Finance Committee on March 31st, 2009

[David Powell]

The last time I looked at the figures, the banks were up at about $1.3 trillion, or something like that. We're at $112 billion, so that gives you a rough idea. It's a little under 10%, I would think. It's very targeted to consumers and to small business.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Traditionally, when we go through an economic downturn, I can recall that banks would take a look at particular targeted industries, whether hospitality or tourism or real estate. When times got tough, the lending requirements became much more stringent. Within your organization, do you have any blacklisted or targeted regions geographically, and/or specific industries?

[David Powell]

Typically we don't, although they clearly are looking at the credit as a bank in many instances would look at the credit.

The reality is, though, that most of our members are in the business of helping their partners, who are manufacturers, to sell their product. There's a predisposition to want to sell and to finance the product, because that's their job. In the current environment, they will be looking at the ability of the customer to pay, but typically, with a machine, the customer can show that their revenue will be enhanced by the arrival of this new machine; then they'll be likely to get the financing.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Mr. Powell, you mentioned that there has not been an uptake on some of the options that the banks have had available--and Mr. Boychuk or Mr. Conway might even wish to answer this instead. But as an example, in the last mortgage purchase program options, CMHC has seen the financial institutions.... In February they were willing to buy $7 billion, and yet they only sold $2.3 billion; the banks didn't even take advantage of the full option. In March they had up to $4 billion, and yet they only sold $2.1 billion.

In your opinion, why aren't financial institutions taking full advantage of this mortgage purchase program?

[Michael Boychuk]

I think the banks have had quite readily accessible capital in the capital markets themselves. You can see that all of the Canadian banks have been issuing preferred shares. They have been issuing the tier 1 capital through the capital trust notes that have been going out, and they've been issuing it in size, and with very good yield for investors. I think, quite frankly, that today the Canadian banks are well capitalized.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Great. I'm pleased to see that.

Going to the survey, then, Mr. Conway, maybe you can help us square this circle. You say right in there that access to credit has significantly tightened up, the cost has risen, and the process of securing it is more difficult, in particular for SMEs.

We all recognize, of course, that all of a sudden you're basically telling rural Canada that no credit is available. You don't have your large corporate entities in a lot of your rural areas, yet maybe 70% to 75% of all the SMEs are located there. However, they have no access to capital.

I need to square the circle a little bit. The banks told this committee that their loan portfolios expanded by 12%, 14%, 16%, yet anecdotal evidence we hear--and Mr. McKay raised this issue on a number of occasions--from retail, from wholesale, and from the industrial manufacturing sector says there is no funding available, and of course your survey basically endorses that principle.

I would like to understand who is telling the truth. Is there a contradiction, or is this financing just available totally through other sources?

[Michael Conway]

I think it's a question of degree. Our survey differentiated between availability of financing, ranging from very available to available to somewhat available to not at all available, and you had it across the board. In the summary we basically boiled it down to what I refer to as an availability score, and you can see that it dropped.

Our broader survey actually shows that there is a span across and there is availability. For the small businesses, it depends on what they're financing. It depends on the creditworthiness, because banks are businesses. Certain things, such as long-term financing, have tightened more than working capital financing. In particular, the biggest concern relates to the funding of the start-up capital and the follow-on financing for the knowledge economy, something that I think will really drive the creation of jobs and innovation.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

I have a very quick question to Mr. Buell that will totally change things.

On behalf of the seniors organizations in Canada, you made a recommendation to the expert panel on securities regulators. Could you highlight two or three major concerns for this committee's observation?

[The Chair, Conservative, James Rajotte]

That's not really a quick question, Mr. Kramp. Mr. Wallace has a turn after you. Maybe he can come back to that.

We'll go to Mr. McCallum, please.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

We will return for just a moment to BDC and Mr. Dechert's line of questioning. I will ask Mr. Boychuk the question.

I imagine there are two reasons that BDC may not be doing very much. One is the risk profile issue, and the other is that it's just slow to get its act together, possibly due to a lack of urgency to topple the government. I was really assuming the second aspect, and I'm certainly not asking you to comment on the urgency, or lack thereof, to topple the government, but when you said it was your impression from your members that BDC was not active, did you mean that it was because there weren't enough loans available that were not too risky, or was there some other reason?

[Michael Boychuk]

No, I was just expressing what the membership had told us in the survey. I cannot give you a definitive answer as to why. Those are clearly their views, and that's what we were able to obtain through the survey.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay. Thank you.

I'll turn now to the question of pensions. I know Mr. Menzies is doing his tour, and you touched briefly on the subject of this challenge.

I totally agree with you that it's unfortunate that the companies can't pay over ten years, let's say, instead of five years, because that will eat into the current earnings and affect investment and so on, but it's a question of what the pensioners think of this. I think that under current arrangements, they need the agreement of the pensioners if they're to get this extension. Am I correct? My understanding is that more often than not, pensioners would not agree.

If there is such an impasse, what do you think is the appropriate solution?

[Michael Boychuk]

I go back to my initial comment, which we've been pretty consistent with. It is that the best security, whether it's a pensioner or a plan participant who is going to retire at some point in time, is a financially strong and viable plan sponsor. At the end of the day, if funds are being diverted from keeping those companies viable and are being put into pension funds, thereby crippling the sponsoring institution, it's not going to be to the benefit of anyone. It's certainly not going to help Canada.

