrated from borrowing smaller amounts of money to borrowing more money.

• 1035

Obviously we can all do better in lending to small business. It's a market we're interested in. We also have a limited number of branches—117 in Canada—so small businesses to some extent have to seek us out. A number of our branches are in areas in which we cater to new immigrants, and I think we've done a good job in satisfying the capital requirements of new Canadians.

Hopefully that answers your question.

Mr. Werner Schmidt: It certainly did, yes.

The Chair: Does Mr. Guindon from the National wish to answer as well?

[Translation]

Mr. Jean-Pierre Guindon (Manager, Corporate Credit Services, National Bank of Canada, Canadian Bankers' Association): It is important to note that the main market of the National Bank is centered on small and medium-sized businesses. It is always based on demand. There is no credit restriction and there was never any, be it in favor of or against small and medium-sized businesses, nor for large businesses. Credit is always available. We talked about competition earlier and I agree that it is there. For example, in Quebec where most of our branches are located, credit unions are a major competitor. We also talked about leasing.

Like I said and I will repeat it, we have goals and there is no restriction. If there have been drops in credit use or demand, it is to be blamed on market conditions. I cannot think of any other reason to explain the differences between previous years and this one.

[English]

Mr. Charles Coffey: Madam Chair, I'm not here to sell Royal Bank on setting a track record in small business. This is an industry hearing, and in situations like this I need to take the high road because it tends to be less crowded up there. I do appreciate your comment.

One thing, as my colleague from the National Bank has said, when you look at the economy of Canada, well over 95% of all businesses are called small businesses. It's in our best interests, I would suggest, to focus on that market.

One thing we do fundamentally understand, Mr. Schmidt, is the fact that entrepreneurs create wealth. They create wealth in all respects, and not at the expense of the environment, not at the expense of social issues. They create wealth in terms of jobs, community support, and so forth. Again, we are in that business as well and it's a partnership with entrepreneurship. It starts and ends with the entrepreneur, in my mind, as the leader of this business. I believe it goes from top to bottom.

I'm not saying there has been significant growth, but it's a mind-set around the importance of this market. I personally, as the head of the business, ensure on a daily basis that the behaviours of our people are in keeping with that philosophy.

Mr. Werner Schmidt: Thank you, Madam Chair.

I'd like to move into another area now, and it has to do with customer complaints, communications, and things of this sort. I noticed the banking association launched a $ 25 million public relations campaign to tell the world how good the industry is and that it should have a better perception of the banks.

I'm wondering how the campaign is going. From the stuff I'm picking up from my constituents it's not working. So why is it that you use such stilted language? Why is it that you don't talk in ordinary business language that talks to the business person who understands what it is that we're all about?

It's all very nice to talk about some of the things you talk about, such as the ombudsman. If you have a complaint, well, go see the ombudsman. The average person doesn't know what the ombudsman is. All he knows is that things aren't going well.

What he needs to hear if he's got a problem or disagrees with the bank or is mad at the bank is to talk to so-and-so, rather than having this great fancy-dancey brochure that's sitting on the counter. He looks at it and says, oh, yes, another one of those public relations things, they're trying to make themselves look good. I want to know if they can solve my problem.

• 1040

I think that's at the heart of the issue. People have come into my office, saying they have a problem with the bank. When I ask if they've talked to the ombudsman, they ask who is he, what's an ombudsman? They don't know. We understand what an ombudsman is, you know what an ombudsman is, but the average person borrowing money or dealing with the bank doesn't know what an ombudsman is and doesn't know what an ombudsman does.

Although they trust the bank on the one hand, the minute you talk about the ombudsman they say they really have to question whether they should continue this trust relationship. I think it's a very real problem.

Mr. John Leckie: I don't know if my colleagues are going to like me for this response, but I totally agree with you.

Mr. Werner Schmidt: Thank you.

Mr. John Leckie: Maybe I can relate something I think is kind of humourous. On the plane coming here I was sitting beside Charlie, who was on the other side of the aisle. One of the Canadian Pacific employees noticed we were bankers and frankly kind of laid into me that she had a problem with TD Bank. She had consequently moved this particular product over to the Royal. It was my worst nightmare—

Mr. Werner Schmidt: It's a good thing there was an aisle between you.

Mr. John Leckie: That's right. Charlie was laughing so hard I didn't think he'd make it to the meeting. What I did was give her my business card and the telephone number of the business head of that particular product. I've since phoned him to say to expect the call, and I think that's how problems should be handled.

The Chair: Mr. Shaughnessy.

Mr. Kelly Shaughnessy: On the ombudsman awareness issue I would reflect on it personally. Take, for instance, the automobile I drive. I do not know what the complaint resolution system is with that automobile manufacturer, but I do know if I have trouble with the car I'm going to find out what it is and do something about it.

Mr. Leckie's presentation noted the British experience, which has been in there now for 14 years, but the awareness is still only 46%. I'd suggest to you that's because the vast majority of clients don't have a need to seek out that process.

Having said that, we as an industry are not happy with the awareness level of the ombudsman process. That is why we sought these partnerships with a number of industry organizations, such as the CFIB, in the distribution of the material. We want to make sure we get the message out and raise the awareness.

Madam Chair and other members of the committee, I don't know what the acceptable level of awareness is. I know it's not 100%. Given the British experience, it's probably not 50% either, but we have to make sure that when somebody does have difficulty with one of our financial institutions, there is an easy process to determine how one escalates complaints first within the institution and then, if it doesn't work, outside the institution.

The Chair: Mr. Hudon.

Mr. Maurice Hudon: Let's not lose sight also of the fact that hundreds of thousands of calls come into our call centres, called Info Services. I suspect the same is true at my competitor's banks. They deal with problems on a day-to-day basis, and the vast majority of those problems can be resolved by accessing the 1-800 phone numbers that are available. An even smaller proportion get resolved when people walk into their local branch.

I think we collectively felt there were a small number of problems that weren't getting addressed properly but were significant enough and important enough to require a mechanism we didn't have in place.

At the end of the day, 99% of the issues our customers have get resolved well before there's a need to go to an ombudsman. It's not as though a process wasn't in place first.

Mr. Werner Schmidt: Madam Chair, I want to make it very clear. I'm not concerned about the process; I'm concerned about the image. I'm not even concerned about the ombudsman.

It's like Mr. Shaughnessy just said. If I've got a car that's got a problem, all I want to know is whether I can get it fixed. I think that's the issue. The businessman wants to know, the customer wants to know, whether he can get the problem fixed. That's all they want to know. They don't care whether it's an ombudsman or an escalating process, whether it's this kind of process or that kind of process. They don't care; just fix the problem. That's what they want to know. That's the issue.

• 1045

I'm really talking about public relations. My honourable colleague, who has great difficulty with the banks and small lending.... I think it is partly that issue. Is the perception out there that the banks are the small businessperson's enemy and that they prefer the larger business, or is it that the bank really wants to help everybody? The image that's out there in the minds of some people is that the banks don't care about the small business, but they do care about the big business. I think that's the perception out there.

