Finance Committee on March 3rd, 2009

[The Chair, Conservative, James Rajotte]

I call the eleventh meeting of the Standing Committee on Finance to order. The orders today, pursuant to Standing Order 108(2), are for the beginning of our study on measures to enhance credit availability and the stability of the Canadian financial system.

We have two organizations with us this morning. First, from the Department of Finance we have Mr. Jeremy Rudin, the assistant deputy minister for the financial sector policy branch. Hopefully, momentarily we will have Mr. Tiff Macklem, the associate deputy minister, as well.

The second organization we have is the Business Development Bank of Canada. We have the president and CEO, Mr. Jean-René Halde.

Welcome to both organizations. I was going to start with Mr. Macklem, but perhaps I'll start with the BDC, and then we'll go to the Department of Finance second.

[Jean-René Halde, President and Chief Executive Officer, Business Development Bank of Canada]

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.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Mr. Tiff Macklem. He's the associate deputy minister and G-7 deputy for Canada.

Thank you for being with us here at the committee.

[Tiff Macklem, Associate Deputy Minister and G7 Deputy for Canada, Department of Finance]

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.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Macklem, for your presentation.

We'll go to questions from members.

Mr. McCallum, you have seven minutes.

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

Thank you, Mr. Chair.

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?

[Jean-René Halde]

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.

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

I don't want to interrupt you, except time is running out. I had a very specific question. You said there would be $5 billion in credit. How long will it take for that credit to be extended, and what proportion of it will be extended in three months' time and in six months' time?

I know you can't give absolutely precise answers, and I know you have to be concerned about creditworthiness, but I'd like you to be as precise as you can in telling us the timing of getting that money out the door. It's a situation that closely parallels that with infrastructure money: it doesn't do any good if the money is just sitting in your bank.

[Jean-René Halde]

We're all aware of that.

I can't speak on behalf of the financial institutions; I can't speak on behalf of EDC. What I can tell you is that on the ones we're involved with, we're running at 100 miles a hour to get this done. But it's also a function of whether our colleagues in the financial institutions, for example, will increase their number of referrals. If they increase the number of referrals, trust me, we'll do those loans.

So I'd hate to commit on behalf of a whole group on a number that, at this point, is difficult. I can only assure you that we're doing everything we can to do it.

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

Okay, I have one last question.

I've also been informed by a business person who went to the BDC immediately after the budget, and who was not currently a client of BDC, that BDC told him that if he was not currently a client he need not apply, because they were only considering existing clients. Is that true?

[Jean-René Halde]

That is not true.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McCallum.

We'll go to Monsieur Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chair.

Good morning to everyone.

Both Mr. Halde and Mr. Macklem talked about the Canadian Secured Credit Facility. Both of you mentioned that consultations began last week. We have been told that the Business Development Bank has been given a mandate, but who will establish the program criteria?

[Tiff Macklem]

We have set up a working group comprised of representatives from the Department of Finance, the Business Development Bank of Canada, and the Bank of Canada which will be in charge of reviewing criteria. Representatives from the Bank of Canada have great experience in reviewing different types of assets to use as collateral, such as ABCP. The Bank of Canada has closely examined all sorts of rules to make sure that we are dealing with good credit, and they will be working on this issue with our two organizations.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

It is believed that the program will accelerate or facilitate access to credit for individual consumers, when they are seeking a car loan, for example. Does it target individual consumers? Average working people today are facing difficulty obtaining a loan to buy a car, not because of their personal situation, but because of the current market conditions, or the recession. A year ago today, they would have been able to obtain the same loan. This problem does not affect only Canadians, but businesses and automobile retailers. How will the program actually work? Will it allow people to obtain a car loan?

[Tiff Macklem]

We have several programs that assist Canadian households. More specifically, the Insured Mortgage Purchase Program has helped households secure a mortgage. Our primary goal is to make sure that banks have access to credit, so that they in turn, can pass it along to Canadian households and businesses. Under the budget, the government has included complementary measures for banks, such as the facility we have just talked about, that can specifically help households buy a car.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Therefore, this program will help people receive the loan that they wouldn't have secured otherwise. You talked about mortgage loans. Will the Canadian Secured Credit Facility help people who have been having trouble obtaining a loan for the last six months? We are talking about small and medium businesses, but what about individual consumers?

[Jean-René Halde]

The goal is that once the objective is attained, it will become possible once again to obtain a loan or lease a car, just as it was possible in the past. There is some work to be done, but that is what we are aiming for.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

What is the amount of $12 billion based on? The figure could have been set at $10 billion or $24 billion. Did the government define this amount in relation to the number of loans that are currently being denied? How many loans are applied for each month, and of that number, how many are denied?

[Tiff Macklem]

Generally speaking, the amount is determined based on the scope of the market. That is already a very significant sum of money. If the program that is now allowing the government to purchase mortgages is successful and if the crisis gets worse, it will be possible to increase the amount. The priority is to get the program up and running as soon as possible. There is work to be done.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Mr. Halde, you mentioned that you are beginning to meet with groups. Which groups are you meeting? Are you meeting with them in order to identify the needs?

[Jean-René Halde]

We are meeting with them for the purpose of understanding their needs. These groups are financial subsidiaries of the large automobile companies such as GMC or Ford Credit.

Yesterday, we met with rating agencies, such as DBRS and Standard & Poor's. Other consultations are currently underway. Consultations will be ongoing for another four or five days, for the purpose of understanding the needs of these people.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

To date, what are these people telling you?

[Jean-René Halde]

For example, an institution will lease a certain number of cars to people. Somewhere along the way, all of these car leases are securitized, which allows them to obtain cash. That market has disappeared.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

The securitization market?