[John McCallum, Liberal, Markham—Unionville, ON]

I don't necessarily disagree with you, but it's a somewhat paternalistic view, because you're saying that you know better than the pensioner what's best for them. The pensioner is aware of that argument; nevertheless, as far as I understand it, they do not accept the extension from five years to ten years because it reduces the security of the pension plans. So they don't agree with that.

Would you still override them and say you know better than they do what's best for them?

[Michael Boychuk]

I can't say I can speak on behalf of the pensioners, but I would say to you there is an inherent flaw in the way the calculation of that funding requirement is done today. When you look at trying to assess at a point in time what we call a marked-to-market rate for liabilities going out 10, 20, or 30 years into the future, you're unjustly penalizing the funding of that plan immediately—for the plans that go out for a long period of time.

[John McCallum, Liberal, Markham—Unionville, ON]

So I guess your position is—and correct me if I'm wrong—that irrespective of what the pensioners might say, you are recommending what you are because you think it is the right conclusion to come to.

[Michael Conway]

I guess, ultimately, it's a balance. We recognize the difficult decisions you have to make in balancing the logic of aligning the funding of the solvency deficits with what we think is a logical alignment over the lifetime in which they relate, against some of the concerns of the retirees and the participants. But we have also come forward and said that we actually stand for a lot of things they stand for, that is, transparency, or opening up and becoming far more transparent in providing regular valuations and providing those valuations to everyone openly and transparently.

Mike mentioned the importance of the strength of the plan's sponsor; and the other thing that will certainly help everyone is the strength of the economy. So it is a balance between getting the appropriate amount into the pension plans and having the corporations have enough money to put it into the economy get it moving again.

[Michael Boychuk]

I would just add to the quid pro quo side of the equation that it's not all a case of just giving to the corporation and giving nothing to the pensioners or beneficiaries of the plans. As my colleague has just commented, we advocate things such as, let's do an annual evaluation every year. Today, if you have a surplus, you can wait three years to file your next annual evaluation. In that intervening period of time, say from 2007, you wouldn't have to file again until 2010. In the meantime, everyone knows what has happened in the market. So is that right for the plan members? We don't think so.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McCallum.

We'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair, and thank you, guests, for coming this morning.

I think I'll focus on Mr. Powell for a minute, just to make sure I understand this. I know you've been working with the finance department on this particular item.

I've heard from the constituents and people in my area who deal with floor plan financing—which we talked about before the meeting began. Floor plan financing is not just by car dealers, but also by others. Well, the one who came to see me was a recreational dealer who needs somebody to finance his boats to sit there until he sells them to customers. And there are other organizations that sell or lease heavy equipment, such as backhoes, for example, and all of those things that construction companies don't necessarily want to keep on their inventory as capital equipment, but to lease when needed, and then to return.

When we've been talking to people about the credit facility we're offering, the $12 billion, we're mostly talking about autos, to be frank with you. Are you comfortable that there are other things on the table being discussed at the time, so these other organizations may have access to government-sponsored capital, as it were, and be able to provide leases for their equipment?

[David Powell]

There's no question that most of the discussion in the media about this program and, I think, generally has been around the auto sector, but the budget was quite clear in talking about vehicles and equipment. I think that's important to remember.

Yes, part of that discussion has always been about floor planning, and certainly the BDC, when it carried out its consultation at the end of February, included floor plan loans as eligible assets. So I think there is an expectation that it would be included in the overall package.

[Mike Wallace, Conservative, Burlington, ON]

My next question might be a little tough.

We've had some difficulty in this country with non-bank asset-backed paper. The courts have to get involved and confirm a deal to make it happen. And to be frank with you, based on the testimony I heard when we were dealing with this in committee, not only did investors not know exactly what they were buying, but I would also say that some of the people selling it didn't know what they were selling.

What comfort level can you give me, since we are now talking about non-bank commercial paper again, that instead of private investors buying it, the government is going to be buying it? What's the difference there, and why should the taxpayer be comfortable that we're doing the right thing in this case?

[David Powell]

Thank you very much for the question, because I think it deals with an important clarification that I would want to bring to this committee.

ABCP, as it was called, is asset-backed commercial paper. As I understand it, essentially commercial paper is like a corporate IOU, where a company comes forward and says, we'll pay you a certain amount on a certain day. But we're talking about an asset-backed security, which is different in the sense that we're talking about actual assets being generated by cashflow from car loans and equipment loans and leases. So you have an actual hard asset behind this particular package.

What essentially happens, as I mentioned earlier, is that a leasing company will take a bunch of leases, bundle them together, and sell the cashflow to private investors, principally insurance companies and pension funds in the past, who had longer-term time horizons. Now we're turning to the government and saying, we're selling this to you; but what we're selling are actually hard assets. There's no mystery instrument in there. There are no derivatives; there are no fancy products. These are things you can go and kick if you want to go and kick them.

So these are hard assets, and our members understand what they are. And they are also under a responsibility to take these back if they don't perform as they're supposed to, the way they're traditionally structured.

[Mike Wallace, Conservative, Burlington, ON]

Very quickly, are the companies you listed at the back of your presentation still in business? I ask because we've talked about the secondary market shrinking, and I'm assuming that some of them are no longer in the leasing business.