What I'm trying to bring out here is that the movement towards more education and more tools for the business is a good move, getting away from some of this other stuff, this perception of being an enemy and inaccessible. It has changed, but I don't think it's changed enough. That's the point I'm trying to make here.

The Chair: Thank you, Mr. Schmidt.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Thank you. I'm sorry for coming late. If I seem repetitive, I apologize for that.

What these figures are telling us and what we've been hearing in this committee over the last umpteen years is that we've reached an impasse. If we're looking at traditional business lending, things haven't changed very appreciably. I don't know really where this whole process is going.

But I'd like to deal with Economics 101. The reality is that for traditional lending, the internal rate of return to the bank on small business lending, if you're talking under $ 500,000, quite frankly is a lot lower than or maybe even at a loss as compared to larger loans. That's clearly the economic incentive not to loan more money to small and medium-sized businesses.

It seems to me you have to do one of two things: just acknowledge the fact that you can't significantly loan in those areas and abandon that field to some other institutions that possibly can, or change your product lines so you can get your internal rate of return down—go to more retail banking or whatever; find better or more effective ways to loan that money out at a smaller cost. Or you could consider small business lending to be a loss leader of some kind, where you're actually picking up other forms of business with that lending—other consumer products and so forth.

But I don't see where this process is going year after year, what we're doing here.

Is there any truth to what I'm saying?

Mr. John Leckie: Yes, there is.

Mr. Shepherd and I had a discussion a few weeks ago along these lines, and I will state quite candidly that a lot of what he says is correct, at least in so far as the TD Bank is concerned, and I think most North American banks. Lending to small business by itself has been a loss leader. But it's important to say it's a loss leader. If you add up the whole package, it's a very profitable business segment. If you add in the group RRSPs for the employees, for example, the payroll that's sold to them, and so on and so forth, the whole package—the whole enchilada—is a profitable segment and one we are aggressively after for that reason.

Also, what Mr. Shepherd said is correct—and we're all on this road, to some degree—it's to get the cost out of underwriting, and that's to the benefit of the borrower as well. A lot of the cost, in our case, I will admit, has been imposed by what I would call “corporate think” or “mid-market think” being shoved down, way too far down, into the small business sector. We overanalyse that. We subject the customer to far too much analysis of their loan application, far too much effort goes into monitoring credit, and so on and so forth.

We're on the path to change all that. I can't say to you today that we have that all fixed. I can say that by the end of 1998 we'll have it largely fixed in Ontario and by the end of 1999 in all of Canada.

In any event, I'm trying to describe to you what's really going on here, and the most important thing is to say that even before we fixed all of this, small business was a very relevant target market to go after. As I said earlier today, we incent our branches and our sales force to grow small business loans and all the other products.

The Chair: Mr. Coffey.

• 1050

Mr. Charles Coffey: Madam Chair, I want to state clearly for the record that I do not agree that supporting small business in any way, shape or form is a loss leader. It is quite the opposite.

I am of the view, having participated in this committee for four years, that with the committee's help we have made great strides with reporting and so on, and I think the growth rates reflect that. Some 46% of my small business clients don't borrow. I have to be a voice for those clients as well. I understand the importance of capital, but I also understand that a significant percentage of my small business clients don't borrow from us. They need all sorts of other products and information.

So any suggestion that small business is a loss-leader, from the Royal Bank's perspective, I do not in any way, shape or form agree with. The economics speak for themselves as our track record.

Mr. John Leckie: That's not what I said. I said the credit piece, which is one of many products, is an issue that is undergoing transition and significant change.

The Chair: Thank you.

Mr. Shepherd.

Mr. Alex Shepherd: The fact that 45% of your small business don't loan tells me that you're looking at a more lucrative area. The ones that do loan are obviously the ones that trigger in additional costs.

What we really want to know on this committee—

Mr. Charles Coffey: That's an assumption I don't agree with.

Mr. Alex Shepherd: —if we're going to continue with this process, is how we can measure the increasing loan activity. Maybe it's through retail banking, maybe through their credit card system. How can we measure that in the future so that we reflect a positive light on how progress is being made in that area?

Mr. Charles Coffey: As we agreed earlier with the member from Saskatchewan, enhanced reporting is an absolute necessity.

Again, I think you made an assumption, at Royal Bank at least, that lending is costly. There is a cost involved in all that we do. I would not agree that it is a burdensome cost and that we're only focusing on depositors at the expense of others. I look at this market in a holistic sense, because small businesses from coast to coast require a broad range of help to assist them in growing and prospering, which is what we're all about.

The Chair: Mr. Shaughnessy.

Mr. Kelly Shaughnessy: Madam Chair, from our point of view small business is perhaps the most profitable single customer segment within the CIBC, and that is because they do have loans, but as Mr. Coffey said, they have a broad range of service needs. Even those who borrow have a broad range of service needs.

I think there is a need for process improvement. I think a number of my competitors have met that need for process improvement through innovative card-based products and simplified application products, as we are just launching too.

The bank that doesn't lend to small business—all our research says that if you don't lend to small business, you're not going to get the right to serve their other needs, and then you will lose money on this segment. So you have to bring simplified processes in, you have to make sure you're in the market, you have to make sure you're lending, and if you're doing that you will earn the right to get those other products and services.

The Chair: Mr. Hudon.

Mr. Maurice Hudon: Mr. Shepherd, one of the challenges that our industry has faced is the issue of cross-subsidization within the various products and services that are offered, and one lesson that we are quickly learning is that cross-subsidization is a very dangerous game to be in. If I cannot ensure that any given product or service that we offer to a client isn't profitable, we make ourselves vulnerable to suppliers or so-called mono-lines, who are going to come in and target very specific services, and will be able to do so profitably by virtue of the cross-subsidization that we may have had in our systems over the past few years.

I would venture to say that just about the only loan that isn't profitable is one that's not drawn down. Borrowing customers are profitable to the bank, and we try very hard not to be in the business of having too much cross-subsidization. There's no doubt that sometimes it's thin, and it's by being able to provide products beyond the central ones that render the relationship a profitable one. More and more our industry will need to be cautious about providing services that are profitable and about being very efficient in order to be able to compete with people who can come and target very specific services.

• 1055

The Chair: Last question, Mr. Shepherd.

Mr. Alex Shepherd: It wasn't that long ago—maybe it still exists—where somebody wanted a conventional small business loan of $ 50,000 or $ 100,000 and the banks said give us $ 3,000 and we'll think about it.

If that $ 3,000 is no longer in the system, the reality is that it's still part of the economic equation. We're not keen about loaning in that area because when we start microcosting.... You must admit that you do this, that you flow a loan application through your system to see how much time your manager spends with it, how much time the guys down in Toronto horse around with it, how much time you spend doing credit applications and so forth. By the time you're through, the reality is that for a $ 100,000 loan you can't justify that business.

It tells you that from a corporate structure point of view you'd be crazy if you didn't do this and that the internal rate of return on loaning in that area just doesn't make any sense as a corporate choice.

