Thank you for inviting me. I'm grateful for the opportunity to be here today.
I'm grateful for the opportunity to be here.
Part of your motion refers to access to credit for businesses. BDC can speak to this topic with a great deal of knowledge, and I am happy to do so. To begin, a quick reminder of BDC's three main activities: financing (term lending and subordinated financing), consulting and venture capital. While consulting is key to developing the skills of Canadian entrepreneurs, and venture capital is crucial to commercializing Canadian technology, I'll focus my remarks on business financing.
Through our 100 branches across the country, we have 1,800 people providing financing to businesses. Through our lending portfolio, which stands at close to $12 billion, we support 28,000 entrepreneurs. These clients in turn generate about $160 billion in sales, including about $22 billion of export sales.
Moreover, we have about 3% of the term lending market. This makes us small compared to other financial institutions. Our 100-branch network is modest compared to the 6,600-plus branches of Canada's 6 big banks. We have 600 account managers who speak to thousands of entrepreneurs every month, and this gives us a good feel for the pulse of the market.
Right now, we see two forces at work.
The first force is the recession. A great many entrepreneurs are hesitating to start new projects; entrepreneurs are delaying until they have a clearer sense of what the marketplace holds in store. As a result, we see a lower than normal number of entrepreneurs wishing to finance projects, and our pipeline of potential deals is shrinking.
The second force, on the other hand, is tightened credit conditions. This is the result of several factors: the exit from the marketplace of some non-deposit-taking institutions, the substantial reduction in the securitization market, a difficult bond market, and the difficulty for financial institutions of lending in an uncertain economic environment. So more entrepreneurs are coming to us for help than in normal times, and we are lending more. We will have authorized more than $3 billion in new loans this fiscal year, ending this month. One-third of the loans are going to the manufacturing sector. We're also seeing a much greater number of mid-size firms approaching us; transactions of over $5 million have increased 50% year over year.
Now, our branch employees are talking to their counterparts at other financial institutions more than ever before. In the first ten months of this year there were 15,000 contacts, compared with about 9,000 for all of last fiscal year. And these conversations have produced more than 1,200 referrals this year. So we are working to help as many entrepreneurs as we can; that's our role in good times and bad.
You'll recall that in November 2008 the government granted us a $350 million capital injection. We've thus far received $250 million, which we've already put to good use in the financing marketplace. We expect the other $100 million in April, and we'll use it for a new line of credit guarantee, which we're developing in consultation with financial institutions.
Now, the budget bill before Parliament contains two initiatives that involve BDC. The first is the business credit availability program, known as BCAP. It's a collective effort of Canada's big banks, EDC, and us to ensure that at least $5 billion in loan and credit support is made available to creditworthy businesses whose access to financing would otherwise be restricted. Representatives from all organizations have already begun to meet at senior and working committee levels to determine the best ways of doing so.
For large corporate clients, we'll start participating in syndicates to replace departing lenders. For mid-market-sized loans, financial institutions will share in an increasing number of commercial mortgage deals on a pari passu basis with us. For smaller deals where pari passu might be inefficient or costly, we will purchase participation in commercial mortgages.
I mentioned earlier that we're putting in place a line of credit guarantee program, the fourth thing we're working on. And, finally, we're exploring with some institutions a way to deal more quickly with small loans that would get declined as a result of those institutions' scoring systems.
So there's a lot happening. Collaboration with EDC and the banks is good, and we're seeing constructive partnerships being developed.
Now, I am aware that some people think that BDC is not acting fast enough or even lending enough. It's important for you to know that the people who work with me at BDC do so because they are motivated by our mandate to help entrepreneurs, and this motivation is why they, like me, join and stay at BDC. We're striving to help as many entrepreneurs as we can. But it's also crucial to remember that we are a commercial crown corporation, a bank, with a statutory obligation to do deals where there is a reasonable chance of success. What this means, unfortunately, is that we cannot help everyone who asks. I can assure you that every approach for financing gets a detailed review. Every entrepreneur who approaches us is given a chance to present their case. We want to help, and we understand the need for speed, but our commitment and desire to help come with parameters and responsibility, and we must seek creditworthy clients and commercially viable projects.
