[Recorded by Electronic Apparatus]
Tuesday, April 25, 1995
.1035 
[English]
The Chairman: Order, please. Good morning and welcome.
Pursuant to Standing Order 108.(2) and pursuant to recommendations contained in its report, Taking Care of Small Business, and documents that were released with the 1995-96 budget, this morning we shall resume a study with the major banks to devise performance benchmarks for small- and medium-sized business financing, in particular the establishment of quarterly reports by the major banks and financial institutions to review their performance in this area.
As you know, we have been examining the issue of bank lending to small business, especially a follow-up to our second recommendation. In part, it's a follow-up, as I said, to the February budget.
We've already heard from the large chartered banks, and most of them noted that the Canadian Bankers Association, the CBA, had been working with the Department of Finance and other government agencies on an improved series on bank lending to small business. We obviously want the best data possible, and we praise this effort in an important first step, but only a first step, in deriving performance benchmarks.
We look forward to working with the Canadian Bankers Association in taking many more steps toward performance benchmarks, and as I have said many times before, those benchmarks should also include not only statistics but service indicators.
With that as an opening statement, on behalf of the committee I would like to welcome the Canadian Bankers Association and particularly Helen Sinclair, who is the president and chief executive officer, and Douglas Melville. Ms Sinclair, I understand you're accompanied by Douglas Melville, who is the director of financial services policy. I understand you have a short opening statement and we'll then turn it over to questions. Welcome.
Ms Helen Sinclair (President and Chief Executive Officer, Canadian Bankers Association): Thank you very much, Mr. Chairman.
[Translation]
For the information of French-speaking members, I had a few sheets that I wanted to circulate, but I did not have them translated because the terminology was very technical. So, I could not distribute anything and I apologize for that. I hope that the members of Parliament will be able to follow the data that I will put on the table today.
[English]
Mr. Chairman, our appearance marks the end of two sets of appearances by the banks over the past year. What we believe has been conveyed is that amid a fair degree of uniqueness between the banks with respect to their approaches to the independent business market as you see borne out by a wide range of products and services, there is also a very strong sense of industry-wide commitment to small business relationships, borne out by fierce competition for the business, which you heard about from all of your witnesses - including the smallest of them, the Hongkong Bank of Canada, which spoke to it, 80% of its portfolio being in small business - but also borne out, I hope, by the recent focus in our organization on the common code of conduct, on alternative dispute resolution mechanisms, and on extensive core education programs offered by our educational arm, the Institute of Canadian Bankers.
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We do understand from the proceedings of both sets of hearings that concerns remain with your committee, and we do understand that we've been asked to appear to address those concerns, which you listed, Mr. Chairman, at the end of the CIBC's appearance, as being of two kinds: one, a call for performance benchmarks to be produced by our industry; and two, a call for a discussion on the question of barriers to accessing capital. What we would like to do effectively is address both of those issues quickly in our opening presentation and give you a sense of the progress we have made since you last met last March.
As I say, I did have a listing of data I wanted to share with you. I will try to give you a concise depiction of that data and will be glad to go back over it if some of the elements drop out. Let me begin with the question of benchmarks.
What we would like to do is table with you a structure for responding to the call for performance benchmarks. We divide those benchmarks into two groupings: first, a set of volume indicators; and, second, referring to your opening comments, Mr. Chairman, a set of service indicators. We do recognize that public information with respect to our operations has not kept up with the rapid growth of small- and medium-sized enterprises and their increased importance to the Canadian economy. We also recognize the very fundamental point that public information that is timely and relevant enhances the credit allocation process of the marketplace, a point that this committee has made repeatedly.
We do want to sound one cautionary note which will not come as a surprise to you given the testimony you have already heard. We would have grave concerns with a quotas approach to benchmarks and we are encouraged that this committee as a whole would appear to share this viewpoint. We believe a credit allocation system imposed by government would first, put at risk the safety and soundness of the financial system and, second, undermine our - and I'm talking about the banking system - general corporate obligations and our more specific obligations under the Bank Act.
Beyond the imposition of well-articulated quotas, Mr. Chairman, we believe we must also guard against the imposition of de facto quotas through undue political oversight of bank strategies and operations.
Having voiced this one word of caution on the statistics, let me go on to be more specific. I will start with the volume indicators. What we're proposing to do is to add to the data we have recently begun collecting, that data being loan information of large banks broken down by region and by threshold amount of credit, starting with credits in the zero to $500,000 range.
We plan to enhance this data and its availability. To do so we will produce breaks below the $500,000 threshold as required. We'll produce breaks by industry sector. We will bring in smaller banks and non-bank financial institutions where we can and we'll make an effort to do so. We will make this data available to the Bank of Canada for publication in its quarterly review.
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As you know, in order for the Bank of Canada to publish the data it will have to show a very high degree of integrity.