Mr. John Leckie: But that's all changed. We're in a transitional period where business cards for up to $ 50,000 are underwritten as quickly and as easily as a Visa application. We're in that transition now, and that's a hopeful sign for small business people.

Mr. Alex Shepherd: This process is outmoded because it talks about conventional business lending.

Mr. John Leckie: I think everything is quickly becoming outmoded. I think a lot of what we're talking about here is that history doesn't count a whole lot any more—in my opinion.

The Chair: Thank you, Mr. Shepherd.

[Translation]

Ms. Lalonde, do you have any other question?

Ms. Francine Lalonde: Yes. I would like to talk about another promising sector where you have an asterisk, the knowledge-based industries. First, I would like to know if the number that we see there, the last one at the end of the tables, on page 23, is for all the knowledge-based industries. Then I go to page 30 where you talk about Quebec and authorization levels of $ 25,000. Are you applying the same criteria as for other businesses when you extend loans in that sector where risks are even higher, be it multimedia, cinema or any other field related to computers? It is a sector where basic investment needs are often larger, where risks are high but where success can be enormous.

I think that it is a real challenge and I would like you to talk about it. Then I will have a sub-question.

[English]

The Chair: Mr. Shaughnessy.

Mr. Kelly Shaughnessy: That is the definition of the knowledge base.

[Translation]

Ms. Francine Lalonde: There are others as well.

[English]

Mr. Dieter Jentsch: To answer the broader question, I would agree with your observation that they take a different level of due diligence, different questions, and different education in terms of the thought processes of our lenders. In 1994 as an industry we had less than three specialized units dealing with that sector across Canada, and today I think it's well over 60 as an industry, which shows you the banks have recognized that we need to train or educate our lenders as to how you analyse some of the specialized industries you referred to.

• 1100

It is a never-ending challenge to deal with the changes in the software industry, the biotech industry, and some of the knowledge-based industries that get a lot of the spotlight. At Scotiabank, we put our lenders, our account teams, through whole different types of questions so that they can better understand the risk, so we can better manage it.

We all went through that phase as an industry where we had some changes. Industries change and evolve. I think you're seeing a real change in the banking industry. We're saying we recognize that a level of expertise and specialization is required, and we need to train our lenders to better address those issues.

[Translation]

Ms. Francine Lalonde: Would the other witnesses like to answer that question?

[English]

Mr. Kelly Shaughnessy: In our case I think it's much the same. We recognize that lending to the traditional knowledge-based businesses is a highly specialized field, so we do have specialized account managers across the country whose sole responsibility is to deal with both small and medium-sized knowledge-based businesses.

As well, recognizing the risk that is involved in it, and one has to keep in mind the various life stages that a knowledge-based business goes through, from the stage of just being a vision or somebody's idea to some of them actually getting up the ladder with a product that is marketable.... We also participate in some venture funds to assist knowledge-based businesses across Canada.

Mr. John Leckie: I have a quick comment. At the true small business end of the equation, that is, loans for less than $ 250,000, I don't care what business they're in as long as it's legal. I don't think we need to analyse the kind of business they're in at that end of the equation.

Your question is more apropos to the mid-sized companies. Then a lot more analytics have to go into it and a lot more specialization has to come to the table from both the borrower's and the lender's standpoint.

I think it's very important to split the SME thing. I've talked to many of you about this. Small and medium-sized business—we tend to mix them up, but they're different.

Mr. Charles Coffey: Madam Chair, it certainly is a different risk profile. In some of the KBI or new economy companies, particularly on the software side, there's a huge need for cash up front, but there's also a huge burn rate. You know that well because Quebec has been a leader in generating those types of firms.

So if it doesn't come directly from the bank, we then need to team up with others. We've done so very successfully in our bank with FORD-Q, for example, or FedNor or Western Economic Diversification.

Government agencies, third parties, angels—if you go into the Beauce area of Quebec, as you well know, there are hundreds of angels who are prepared to partner with others in providing financing to the new economy entrepreneurs.

The Chair: Another question, Madam Lalonde.

[Translation]

Ms. Francine Lalonde: Are you telling young people who have an extraordinary project, who have a drawing that they can sell to the whole world, who need to buy a $ 37,000 computer program and who don't have a penny that they must look for risk capital somewhere else?

[English]

Mr. Charles Coffey: No, not at all. Let me be very clear. Every credit-worthy deal is financeable. I'm not suggesting they go look for venture capital for an equipment purchase. There are various stages of the growth where they may need risk capital or venture capital. They may need subordinated debt or other forms of debt, but for a $ 37,000 piece of software, I would not suggest venture capital for that in any way, shape or form.

[Translation]

The Chair: Thank you Ms. Lalonde. Mr. Bellemare, please.

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): I would first like to congratulate the Canadian Bankers' Association for publishing the document entitled Preparing business for the Year 2000. Is that document also available in French?

[English]

Mr. Dieter Jentsch: Yes, it is.

[Translation]

Mr. Eugène Bellemare: Very well. I must tell you that I read it from cover to cover and that I took note of several points. In short, it deals with issues our committee spends its time discussing with other bodies. I raise my hat to you.

I would like to get back to the ombudsman, Madam Chair. When I read your document here,

[English]

“How the Canadian Banking Ombudsman Can Help You”, I've discovered that there's an ombudsman for the bank and you also have a Canadian Banking Ombudsman Inc. Can you tell me what the difference would be?

• 1105

Mr. Kelly Shaughnessy: Each of the banks has an ombudsman. If a customer has a complaint and cannot get that complaint resolved at the local or regional level, and frankly at any time, they have the right to go to the individual bank's ombudsman to get that resolved. If the client still does not get satisfaction after dealing with the individual bank's ombudsman, they can then go to the Canadian Banking Ombudsman, which is Mr. Lauber, who's in the room with us today. Mr. Lauber is the Canadian banking industry ombudsman. The CBO is an organization with, as Mr. Leckie said earlier, an independent board of directors. The CBO has the power to investigate complaints for both small business and retail clients of the banks where the client cannot get the complaint properly resolved within the complaint resolution framework of that individual bank.

Mr. Eugène Bellemare: Are complaints more than just a conflict between the officer of the bank and a well-known client, for example. The bank doesn't want to lose a good client or an old client, so they invented this position so that—the bank president can't go down and check, but someone who represents the bank executive goes down. Is the conflict between the officer of the bank and the client? Is this a personal thing going on between them? So they become sort of the ear or the executive of the bank. Was that the origin? Is that the main point of an ombudsman?

Mr. Kelly Shaughnessy: The framework we have today with the Canadian Banking Ombudsman, and I feel very strongly about it because I and some of the members were at the table when this was put in.... There was a concern by members of this committee that the banks weren't listening to their clients. There was a concern by members of this committee that the complaints resolution process was such that the clients couldn't get a proper hearing. The banks, with the full consent and knowledge of this committee, put in—and I'm not boasting but our bank was the first one—individual ombudsmen in each of the banks. Then the banks, and I think it was in this room, agreed to establish the office of the Canadian Banking Ombudsman.