The budget also calls for the creation of a Canadian credit-secured facility to support the financing of vehicles and equipment for businesses and consumers—a very important initiative. We're working on this with Finance Canada, who are here this morning. We've put the consultation document on our website, and I've brought some paper copies if you'd like to review them.
We have started the public consultations and we've met with important stakeholders. We believe that we will finish the consultations early next week and then start drafting an action plan. As with the BCAP program, we are striving to launch this as quickly as possible, but financial facilities like this one, which may go up to $12 billion, are not created in a day. We're very aware of our responsibility to protect taxpayers' money.
In conclusion, no one at BDC, from our board members down to our front-line account managers, underestimates the gravity of the recession or the strain it's placing on business owners. All of us want to support them quickly, professionally, and well. Please know that we're doing everything within our power and means to do so.
Thank you for your time, I would be pleased to answer your questions.
Thank you, Mr. Chairman.
I appreciate this opportunity to meet with you and members of the committee to discuss Canada's financial sector.
With me today is Jeremy Rudin, who is the assistant deputy minister of the financial sector policy branch at the Department of Finance.
I'd like to provide you with an update on evolving credit conditions, discuss Canada's unique position in this environment, and outline the steps the government is taking to maintain the Canadian advantage in global financial markets.
There's no question that Canada faces a very challenging economic outlook in a globally recessionary environment. This will have serious consequences for Canadian families and businesses. Canada is faring better than many other countries, in part because of our sound financial sector. Canada's banks and financial markets are functioning relatively well, in sharp contrast to elsewhere. The fact is attracting global attention.
Unlike in the United States, total business mortgage and consumer credit in Canada has continued to grow, albeit at a slower pace than in past years. Based on the most recent Bank of Canada weekly data as of December 2008, business credit provided by banks stood 13.2% above its level of one year earlier. Business lending by all financial institutions, including non-bank lenders, increased by 11.5% over the same period. Banks have increased both traditional business loans--up 11.2% year over year--as well as guarantees of borrowing undertaken directly by their clients.
Household lending has remained robust. Mortgage lending in December stood 10.7% above a year earlier, while total consumer credit rose 9.1% over the previous year. As of yesterday, four of Canada's major banks had reported first-quarter profits that exceeded expectations, despite these challenging economic times.
While modest compared to previous performances, these positive results stand in marked contrast to those in the United States, where banks collectively lost $26.2 billion U.S. in the recent first quarter.
To help understand these positive results, it is worth outlining some of the key factors underpinning the Canadian financial system and how they differ from the U.S. system.
To begin, Canada's banks and other financial institutions are well capitalized, and are less highly leveraged than their international peers. Canadian capital requirements for financial institutions are above minimum international standards and our banks have built up healthy capital buffers, above our higher standards.
Canada has also been well served by a cap on leverage. Where asset-to-capital multiples on large banks in Canada are in the teens, U.S. investment banks were in the 30s and many European banks in the 40s and even 50s.
The structure of Canadian financial institutions differs from the U.S. Large Canadian investment dealers have been bank-owned since the early 1990s and are regulated on a consolidated basis by the Officer of the Superintendent of Financial Institutions, or OSFI. Canadian households also have smaller mortgages relative to both the value of their homes and to their disposable incomes than their U.S. counterparts.
And last, the Canadian housing finance market does not have the large subprime component that led to the recent problems experienced in the U.S.
In spite of the strengths of our system, there is no question the dislocations in global credit markets have put pressure on access to financing in Canada. While the volume of business lending continues to rise, the terms and conditions available to borrowers have tightened, and some creditworthy borrowers are finding it difficult to access credit.
As the credit crisis intensified through the fall, the government responded with a range of facilities to keep credit flowing so households and businesses could get access to financing. The January 27 economic action plan introduced a number of new facilities in a coordinated package of measures under the extraordinary financing framework, which provides up to $200 billion in financing to Canadian households and businesses.
In general, the framework takes action to correct market failures in segments of credit markets, to mitigate systemic risks, and to prevent possible competitive disadvantage to Canadian firms as a result of the policy decisions taken by foreign governments.
