Special Committee on Cooperatives Committee on July 25th, 2012

[John Lahey]

There's always a potential role for government. For instance, we rely on government-sponsored training programs on how to set up and run a business. Maintaining those types of programs would be critically important. Some of the provinces have programs where they will share in the losses of such a program. That's of some benefit, but I think it tends to encourage organizations to think of this more as charity than anything else. These people do have to go out and engage in the commercial world, so they should learn how to do that right from the first moment.

We've mitigated some of the losses by entering into some partnerships where organizations will guarantee the loans for us. For instance, we have a partnership with the City of Toronto for microloans for disadvantaged youth in the west end, in the Jane-Finch area. They guarantee the loan losses, but they use our program, and we apply our adjudication and our standards and all of those kinds of things.

I think there are ways to drive partnership. I'd be reluctant to say that government should get too involved, but there are some critical points in the process where government can be very helpful, I think heavily, on the education side of things. This is something we have found, and I think research shows that small businesses fail in large part because the owners are not prepared for operating the business.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Yes. I think the requirements that you had set out are very wise in order to help entrepreneurs succeed, whether it's the size or whatever.

I would like you to help me understand what would be the difference or advantage to a cooperative financial institution being federally regulated as opposed to provincially regulated. Could you explain to me briefly what would be the difference or what would be the advantage? You were mentioning the July 6 legislation.

[John Lahey]

The main difference is that you're allowed to operate outside of your home province. There are some other powers that the banks have that perhaps would accrue to a credit union, but many of the credit unions, outside of Ontario at least, or west of Ontario, have access to some powers that the banks don't have. For instance, B.C. credit unions going into the federal jurisdiction have to deal with two particular problems. One is that they no longer would have a 100% deposit guarantee, and the second is that they would have to withdraw from their insurance operations, which they're allowed to do and the banks are not allowed to do.

The primary advantage of going to federal jurisdiction is the ability to operate extra-provincially. That's not to be undersold, because, as I said, diversification of risk is an important thing for any financial institution.

We know that business owners who might be resident in Ontario do business in B.C. When you tell them that you can't help them in B.C., where do they go? They tend to go to the banks. If you're lucky, they'll go to a credit union in B.C., but they don't like to break up their business.

So there are some advantages but also some growing pains that people will have to get their minds around before they go federally.

[The Chair, Conservative, Blake Richards]

Thank you.

The time has expired on that round.

We'll move to Mr. Lemieux.

You have the floor now, for five minutes.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thank you, Chair.

I wanted to explore the issue of financing for co-ops, because we've had a lot witnesses explain that co-ops have challenges seeking capital financing.

I'll start with newer co-ops. When you have new co-ops, they basically raise money by selling memberships. They don't have a lot of capital, and they probably don't have a lot of capital assets. And they don't have a track record, because they're new.

What I'm wondering is whether, as a lending institution, you see a co-op that's starting out as being more disadvantaged than a business, which also does not have.... Actually, it has less membership than a co-op. It perhaps has a low level of financial backing; it too would not have a lot of capital assets. That's why they're seeking a loan in their early stages.

Could you comment on that? Is it just two different but perhaps similar scenarios? Starting up anything is really challenging. Money is hard to come by.

Or do you feel that co-ops are more disadvantaged than a small business would be?

[John Lahey]

I don't think that co-ops would be more disadvantaged than others, all other things being equal. Anyone has to come with a good business case and a good sense of what they're undertaking.

I have to admit that Alterna doesn't do a whole lot of that at this point in time. We don't have the skills to do it. We do some of it. We're helping finance a funeral co-op, for instance, in Gatineau right now. They're in the start-up phase. I think helping anyone in the start-up phase is not for the faint of heart.

I will tell you that by and large, regulators don't like us doing that because of the risk profile that tends to go with it.

I don't think they're more disadvantaged. I just think that it's a really hard thing to do.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

All right.

At the other end of the spectrum are what I'll call the medium to large sized co-ops. We had one in particular here a few days ago that had an $8 million or $10 million project. They were having difficulty seeking funding. I don't quite remember the details or whether the details were provided or what they were.

It could be, I would imagine, related to perhaps the lack of a track record. Perhaps it's the way co-ops report their financial records and whether they're open to the public, etc., so maybe it's harder for a lending institution to evaluate risk with a co-op. Perhaps it's related to the membership structure. When members leave, they take their money with them. Does that provide more risk to a lending institution?

I'm wondering if you could perhaps shed some light on the other end of the spectrum—the medium to large sized co-ops—and why they might find it challenging to seek capital funding.

[John Lahey]

It probably depends on the level of security they're putting up against the loan. At the end of the day, it's easy to give money away. It's really, really hard to get it back. No financial institution wants to realize on security.

Most credit unions focus the majority of their lending on commercial lending. They are loans that are secured by real estate. When you go outside of that, the number of credit unions that are actually positioned to participate narrows quite quickly.

I don't know—

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Excuse me.