It was with the full knowledge, cooperation and—I think some of the members are here today—consent of the committee that this ombudsman process was put in place. It's an independent process when it moves up to the ombudsman level. I don't believe it is a shirking of responsibility by any officer of any bank. It is that we want to give our clients the right to go to an independent body to get complaints resolved when they feel they cannot do it within the complaints resolution framework of that bank.

Mr. Charles Coffey: Kelly said it so well that this ombudsman role came out of the discussions with this committee. While each bank has an ombudsman and the industry has an ombudsman, I consider myself to be an ombudsman, despite the view that I might have a conflict because I had the business banking division. I would suggest to you that in Carleton—Gloucester you are an ombudsman on behalf of at least 20% or 25% of my business clients there. Many MPs call directly to represent their constituents. It's simply another voice of the marketplace. I think there are hundreds of ombudsmen out there. Although we do have the formal process in each bank, it was generated or originated right in this very committee.

Mr. Eugène Bellemare: Your booklet states that he or she is to provide impartial and prompt resolution of complaints. Then two or three pages later it says banks are not bound by the ombudsman's recommendations. But he is bound to publish a list, a list that I've never seen or heard of before. There must have been a list produced in the last month, two months, three months, or a year. If so, could we get a copy of that and could we get a reference? In which paper was it published? Was it published in local papers or a national paper?

• 1110

Mr. Kelly Shaughnessy: Let me be very clear on that too. The reason there's no list is that there has been no occasion where the ombudsman has told one of the banks this is the way it should be done and the bank did not react to that. There is no list because there has never been a case of that nature.

Mr. John Leckie: But there is an annual report.

Mr. Kelly Shaughnessy: There's an annual report, but what the honourable member is referring to is the list of those cases where the ombudsman has made a recommendation and a bank has not acted upon that recommendation. That has not happened yet in the process. With the individual banks—and I'm sure each of the other people have done this or something similar—I checked with our ombudsman Monday of this week. Also, in the case of our internal ombudsman, he has yet to come up with a case where he says this is the way it should be and the business unit has failed to act in that manner.

Mr. Eugène Bellemare: Thank you.

The Chair: Ms. Jennings.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you. I'm sorry if I'm late. I just got back from Montreal and that's why I was not here at the beginning of the meeting. I have a few questions, including some about the ombudsman.

I will start with a theme that my colleague, Mr. Shepherd, mentioned, that is if actually this type of statistics or information is not outmoded. I'm asking you this question because, according to you, only 50% of the credit extended to small and medium-sized businesses comes from the banks whereas 50% of it comes from companies like GE Capital, Newcourt Credit and other rental and leasing companies.

This means that the information that you provided us is incomplete and that you're not drawing us an exact picture of the situation. You even suggest in your summary that we summon the non-regulated institutions so they can provide us with their own data. I would like to hear everybody's comments.

Second, you recognized that Canada is going through a structural evolution of its economy. We are moving from an economy based on hard industries, the manufacturing sector, to service industries. As all the data show that self-employed workers are more and more important, I'm wondering if actually loan products or conventional loans will satisfy the needs of that new segment. I'am asking you this question even though I know that service industries normally require many less loans than other traditional industries. Self-employed workers need other products and services. I would like to know which ones you have already developed or are planning to offer in order to satisfy their needs. For example, I know that

[English]

the business credit cards is one that is excellent.

[Translation]

My other question relates to the ombudsman. I wish to congratulate you for having established...

[English]

The Chair: We've decided to do one question at a time. That was how we started the meeting.

Ms. Marlene Jennings: Okay.

Mr. Kelly Shaughnessy: I'll lead off and ask my colleagues to jump in.

Frankly, I agree with the member that the statistics are incomplete in that half of the providers of debt, of leasing capital, are not reporting to this committee. We as an industry have absolutely no power to make them do it.

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I'm not sure if you as parliamentarians have the ability to force them to do it, but we would certainly encourage and ask you to have the other providers of debt capital and leasing capital to the small and medium-sized enterprises to report so that we can get a true picture of whether or not the needs of these companies are being provided.

With respect to the other services, I'm going to let some of my colleagues have the floor so they can describe perhaps what they're doing.

The Chair: Mr. John Leckie.

Mr. John Leckie: I have a quick comment on the business card. At TD Bank, we launched a $ 50,000 business card with a zero application fee and a zero monthly fee. Attached to that is a revolving line of credit, essentially. We also have a business line product. As you said, some of the products were not appropriate for this market any more, so we have a zero application fee for that small business product and a $ 25 monthly fee.

I think it was Mr. Shepherd who alluded to having to write a cheque for $ 3,000 to get an application through. That is no longer an issue for small business at TD. We have a zero application fee, and that's consistent across the country.

For the non-borrower, who is very important here, we have a business service plan. For as low as $ 5 a month, you can open up a current account and write 12 cheques a month or do your banking at an ATM or on a PC, and so on and so forth. So we feel we're moving with the times and we have competitive products out there.

Mr. Dieter Jentsch: I don't want to compete with Mr. Leckie's advertisement of the TD Bank, but I feel compelled.

I think fundamentally, with home-based businesses as a service industry, we as an industry need to look at how we go back in terms of the adjudication process. We have to make sure that the process that was designed in large part for a corporation type of entity—these companies were much larger in size than what you're traditionally seeing today—is refined in terms of what the application process is all about. I think we're collectively all moving toward a much simplified application process. In many cases, it's one page. That's the case with our organization, and I think it's industry-wide.

I think it moves on to further the ongoing relationship with the small customer in terms of the interaction between alternate delivery channels like ability access, banking through the telephone and the Internet, and technology-based products. These cater in large part to the small business owner who works out of his or her home to allow them to access banking that has traditionally perhaps been inaccessible except to large corporations. So I think we're all moving to a much more streamlined application procedure and accessibility that would be made available by alternate technologies.

The Chair: Ms. Jennings, this is your last question.

Ms. Marlene Jennings: Yes. It's my second and last question.

Concerning the ombudsman, I began earlier by saying that I congratulate you on putting into place this kind of process. I think it's very important.

I do have two concerns. First, I've worked in the area, but with police, not banks. One of my experiences has shown that with most people, the level of awareness is not....

You said that about 46% are aware that some kind of process exists, if I'm not mixing that up. If my figure isn't right, you can correct it when you respond.

The level of awareness from our experience in policing has shown that what's important is that, even if people don't know what the process is, they should know that there is some kind of independent process. The issue of the banks having 100% compliance, I think, is very important, and it's something that needs to be publicized.

Second, real-life cases need to be publicized, while obviously safeguarding confidentiality and identities.

Those are ways in which, on the policing side, we found that we were able to build a level of confidence in the whole independence and objectivity of the ombudsman.

The other issue is that the ombudsman, at least the Canadian Banking Ombudsman, cannot examine complaints that deal with policy issues, for instance. That's according to your leaflet.

Does an individual bank ombudsman have the authority to look into a complaint about a banking policy whereby someone is claiming that the policy is structurally wrong or discriminatory in its actual state. For instance, Mr. Shaughnessy, does your banking ombudsman have that authority?