Before I set out this framework, let me stress that these measures do not consume taxpayers' dollars. These are not bailouts. In effect, by providing liquidity, longer-term funding, and lending assurances to banks and other financial institutions, the government has accumulated a de facto investment portfolio, one that's earning close to 100 basis points on the dollar at little or no risk to the federal treasury. In the interest of brevity, I'll just mention several of the key measures.
The insured mortgage purchase program is buying up to $125 billion in insured mortgages from financial institutions. As of February 24, 2009, this program has provided $51 billion in financing to help banks continue to lend to Canadian consumers and businesses.
The government has enhanced the resources and scope of action to financial crown corporations so that they can extend up to $13 billion in incremental financing to Canadian businesses.
The Canadian Lenders Assurance Facility, which provides insurance on the wholesale term borrowing of federally regulated deposit-taking institutions, became operational last week. As conditions in financial markets improve, banks may not require this assurance, but as the Canadian Bankers Association put it, it's a useful tool to have in our tool kit.
Consultations have also begun on how to structure the Canadian Secured Credit Facility, which will support the purchase by the Business Development Bank of Canada of up to $12 billion in term asset-backed securities backed by loans and leases on vehicles and equipment.
In addition to the government actions, the Bank of Canada announced on February 23 a new term purchase and resale agreement facility for private sector instruments, which will allow eligible market participants with significant activities in Canada's private sector money and bond markets to obtain liquidity using a range of securities as collateral. This measure significantly broadens access to liquidity for a new group of market participants. And this morning the Bank of Canada further reduced their policy rate to 50 basis points, a new historic low.
As you are aware, the government is also pursuing other initiatives to strengthen our financial system. Past measures taken by the government have been important in dealing with the crisis. In particular, the change to borrowing authority in Budget 2007 allowed the government to provide liquidity to financial institutions when they needed it last fall.
The government, along with willing provinces and territories, is moving ahead to establish a Canadian securities regulator. And the government is enhancing the authorities of the Minister of Finance and the Canada Deposit Insurance Corporation to safeguard financial system stability.
All the measures I have described are consistent with our IMF and G-20 commitments to work with our global partners during these difficult economic times. Indeed, I have the honour of co-chairing with Rakesh Mohan, Deputy Governor of the Reserve Bank of India, the G-20 working group tasked with making recommendations to enhance sound regulation and to strengthen international standards in the areas of accounting, disclosure, and risk, and to help provide greater consistency for regulatory regimes. We are now writing a report in preparation for the G-20 leaders summit in London next month.
I can say with confidence that Canada's expertise in these matters is valued, and we are making an important contribution to the global financial system. As The New York Times put it last weekend, “Why not emulate the best in the world, which happens to be right next door?”
Mr. Chairman, I appreciate this opportunity and I look forward to your questions and those of the committee. Thank you.
Thank you, Mr. Macklem and Monsieur Halde.
Congratulations, Mr. Macklem, for your position in the G-20. As you know, we Liberals have always pushed it; Paul Martin, in a sense, helped to create it, so we think it's a vital institution.
But I'd like to focus on the BDC. We have heard across the country that business is desperate for credit—which you alluded to in your comments—but we do not feel there's a sense of urgency on the part of BDC. A prominent business person, who didn't want to reveal his name, wrote to me that the government announcements on BDC and EDC, in and of themselves, don't get us very far. He said:
||So the real story question is what specific plans or measures they are taking to use this increased headroom to help small businesses and exporters, and on this EDC and BDC have announced absolutely nothing. The result is absolutely nothing is happening, except credit outlook for Canadian business has deteriorated to further record low levels, per Bank of Canada's latest survey.
When I read your remarks, Mr. Halde, it contains language that makes me nervous and tends to corroborate this view. Yes, you talk about the $5 billion that you may get out the door at some point, but you say, for example, “Representatives from all organizations have already begun to meet”. Well, my goodness, of course they should have begun to meet the day of the budget. That does not reassure me one little bit.
On the next page you say, “We are also exploring with some institution a way to deal more quickly with small loans”. Well, I should hope you're exploring. I would have hoped you'd already explored and been on the job. It's March. The budget was in January. We have a crisis.
Then I read, “So there is a lot happening: collaboration with EDC and the banks is good, and we are seeing constructive partnerships being developed”. Wonderful.