Second, we will produce loan-loss statistics developing a common approach for the reporting of those statistics, again by loan size threshold.
Third, we propose to look at approval rates. We'll conduct an annual survey that determines loan approval rates and the causes of turndowns. The survey will produce breakouts by gender of owner, by sales level, by number of employees, by age of business and by industry sector.
It will also track turndown applicants to determine whether they ultimately achieved success in obtaining their financing.
Fourth, with respect to knowledge-based industries, we will develop a statistical reporting capacity with respect to lending activities to knowledge-based industries. This will require that we go beyond Statistics Canada's standard industrial classification code, which today does not give you a handle on what most people would consider to be knowledge-based industries. We will have to develop the capability to define those industries and to collect data as defined.
Those are the volume indicators that we have been looking at. I would like to go on to service indicators, of which there are four sets.
First, in the area of complaints, the banking industry will measure and report on the effectiveness of the banks' complaint handling procedures including, first of all, measuring bank staff awareness of their individual bank's codes of conduct and their alternative dispute resolution mechanisms; measuring user satisfaction with respect to bank codes of conduct, and there we're specifically looking at determining adherence to the bank's commitment to provide reasons for turndowns and to provide referrals to alternative sources of financing where there has been a turndown.
We will develop and publish key measures relating to alternative dispute resolution processes, including the number of complaints that go through those processes, the duration of complaint handling, and the number of complaints that have been resolved to the complainant's satisfaction.
Going on to the next set of indicators, in the area of customer satisfaction, we will conduct an annual small business customer survey to measure customer satisfaction in the number of areas of the small business relationship.
We have not determined yet what all those areas will be. We look forward to a discussion with yourselves and we expect to be doing some focus group research of small business entrepreneurs to identify and then go on and survey the key elements of service as seen by the customer.
Third, we will look at account manager turnover and we will annually measure the frequency of that turnover in our system.
Fourth, with respect to education and training, we will track the participation of both bankers and small business customers in our education programs. When I say ``our'', I'm talking about the Institute of Canadian Bankers programs.
That concludes our thinking to date on the performance benchmarks. I will go on to the second topic, which is the question of barriers to accessing capital referred to at the conclusion of your March hearings.
We believe that the volume and service indicators I just alluded to are also going to be very helpful in helping to pinpoint why and where there may be barriers to accessing capital for small business.
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With respect to more specific questions, such as are there barriers and what's their nature in relation to capital for female entrepreneurs or in relation to trade finance or in relation to knowledge-based industries, what we are proposing to do is, in a sense, a repeat of a study we conducted in 1990. It was conducted by Professors Wynant and Hatch at the University of Western Ontario. We will be more targeted this time and we will target in on the major public policy issues, which we take to be from your hearings this question of barriers in very specific areas. These areas, yet again, remain to be decided following discussion with yourselves and with others.
Let me conclude, Mr. Chairman, by saying that we're embarked on a major project. We're daunted by it. Certainly we're very aware of the challenge we face, but I should tell you we are totally committed to bringing it to fruition quickly. Obviously, we're most interested before we go too far in getting your input.
On behalf of all of our members, I want to repeat their invitation, which we see is fundamental to the ongoing dialogue we will be having with your committee over the years. We repeat their invitation to have you witness their small business operations directly. They have asked me to extend that invitation again. I also want to ensure that the committee is aware that our annual conference this year, which is going to be held in Ottawa on June 15, is specifically on the subject of independent business, and I'd like to invite the members to participate.
That concludes my opening comments, Mr. Chairman. We look forward to the discussion that is to follow.
The Chairman: Thank you very much, Ms Sinclair.
Before I ask our colleague from the Bloc to begin, I will say as the chair that I think indeed this is a significant breakthrough. I think it's a very positive and progressive sign that you've come to the table in good faith to partner with our committee. I look forward to working with your association on behalf of our committee.
When I listened, I listened carefully to the fact that we're not only talking about volume indicators, we're talking about service indicators. Although we did hear before the break some of the issues, I think today we've heard something brand new. The fact you're prepared to produce breaks below the $500,000 level, the breaks by industry, bringing in smaller banks, the non bank lenders where possible, the data being made available, I think that's significant.
Also, for the record, I think it's important for our committee to note and to applaud and congratulate you because I think this is new information and it follows specifically along with our work. It's the first time not only since I've been sitting in the chair but around this table that I've heard the Canadian Bankers Association come forward on behalf of your industry and finally be prepared to talk about loan-loss statistics, approval rates and the whole knowledge-based industry.
So from where I sit as your chair - I'm not going to try to prejudice my colleagues too much - but I think this is a significant breakthrough.
An hon. member: There's no bias.