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Mr. Kelly Shaughnessy: To deal first with your questions and clarification, the 46% was the U.K. model, and we were using that as an example of a model that had been in place for 12 years.

The Canadian Banking Ombudsman is in the room today, and I'm sure he's taken note of your very good recommendations on publicizing the wins his office has been able to deal with.

With respect to the CIBC's individual ombudsman and on policy, I know of no policy within the CIBC that restricts Mr. MacLean's ability to investigate any matter where a client complains.

Mr. Charles Coffey: I think, Madam Chair, I would also add a comment to that, and I would tell you that I meet with the Royal Bank ombudsman monthly to talk about issues that he is dealing with in the whole area of small business, because like you, he is another voice of the marketplace: the voice of the client. Yes, this issue of independence does come up from time to time, and your reference to your previous role as the deputy commissioner of police ethics of the province of Quebec is an appropriate one, because this debate around independence—when you obviously were very independent in that regard—is still an issue. I think it's more of a perception-driven issue than reality, because again, the voice of the market is important to me, and I will listen to those voices wherever they may come from.

Mr. Dieter Jentsch: I want to make a further comment on that as well. Certainly in our organization our ombudsman has the full avenue of communication on policy. If there's a policy issue that has come up and is one of debate, certainly it is debated and it's open for question at any time. We also go one step further in that when we publish an annual report of the ombudsman's office, we do articulate case studies of actual live cases, with the names of course being withheld, but of cases that a customer could read and say this resembles me. This annual report is available in our branches and is accessible by any one of our customers or prospective customers. They can actually look at it case by case. We list about three cases, a situation where we ask the customer to keep their documents, what the relevance of that was, and how we helped in that situation. There are pros and cons in each case provided so the customer can actually realize that, hey, this is something I can relate to.

The Chair: Thank you, Madam Jennings.

Mr. Solomon, please.

Mr. John Solomon: Thank you very much. We really do appreciate the information you've provided to us, and one of the issues I wanted to pursue now is in relation to what information you provide in your American operations with respect to small business information that you don't provide to us. Any information, for example, that's required under regulation in the United States is far more detailed from banks than apparently we get. I'm wondering what your thoughts are on whether you're providing more detail in the United States to your operations. For example, the Bank of Montreal has purchased the Harris Bank, I believe, and there are certain regulations that you have to meet there with respect to providing statistics and information, and there are other issues as well. I'll follow up on this.

Could you just give me an overview of what sort of information you provide to the United States that you don't provide to us? Could you do that for us as well?

Mr. Maurice Hudon: Let me respond on behalf of the Bank of Montreal. I saw Dieter was getting nervous when you were looking at him.

Mr. John Solomon: Mr. Hudon, I meant.

Mr. Maurice Hudon: I'm afraid I am not familiar with the specifics of the information that we would be reporting or that Harris would be reporting to the regulators in the U.S. by virtue of the legislation that they obviously have to abide by, because the area of my responsibility is for the business banking areas within Canada. Clearly, we abide by those regulations. I do know that the Harris is actually held up as a model by many parties who have insisted that this kind of legislation come into play. That much I know. I would be happy to get that information to you. In fact, if you would like I will make sure we try to send your office information as to what it is that we do in that respect, if it would be helpful.

Mr. John Solomon: Sure.

The Chair: Mr. Jentsch.

Mr. Dieter Jentsch: In the United States, our organization is substantially committed to the corporate banking market and not the small business market, but as a matter of observation I understand that in this CRA legislation the smallest loan tier stops at $ 100,000. In Canada, of course, we go much further than that. I think we report in terms of a smaller bandwidth in Canada than they do in the U.S.

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I also understand there isn't any comment or breakdown of sales required for $ 1 million or less, and I think it's $ 500,000 for farms. I think this CRA legislation shows that reporting is not quite as onerous on bands and sales volume as it is in Canada, but again, we will be pleased to look at that issue for you.

Mr. Kelly Shaughnessy: We don't have any small business operations in the States, so I cannot answer that question.

The Chair: Mr. Solomon.

Mr. John Solomon: The information I have indicates that in the United States it's required by law that financial institutions, by branch, have to provide information, including the number of loan applicants, those that have been approved and rejected, and other details. I'm not sure whether this is accurate, but I'm also informed that the loans would be categorized by size of loan, for example $ 25,000 to $ 50,000 as a minimum and so on.

I'm curious about that because it would be important information. In particular, it would be important as baseline research information to compare what has been happening in Canada with respect to small business loans in the future, after bank mergers occurred, if that in fact happened, so we could track and ensure that resources are provided to the small business community. As was indicated earlier, the mergers would be good for small business; there would be more capital, easier access, more competition, and cheaper rates.

There was another thing I was wondering about with respect to small business loans. In their survey the Canadian Federation of Independent Business indicated that 27% of their members feel that access to availability of financing is a problem. Yet you say that 85% of your applications are approved for small business loans. How do you square that discrepancy between CFIB membership information and your information?

Mr. Charles Coffey: I would like to respond to the last part first. There are two points. You mentioned earlier the same organization in their survey ranking access to capital as 8 out of 10. I would remind you that the respondents to the survey are only given 10 choices. Similar surveys in the U.S. market give 75 choices. It's almost a forced ranking, so access to capital by virtue of that survey will be an automatic 1 in the top 10, but that's something aside.

Our loan approval rates for small business in Canada are 88%. In rural Canada they are 90%, rural Canada as defined by Statistics Canada.

Mr. Solomon, you said the 27% was relative to....

Mr. John Solomon: I said 27% of members of the CFIB polled believe that availability of financing is a problem, not that they've been rejected, but they're obviously in business—

Mr. Charles Coffey: In context, you have 10 choices, a couple about regulation, taxation, access to capital, which is—

Mr. John Solomon: So what you're saying is it's the way the survey is designed.

Mr. Charles Coffey: That would be my view, but I think you would have to form your own opinion on that, of course.

Mr. John Leckie: I have a quick comment. This debate happens on several fronts and I think we have to be careful that the definitional issue of access to credit or access to bank loans is very different from access to capital or access to financing.

When you make these comparisons with the U.S. in particular, when we're talking about access to financing, that can include equity and it can include debt in the mind of the person filling in the question. Subjectively, I would comment that the issue in the U.S. on equity is a lot less onerous than it is here. It's a lot less of a big problem, and I think the CFIB would confirm that.

The reason it's a lot less of a problem down there is that their taxes are a lot lower, so they have more after-tax retained earnings, which allows them to grow more equity. When they have more equity they get more debt loaned to them and it's a double win. I think that's something we ought to pay attention to.

The Chair: Thank you, Mr. Leckie.

Do you have a last question, Mr. Solomon?

Mr. John Solomon: The Bank of Montreal perhaps would be the best one to answer this.

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The Harris bank was purchased by the Bank of Montreal, with certain conditions. The conditions were that the bank provide about $ 490 million Canadian for reinvestment purposes, according to the Community Reinvestment Act in the States. A criterion for that act is that the financial institution in question would be required to invest that amount of money in the district or regional area in which the Harris bank operates. The Bank of Montreal happily complied with that.