Could you just repeat that? You're saying that co-ops that lend money use real estate as their—

[John Lahey]

It is credit unions. Most credit union lending that isn't agricultural—agricultural is a little different—and that is commercial is secured by real estate. That reflects the size, the risk tolerance, and the profitability of credit unions.

For instance, my particular credit union does lots of things the banks don't do. But one of the things we also don't do that the banks do is make a ton of money. Our ability to backstop high-risk loans is relatively limited. So the quid pro quo for us is that we tend to rely on real-estate-backed lending.

My guess is that the one you're talking about either hasn't talked to a credit union or is talking about financing something that's secured by receivables or inventory.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Yes, it might have been related to that. But I think it was also that they were looking for a large loan, and credit unions might not be able to do that, which would have meant parsing it into—

[John Lahey]

We do pretty big loans. Alterna has done loans in partnership with Vancity, through its Citizens Bank and through Concentra Financial in Regina, and that sort of thing.

We can do reasonably large loans. They aren't $500 million loans, but $30 million to $50 million loans are not unusual.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Okay.

For the customer, is that a one-stop shop? I go to you and you will partner with someone else, or is it about me running around?

[The Chair, Conservative, Blake Richards]

The time has expired, but I'll let you finish up.

[John Lahey]

We work it out. That's our competitive advantage with the banks. We try not to send people from pillar to post to organize their own.... We try to work as a one-stop.

[The Chair, Conservative, Blake Richards]

Thank you.

We'll move now to Madame Brosseau.

You have the floor for the next five minutes.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Thank you both for your presentations. I find that we're learning so much so fast, it's amazing.

Mr. Lahey, it was really nice going through this book and reading all the positive testimony, hearing the stories of people and families and how you've really changed their lives. It must be heartwarming to know that all the work you're doing is changing lives.

You mentioned that the demand was far greater than your capacity. Will there be expansion in the future? You're mainly based out of Ontario, so are there expansions or mergers or anything planned in the future?

[John Lahey]

As I said, we package microfinancing under our community economic development effort, and we are in the process of trying to expand that. With regard to microfinance, I think the point in the report is that we currently have three people doing it. If we had the capacity to put nine people on it, we could keep nine people busy. If we had 15 people, we could keep 15 people busy.

I think there is a lot of demand for microfinance, but it's very labour intensive. As I said, in terms of direct income statements, you don't make much money. It's hard to put too big a piece of your operations up against it, because at the end of the day regulators do require us to make money, to generate capital, to protect our depositors. It's a balancing act.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

Do you feel that credit unions are more or less susceptible to the financial crises that have plagued the world's largest, most prominent banks? Are they more or less susceptible, or are they better off?

[John Lahey]

I think the credit union system in Canada has demonstrated that it's a very strong set of institutions. We're just as regulated as the banks. Some of the standards aren't quite where banks' standards are yet, but the reality is that our business is pretty bread and butter.

If you look at Alterna, half of our balance sheet is residential mortgages. We write nothing off on those. Half of what's left is secured lines of credit, which are secured by residential real estate and probably have loan-to-values of 25% to 30%. There's virtually no risk to that. Our commercial loan portfolio, which is the rest of it, has zero delinquencies because we're pretty conservative lenders. I think that's true of most credit unions across the country—certainly the large ones.

There are some small ones that are struggling, but they're relatively modest in size, and the regulators are working cooperatively with all of them. I think they will either be wound down in an orderly fashion, like the Holy Rosary Credit Union, or they will be nursed back to health.

Generally, all of the credit unions in Canada collectively have strong capital positions and strong liquidity positions, so I don't think we're more susceptible.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

You do a lot of education. I was on the Alterna Savings website, and you have a lot of classes to help people understand what it means to take out a loan. You help them and follow them through the process. It's not just about lending the money and leaving them there: you educate people so they're actually learning and making good, educated choices.

Is this a practice that you've always had?

[John Lahey]

Educating consumers has always been one of the core principles of cooperatives. The degree of focus has ebbed and flowed over the years, but Alterna finds that educating consumers has a strong payback for us. We've particularly seen it in the micro-lending program. We see it in the commercial lending program as well.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

We've heard from a lot of witnesses that education is a big thing when it comes to cooperatives. I didn't know very much about cooperatives before being on the committee, and I find I'm learning so much—my colleagues and I. We're very proud, and lucky, as this is the International Year of Cooperatives. This is great, but we're really looking for some answers.

Do you think the federal government has a role in partnering and enabling the development of cooperatives, and nurturing them?

[John Lahey]

I think anything the federal government can do to support the development of cooperatives is in the best interests of Canadians. It's a proven business model. It's an alternative to the public company. It's not a replacement but an alternative to the public company.

I've yet to see any scenario that caused me to believe there's a downside to supporting the development of cooperatives. So my answer would be yes.

[Ruth Ellen Brosseau, NDP, Berthier—Maskinongé, QC]

I don't know if you've heard about the—