So my question is a very specific one. I think businesses are desperate for credit. I think businesses want to know what specifically you are doing. If you have $5 billion in additional loans to make, I would like to know when that $5 billion will be disbursed in loans. For example, within 12 months of today, is it reasonable to suppose that all of the money will be lent? Within three months of today, how much of that money will be lent? I don't get the impression that either the government or BDC understands that we are in a crisis, so I would like to ask you, can you be specific as to the timing of that lending to small businesses?
Well, I guess I beg to differ with you about the fact that BDC does not understand the need to move quickly. I guess I'd ask you to separate in your own mind the usual activities, the normal activities of BDC, and the special program referred to as BCAP.
The normal activities of BDC are up. Here are some statistics you might find interesting: in the automobile sector, we've increased our lending by 11.5% versus last year; in the forestry sector, we've increased our lending by 20%; in the tourism sector, by 6%. And you know as well as I do that these are very difficult sectors, ones that truly need help. And for our normal activities, we are busy recruiting some more people. There is as much going on as we can physically do presently on the normal side.
The second thing you're referring to is the BCAP, the business credit availability program, which came our way at budget time. It's an effort by all financial institutions, not just BDC, but EDC and us, jointly or collectively, to work together to try to do more. I've said to you that we have five projects under way with all of them. When we met with them, we asked, how can we help? They said, first, please step in on syndications when we have people, other players, who are no longer at the table. We're in the midst of doing that.
We have the five initiatives that I've mentioned, including purchasing, helping them to purchase commercial mortgages so that it frees up some capital for them. But these are all new initiatives, and everyone is beavering away at making sure these happen.
Sure. I guess there are a few thoughts.
As we listen to the global discussion, there is clearly a wide range of opinion out there. There's no question that things need to change. This is a very serious crisis. There have clearly been regulatory failures.
Some players are looking for a very high degree of regulation. Some are looking for a grand global regulator. I think Canada is an example of a country that is market based and very open to trade. It has yielded tremendous benefits from trade and open financial markets, but has not had the kinds of problems we're seeing in the United States, the United Kingdom, and a number of countries in Europe.
I think that reflects a better balance in Canada between efficiency and stability. I think the Canadian experience is demonstrating that you can achieve the benefits of a dynamic, open, and market-based economy. Provided you keep a sufficient balance between stability and efficiency, you can avoid the worst of these financial crises.
As I mentioned in my opening remarks, a number of features of the Canadian system have served it very well. We have higher capital standards and our banks hold healthy buffers above those capital standards. I think the cap on leverage has been enormously important in preventing some of the worst excesses from building up in Canada. As I mentioned, Canada has a cap on leverage of 20 to 1, so this has prevented leverage from going up as you've seen in a number of other countries. The world is currently going through a very abrupt and painful de-leveraging financially. Many global banks are trying to get down to about the Canadian standards of leverage.
This is an opportunity for Canada to punch above its weight internationally. We have learned, as have many others in this crisis, that even if we get our own house right, we are being side-swiped by the failures of other countries. We all have globally a responsibility and an imperative to get the global system of regulation right, and Canada I think has a good message. Sound regulation starts at home. There needs to be international oversight to ensure that others are living up to their responsibility. There are some changes that need to be made and people are looking to Canada to draw on that experience.
Good morning, gentlemen, I listened to Mr. Macklem's presentation. As my colleague who spoke before me said, the Canadian financial system is highly spoken of. We are always comparing ourselves to our American neighbours. You talked about the reasons why our performance is better, here in Canada. I believe that you are right.
However, at the very end of your presentation, without any warning, you mentioned the fact that the government seeks to establish a pan-Canadian single securities commission. You did not provide any explanation for that statement. This is a major change that has not garnered any consensus among Canadians. This is certainly not the case in Quebec. We are, indeed, committed to preserving the Quebec Securities Commission so that we can determine our own priorities. To my knowledge, the system works very well. In fact, you provided the proof yourself.
How can you support the government's decision in such an indirect way? You did not provide any argument in support of the creation of a single regulator, and yet, this is a major change that the Government of Quebec stands against. In fact, the National Assembly of Quebec unanimously decided to oppose the creation of a single commission for the entire country. How can you say that the government is going to achieve this, as though everything will remain the same?
Thank you, Mr. Chairman.