I'm wondering how an act like the Community Reinvestment Act would work in Canada, or whether you see even a need for it in Canada so that we could provide more access to capital for our small business community.

The Chair: One moment, Mr. Shaughnessy.

Members, it's a quorum call. It's not a vote.

Go ahead.

Mr. Kelly Shaughnessy: Madam Chair, on a point of order, I believe the member is talking about the CRA in the States, and we came here to talk about small business. The CRA is a piece of legislation in the United States of America that is far broader than a small business issue, and if the members want to talk about that, I think we as an industry would feel more comfortable if we brought up other people, or if we brought up people who were properly prepared to discuss that piece of legislation.

The Chair: Thank you, Mr. Shaughnessy.

Mr. Hudon.

Mr. Maurice Hudon: I feel compelled to say that I think the number you mentioned was $ 490 “billion”, but I'm sure it wasn't that.

Mr. John Solomon: No, “million”.

Mr. Maurice Hudon: Okay. I was sure it wasn't that.

I'd like to expand a little bit on Kelly's point. The U.S. experience was founded on an industry and a condition in an industry that's very different from the one we have in Canada, a very fragmented industry with tens of thousands of banks that were serving very small pockets as opposed to a system that serves nationally here.

I think Kelly is quite correct that to get into those kinds of issues and understand them, I think, would require an awful lot of time and people who are really capable of dealing with the experience from a perspective that we may not be able to do for you here today.

The Chair: Thank you.

Mr. John Solomon: I have a question, Madam Chair. At the last meeting, on Tuesday, 48 hours past, I gave notice for a motion to the committee in which we would consider calling the banks and others before the committee for a review of the bank merger. We've attempted to do this through the Minister of Finance, through the finance committee, through the Prime Minister and other areas, and I'm wondering whether we would be dealing with that motion today, to have the industry committee pursue this, or whether we would do it at a later date.

The Chair: Mr. Solomon, with all due respect, we invited the witnesses before us several months ago now and scheduled this meeting, and I would ask that we deal with your motion today at 3.30 p.m., as I suggested on Tuesday afternoon, at which time I received no objection from you and assumed would not be a problem.

If that is a problem, we can deal with it now. However, we do know the finance committee is dealing with the very same issue, as stated very clearly in the House of Commons by the finance minister in answer to a question.

So it's up to you right now. We do have witnesses before us who, with all due respect, have arranged to be here out of their busy schedule. As I suggested on Tuesday, we would deal with it Thursday afternoon. If you check the blues, you'll see that.

Mr. John Solomon: I'm obviously in the hands of the majority of the committee, because I'm only one member, but my sense is that I couldn't direct any questions to the bank representatives today with respect to the mergers, even as they apply to small business, because it was out of order.

I mean, 3.30 p.m. would be sufficient for me, but I was wondering—

The Chair: We have a meeting scheduled at 3.30 p.m., and we will deal with the motions that came up on Tuesday afternoon at the beginning of that meeting.

Mr. John Solomon: Okay.

The Chair: Thank you. I appreciate that, Mr. Solomon.

Mr. Lastewka.

Mr. Walt Lastewka: Thank you, Madam Chair.

I want to switch to one of the brochures you circulated on year 2000.

This committee has done a lot of work in reviewing large corporations. The banking group came to the meeting. But as we get down to reviewing more and more of business and industry across Canada, it's become very clear that the danger point is going to be in SMEs, partially because the large corporations have enough resources and enough talent to work their way out of it. The branch-plant or smaller companies in Canada have their headquarters in the U.S. or elsewhere to help them, but when it comes down to Canadian SMEs, as the Canadian Federation of Independent Business came here and reported, it was very clear to us that when it gets to the crunch in the next three, four, or five months, it's going to be the SMEs that are going to go bankrupt. It's going to be the SMEs that are going to make business decisions to get out of business for one reason or another.

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I read your brochure from cover to cover and I really appreciate the points you put into it, but I think it would be good for this committee to understand what additional work you're doing, whatever it is, with SMEs to make sure we don't have a whole pile of complaints from SMEs and bankruptcies in this country in the next 18 months.

If the statistics from Statistics Canada come through in June without a major improvement, we're heading for a disaster in SMEs as far as preparation for year 2000 goes.

Mr. Charles Coffey: Madam Chair, I'll start on that very important and critical point. I think the Government of Canada recognized the importance of this issue when the Minister of Industry commissioned a very senior task force to look at the issue. That task force has reported in relatively short time. It's a huge issue for my bank.

I agree with the member for St. Catharines that small businesses need help. They need help not only from us, they need help from the government and many other sources.

The issue here again that I want to go back to is one of my earlier points: transfer of knowledge. We're doing this, Mr. Lastewka, through seminars. The bank has just mailed questionnaires in the last two weeks to all 400,000 of our business clients. For some of them, there's a questionnaire they must complete. Depending on their relationship with the bank, they must be returned. So I'll be working very closely with them. As we go forward, we'll have to ensure that when people are applying for credit, they are year 2000 compliant.

The reverse is also true. Many corporations who want to deal with our bank are saying they want us to tell them very specifically our readiness for the year 2000.

I would also suggest that a number of economists—I can't recall the economist quoted in the daily press last week—are raising additional concerns that the year 2000 problem may—that's “may”—cause a global recession, so obviously, that's of concern to everybody. So your point is a very valid one.

It's not only banks, but every other organization who has expertise or knowledge in this area must be seen to be taking very dramatic steps to assist businesses or associations, or whatever, to first of all understand that this is a problem. The year 2000 is not going to be delayed a couple of months to allow people to get ready. We know exactly when it's coming, so we are doing both internal and external audits in a very positive way with our client base.

Mr. Kelly Shaughnessy:

[Editor's Note: Inaudible]...Mr. Coffey's statement. That particular document was put in your folder. Had we put in your folder all the documents that the individual banks were doing for the Y2K, we would have to give you a binder this thick.

I can certainly say from our organization's point of view that we view it as a very serious issue. We have done a number of things, such as publications and brochures, to bring the awareness up. As I said to the committee before, we intend to, in partnership with others, also dramatically increase the awareness of this.

Mr. Maurice Hudon: We're very much like our colleagues at the other banks in that we have recognized for some time that this is an issue. We have over a thousand men and women who are account managers across the country who are equipped with more information than they certainly would have had a year or two ago about the significance of this problem.

These are the men and women who deal with the relationships we have with small business. They're able to have intelligent conversations about the kinds of risks that their own clients should be looking for. What are the programs they might consider putting in place? What are some of the hidden risks that were referred to in fact by one of my colleagues earlier? It's one thing to understand that your systems are in good order, but what about your principal customers or suppliers? How do you go about managing those issues?

So to your point, the issue of the year 2000 is very much on the radar screen of our institution certainly, and I think you heard that from others. In fact, we've also put in place loan programs to allow very favourable terms for the borrowing of money to help rectify situations.

So I think not only has there been printed material, but you're really seeing evidence that our organizations are coming to grips with it in meaningful ways for our clients.

The Chair: The last question is from Mr Lastewka.

Mr. Walt Lastewka: The Federal Business Development Bank made an announcement about $ 50 million to do two things. It was to get the message out there that there is money for Y2K for the SMEs, and it was also to assist SMEs.

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I would be very interested to get from each one of the banks your specific programs of loaning. You're getting the message out there for the Y2K, but I'd also like to know what additional ways you're going about making sure SMEs understand they have to do it and they have to do it now. Because there's no doubt in our minds that unless there's accountability and follow-up with every SME, we're going to have a list of bankrupt SMEs come the year 2000.

Mr. Charles Coffey: We share your concern, and I will supply all to you within 48 hours.

Mr. Dieter Jentsch: I would echo what my counterpart at the Royal said, but what we've instituted in our organization is a formalized process of review, not only on the borrowing customer but on the non-borrowing customer. In fact there's a checklist the customer fills out to remind themselves of the things they need to look at—what they need to check and review. We provide them with sources they can contact as well, whether it be our web site or other organizations that can assist them in the review process.

We advise them through current-account stuffers; we advise through the formalized loan process; we advise them through checklists that are on the counters. While we haven't announced a form of loan program such as the Business Development Bank has, if a company requires funds in order to rectify their systems, they are always available for any purpose, not just Y2K but any business need. We deal with that at that time.

In summary, there is a formalized process in place to deal with the Y2K issue for the SME market as well as our large customers.

Mr. Walt Lastewka: My concern is it can't be a long process.

Mr. Dieter Jentsch: A short process.

Mr. Walt Lastewka: It has to be very quick and to the point. I can't overemphasize the importance of the follow-up with all the SMEs, because what we don't want, and the fear we all share, is that's where the bankruptcies are going to start tumbling if they're not ready.

The Chair: Thank you, Mr. Lastewka.

We are running out of time very quickly, members. I'm going to propose that I allow one final question from the speakers on my list. Hopefully that will leave some time at the very end to allow our representatives a last-minute commentary and the chair one brief question.

Mr. Schmidt, could you be very brief in your last question?

Mr. Werner Schmidt: Madam Chair, I would like to refer to the caveat at the bottom of page 119, just before the definition of KBIs. What proportion of small business is KBI, knowledge-based industry? I recognize that 2% of the lending it has done is to KBIs, but of the overall economy, what proportion is KBI?

Mr. Kelly Shaughnessy: I don't know the answer, but I'd suggest we get the answer and table it with the committee.

The Chair: Okay, thank you.

Ms. Brown.

Ms. Bonnie Brown (Oakville, Lib.): Thank you, Madam Chair. This is my first time, so—

The Chair: Yes, I know, so I'll be quite lenient.

Ms. Bonnie Brown: First of all, I would not like to leave the guests with the impression that we don't appreciate the cooperation they have shown since the beginning of this process, not only to do with small business but also to do with some of the things that were listed at the beginning, of which I am aware: the Career Edge cooperation with HRD; The Entrepreneurial Spirit, same thing; your interaction with Calmeadow, which many of our members of Parliament are very interested in, this micro-credit business; the leadership you've shown on Y2K, and we're quite aware that the banks are pretty well ahead of everybody else; and now this morning you've made us aware of the educational process you're into to assist your customers. We're really appreciative of that.

And I for one, as one MP, am very appreciative of the ombudsman, because unlike Mr. Coffey, I didn't aspire to be one. I don't want to be an ombudsman. I do not want to solve people's problems with their banks. I want the banks to have this mechanism so I can simply refer people who call me to a phone number: “There's this nice man or woman over there. He or she will take care of you.” I'm very grateful about that.

We started this process when most of us had a series of complaints from constituents. As you know, it was picked up in the papers and it was a big issue in 1993. So this process has been very good. But I have a question for you. Are the collection and publication and these regular meetings helpful to you? Have they been helpful to you over the past few years? If so, can you give me some examples of how the banks themselves have benefited?

Mr. Charles Coffey: Benefited from what, just for clarity?

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Ms. Bonnie Brown: From the collection of these statistics and these meetings.

Mr. Charles Coffey: I would say the stats, to my mind, are a subset of something much larger. We're looking at history. My focus is through the windshield as opposed to the rearview mirror. I would say that this process, the dialogue we've had with the House of Commons industry committee, has been extremely helpful. I've said it many times in the past and I'll repeat it here again today. Again, when I hear from an elected official I know that he or she represents 25% of my client base. Again, it's a voice of the marketplace, but more important are the suggestions that this committee has made. The ombudsman is just one example. But it's a larger process of dialogue and it's the great democratic process at work in this country.

Ms. Bonnie Brown: If only half the lenders to SMEs are now represented in these statistics, is it time for you and us to begin to design some other kind of way of collecting these statistics if in fact we want to get a handle on lending to SMEs? On the other side of that question, I can only repeat that in my office I have only a rare complaint these days. At least where I live I don't have these small business persons coming in and complaining about access to capital. So I can only conclude that they're getting it somewhere, maybe from some of the new players, or maybe they're making so much money they don't need to borrow so much any more.

My other question is, are we chasing a horse that we thought had bolted out of the barn when now it seems to be safely back in the barn? In other words, is this still a problem? Some of my colleagues seem to think it is, but my experience in my own constituency is that the number of complaints has shrunk to almost nothing. That could just simply be a reflection of the business climate in my constituency.

Mr. Charles Coffey: Madam Chair, as the member was speaking I was reminded of a meeting a number of us attended last fall with the Minister of Indian Affairs and Northern Development, the Minister of State for International Financial Institutions, and others, including the leadership of three aboriginal groups in Canada, the first nations, Inuit and Métis. The whole issue was access to capital and transfer of knowledge. I listened as I do until sometimes I get exercised. I looked around the room and I asked the ministers, where are the others? Where is Newcourt? Where is GE Capital? Where is ING? Where is Wells Fargo? How many have established units as we all have done in remote aboriginal communities? We are delighted to do so. It's a hugely important market for us? Why is it that these six Canadian banks are expected to do all of that?

To get to your point, yes, let's get.... I could ask Hudson at Newcourt to come in and share his numbers. He would have some advice and counsel for me; he'd probably tell me to get lost. There's no reason to do so. It's competitive information that we are prepared to share, but no one else seems to be, and if you can help in that regard I think it would be a tremendous step forward.

Ms. Bonnie Brown: Thank you very much.

Thank you, Madam Chair.

The Chair: Thank you, Ms. Brown.

Madam Lalonde, one brief final question, please.

[Translation]

Ms. Francine Lalonde: The actual source of data we have on your clients satisfaction is a survey. There is a question I want you to ask. I would like you to tell me right away that you will. It seems to me that to be credible the survey should consist in a longitudinal study or target the same businesses. These statistics don't allow us to see, when growth problems arise, if you're really there. Problems arise when a business is established, then when it grows. As only present businesses are surveyed, we cannot follow case histories to really find out about the effect of loans, which are an essential tool for most businesses.