Thank you to the witnesses for appearing.
Just quickly, Mr. Halde, it's a nice story. You talk about the Business Development Bank of Canada and all the things you're trying to help. But let's not deny that you are a bank, and it does cost more to do business with your bank. You do run your bank like a bank; there are fees.
I'm talking maybe from a personal point of view. I have a constituent in the textile business who came in. They have been suffering for a number of years, but now things have finally turned around in their area. They're one of the few survivors. They're looking for additional financing. They have some firm orders because their facilities are in close proximity to the U.S. market. Here we have an example of a $100,000 loan where fees of $8,911 are being charged on an amount that was outstanding. It came to about $40,000.
I understand it's in special accounts, but there seems to be a problem. You are pretty well the lender of last resort, but you are treating people like you are a bank. I understand that you have to make money, but there doesn't seem to be a mechanism where people can come to the bank and say they want their case to be reviewed or have a second person look at it.
Am I missing something? If the business sector doesn't have the confidence that they can do business with you on the second round of these additional moneys to be lent through the business credit availability program, how am I going to feel at ease that you will be able to get that money out, not only to the right people, but efficiently and at a reduced cost?
I'm just trying to understand what the Government of Canada is at risk for, because anything can happen. We're not sure. The wheels seem to be falling off the car.
We can look at what happened with AIG, where $60 billion was put in and now another $13 billion or $15 billion seems to be required. We're now talking about billions as if they're quarters or dollar pieces. People are saying that the $60 billion is money that the American government threw away.
Mr. Jeremy Rudin: Yes.
Mr. Massimo Pacetti: I want to focus on the Canadian government, because I'm seeing here that there may be a need for another round of mortgage backing. If we look at how much we're on the hook for in real estate, we're over a trillion. If the real estate market goes down 10% or 20%, we're going to be on the hook for the exposure to Genmark, AIG, and CMHC. That's going to require a couple of billion dollars. That might seem like chump change, but I think it's quite important to the average Canadian citizen.
There is talk that pension moneys may need to be backed or guaranteed. As for financial institutions, the banks are okay, but I don't think there are just banks out there. There are also other institutions that may need to be boosted.
I'm not sure what else there is out there. There are tons of things. That's one of the reasons we're having these hearings. This is not just about stability now, but future stability. What role is the Government of Canada going to play, and how stable will you maintain the financial market?
Let's talk dollars.
Thank you very much for your time today.
I had to step out, so if I'm repeating anything, my apologies.
I did have a question. There was a discussion earlier with Mr. Macklem, so maybe, Mr. Rudin, you can help answer it.
The material we received talks about the success of the banking system here in Canada, of which we are all immensely proud. There is a piece about the banks experiencing profits greater than expected or predicted, and yet at the same time there is a comment that it's not the amount of credit so much as the cost. Certainly, anecdotally, that is what we're hearing. So this morning I've already heard some inconsistencies in saying yes, there's a lot of lending happening, but we're pulling back on the securitization aspects of it--which I think is a good thing, given everything we've seen. Then we have banks seeing higher profits than expected, and yet we're also hearing that the cost of lending has gone up.
I would like it if maybe both you and Monsieur Halde could comment on that, because I have yet to really hear an answer as to why that is.
I'll see what I can do.
If we're speaking about lending to business--let's start there--businesses can get credit from banks, from non-bank lenders, and directly from financial markets. We've seen a sharp reduction in credit available to businesses directly from financial markets, of which the securitization channel is the most dramatic.
Lending to businesses by banks is still increasing, measured on a year-over-year basis. Total business credit is still rising, but still more slowly. It's not as if the banks, even though they have increased lending, have stepped in and completely offset declines in other areas.
At the same time as the volume of credit extended by banks continues to rise, the terms and conditions under which it is being extended, especially at renewal, are definitely becoming tighter. You see this in the senior loan officer survey conducted by the Bank of Canada, where every quarter the majority--a large majority--of the banks' senior loan officers say they're tightening credit conditions, even relative to the previous quarter. We know this to be happening, and of course the people who are on the receiving end of it, whether they be households or businesses, are not happy about it. So it is certainly possible that--and indeed it's what's happening--the volume of credit is continuing to grow, but the terms and conditions are tightening at the same time.