[English]

Mr. Kelly Shaughnessy: I think what we should do with the hon. member's point is take it up with our survey working group in the CBA. These are people who are experts in this. The survey is drawn from a random sample with approximately 2,500 respondents. It is very, very heavily skewed to the small business market. But I take your point, and I'll refer it to the survey working group.

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The Chair: Merci, Madame Lalonde.

Mr. Ianno, one brief final question.

Mr. Tony Ianno: Thank you. I'll save the question, then.

The Chair: One question.

Mr. Tony Ianno: Yes, I'm going to.

First of all, banks have $ 600 billion of deposits compared to ING at $ 850 million of deposits. That's part of the discrepancy. And Newcourt—I wonder how much in deposits they have in their system. We can deal with that another time, because I only get to ask one question.

The turndown rate—we talked about it before, and that it's difficult to determine whether someone was seeking a loan for a small business, whether it's paper or another method that was used. Is it possible to develop something so that we can actually have stats that can go in, in terms of how many actually asked for an SME loan, how many were turned down, and along with that, the loan-loss ratio for SMEs compared to large business? Could we have that in the stats so we get it every quarter?

Mr. Kelly Shaughnessy: The survey is done annually, and I think it does address those points. The loan losses, as we've—

A voice:

[Editor's Note: Inaudible]

Mr. Tony Ianno: No, I'm not talking Lightstone; I'm talking specific turndowns, so that we can get the total requests of loans and the total turndown.

Mr. Kelly Shaughnessy: Once again, we go back to why we're doing the Thompson Lightstone survey, and that was done with the complete partnership of this committee of Parliament. The reason we did the survey is we wanted to get away from a bank account manager saying, “Mr. Ianno applied for a loan and we turned him down”, or that they'd approved him. We wanted to get Mr. Ianno's perspective as to whether or not he applied for a loan, to use that as an example. So that's why we're doing the survey.

If we don't feel that survey is meeting the purpose, then I'd suggest to you we're going to have to have another look at whether we should be doing that survey in the first place, and sit down with members of this committee to see if there's an alternative way of doing it.

On the loan-loss statistics, as we've articulated to this committee in the past, loan losses are generally determined on an annual basis by the banks. That is why that's done on an annual basis, as opposed to quarterly.

Mr. Tony Ianno: We don't have it, though, on a—

Mr. Kelly Shaughnessy: You have it.

Mr. Tony Ianno: The first segment—it's in here?

Mr. Kelly Shaughnessy: Yes, that has been tabled.

The only thing is, you have to be careful with the loan-loss statistics because of the confidentiality. You're not getting the same degree of—

Mr. Tony Ianno: I don't need it broken down; I just need the overall.

The Chair: Mr. Ianno, we'll see what we can do for the next meeting.

I want to just briefly, before the witnesses have to leave and before we adjourn the meeting, not only thank you for being here—it's been a very interesting discussion, and I think most of the time we did take the high road—but also remind you about a section in my letter in light of Madame Lalonde's question, which was about trends in lending data from the beginning until now, and I didn't really see that. I'll try to be a little more explicit next time, because I had hoped that we'd have the lending data as well as the trends and rejection and default rates, and how the bank policies have changed from the beginning, since we started our discussions, until now. I don't have anything in front of me that I can look at.

I know there's been discussion about it, but for our next meeting it would be nice if we could do...and on a historical basis, see where we've come.

I also wanted to pick up briefly on Mr. Solomon's comment because it's a concern I have, and I'm going to bring this up with StatsCan. I don't find that the categories are broken down finely enough, either.

Southwestern or southern Ontario: when I look at the GDP for the area that I represent—Windsor, Essex and Kent counties—knowing it's equivalent to the entire province of Manitoba, and looking at the statistics lumped in all together from Windsor all the way up, including St. Catharines to Orillia, not including Orillia, you can't do any kind of comparison on how lending is working versus how the economy is growing, and whether small business in certain regions is getting what it needs.

That's a real concern I have, which leads me into my question, and one of the questions that was in the letter, with regard to rural communities—the availability of small business lending and banking services.

I heard Mr. Leckie and Mr. Shaughnessy say that we're in a world of electronics, but the reality is for lending and for small business, and for small business to make deposits, they need a bank, and they need an institution. They cannot afford an hour out of their day to make a deposit. It just doesn't work that way in a cash society. We're not in a cashless society right now, although I know there's the experiment going on.

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I'm a bit concerned when I hear this kind of discussion that we forget sometimes that there are areas that do not have access or that need to have continued access for small businesses to grow. If the statistics are right—and we base everything on statistics today—the real growth area in Canada is in rural Canada. That's where the potential is.

In your final comment to us today, could you just tell me where the banks are with their commitment to small business in rural Canada and what the possibilities are? If we could break this down, I will talk to Statistics Canada about the confidentiality. We can't tell if rural Canada is getting the access to capital or the lending ability they need based on the way these ratios break down, from what I can tell.

Mr. Kelly Shaughnessy: I can certainly reply to your question on behalf of the CIBC on whether rural Canada is important to us, whether small business is important to us, whether agriculture or aboriginal banking is important to us in rural Canada. The answer to all the foregoing is a definitive yes. Very definitely it's extraordinarily important to us and it's most definitely a very profitable part of our business.

Mr. Charles Coffey: I would be prepared to share with this committee all that we as a bank are doing in rural Canada. I have some concern about sharing that with my colleagues here because it is competitive information.

Regarding this whole question around branches, when people ask me how many points of sale I have in Canada, I say around 18.5 million. We need to think about that—nearly 20 million points of sale for banking services in Canada.

To your specific question, I would be delighted to come back to you directly, to any member of this committee, or to the committee as a whole to tell you exactly and very specifically what Royal Bank has done and more importantly what it plans to do in terms of ensuring that rural locations, whether they be Iqaluit and rural in the sense that they're remote, or Norway House, a first nation community in northern Manitoba, have the same access to capital as someone on the corner of King and Yonge has, to quote the Minister of Finance. We will ensure that; I will commit to you to do that at your convenience.

The Chair: I appreciate that, Mr. Coffey. I think the challenge is more than just access to capital; it's access to service. I have to make that point very clearly, because I hear that we're in this cashless society, but we're not in a cashless society in rural and remote parts of Canada. It will be years before we ever have the technology to be in that situation, so that's where access to service becomes very critical for small business and for small businesses to grow.

That being said, that's the only question I'll indulge as the chair. I want to thank Mr. Howden, Mr. Coffey, Mr. Leckie, Mr. Shaughnessy, Mr. Jentsch, Mr. Hudon, and Mr. Guindon for being with us today. It has indeed been a very interesting discussion. This is the second time I've had the opportunity to participate, and I thoroughly enjoyed the conversation, in particular when it's been on the high road. I know there's a tendency to stray off that a bit, but we'll try to ensure that. On behalf of all the committee members I want to thank you.

I'm now going to adjourn the meeting. I ask the members to please see the clerk before they leave to pick up your draft report. Thank you very much.