The Chairman: There's no bias. Look, you have to give praise where praise is due. I came thinking you would end up echoing what your member associates had been saying to us prior to the break and your coming to the table today with some brand-new information. I think we as members of Parliament should recognize that and congratulate you for it. Certainly I see that and I think it's a significant breakthrough today.
Mr. Rocheleau, please.
[Translation]
Mr. Rocheleau (Trois-Rivières): Good morning, Ms Sinclair.
I would also like to thank you and congratulate you for your positive approach to the recommendations of the committee.
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In that respect, one of the main problems facing the committee has had to do with our not being able to prove whether or not there was a credit crunch. Depending on how you look at it, you could claim that there was one when all the while the drop in the volume of loans was simply due to a drop in demand.
Do you think that with the new openness, it would be possible to demonstrate scientifically or objectively, given the new data at our disposal, whether or not there is indeed a credit crunch?
Ms Sinclair: Yes, Mr. Rocheleau. I believe it will be possible to do this according to two major criteria, as has been pointed out by my colleagues from the banks. You already have figures that are in the public domain with respect to the banks' cash flow, that is to say those funds that are invested in treasury bills and are therefore available to be loaned out.
You have in the figures - I do not know if this was distributed - , but, for the first time these past few weeks, we have figures which show the banks' lines of credit and business loans. You can see to what extent lines of credit made available to SMBs are still unused.
Mr. Rocheleau: Will we be getting figures relating to loan applications by SMBs which were rejected?
Ms Sinclair: Yes, you will be getting those figures, as well as the main reasons for the loan refusals. The figures, as you will note, do not point in any one direction, but fluctuate with the economic cycle.
When you look at those figures, you will be able to assess them with as backdrop the figures for economic growth.
We must always remember, as Mr. Birmingham said, that economic upturns are not always noticed immediately. You will often notice a delayed response in the credit figures when compared with the figures for economic growth. You will indeed be getting the figures you made reference to.
Mr. Rocheleau: One of the most significant issues the committee has dealt with has been this whole issue of the new economy. Are you able to tell us from your vantage point - which in effect sets you above the crowd and allows you to see how attitudes change - whether or not the banks are better able to deal with these new realities? Or are they uncomfortable, in which case this should be recognized, since loan guarantees in the new economy are quite different from those previously provided. Are you satisfied with the way in which the banks' culture and attitudes have evolved in the face of this phenomenon?
Ms Sinclair: I am quite satisfied with what has been done by the banks to look at those areas, Mr. Rocheleau. Not all of the banks have looked at the same areas. Perceptions vary among the banks. It is not just a matter of how they perceive the various sectors, but what they see as their particular capabilities, because every bank has its own history.
There have been very tangible efforts on the part of all the banks to better understand those areas, to become more flexible in the granting of loans, and especially, to find secondary sources of reimbursement. When you do not have any tangible assets, there is always this question: What happens if the projected income does not materialize? We have to look for secondary sources. Efforts are already underway to find those secondary sources.
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There is one thing that is quite remarkable, and it has been mentioned by all the witnesses who have appeared before you. In terms of human resources, the banks across the country now have people who are dedicated to those new industries and specialized centres dealing with them. Not every bank employee will be called upon to deal with those industries, given the high degree of specialization required. You can see that human resources have been allocated to these industries in each of the banks.
Mr. Rocheleau: One last question, Mr. Chairman.
Recently, as we know, the government brought in new restrictions limiting access to loans granted under the Small Business Loans Act. Do you have some idea of what impact that might have on SMBs, particularly on those SMBs belonging to the new economy?
Ms Sinclair: Yes, with respect to the new arrangements. Costs will go up. Generally speaking, when costs go up, volumes go down. I believe we can expect a decrease in volume. We can also expect that, to a certain extent, there will be a redistribution of ordinary loans, that the percentage of ordinary commercial loans relative to loans granted under that program will be different within each bank.
Mr. Rocheleau: Is there not a danger, given the critical nature of the new economy, that potential applicants, already worried about not being able to offer sufficient collateral, would be further discouraged knowing that they would have to pay more for their loans? The impact could be quite negative.
Ms Sinclair: Our experience to date with that program has shown that it is not very well focused on the new economy. If you sit down and analyze those industries that are benefitting from loans under this program, they are mostly small businesses, such as restaurants and service companies, and most of the money no doubt is used for improving, as opposed to buying, real property. It is used for what are called visual improvements. I understand your question, but I believe that experience tells us that, in fact, the program to date has not really served the new economy very well.
Mr. Rocheleau: Do you feel that this might be a niche, and that governments should focus more on finding a way to support people involved in the new economy, with respect to getting access to capital if this is not provided for in the Small Business Loans Act?
Ms Sinclair: I believe that we, in the private sector, have the duty as well as the ability to provide that support. The challenge for us is to gain a better understanding of those industries and how we should go about lending to them. To a large extent, this is a question for the private sector, not the public sector.
Mr. Rocheleau: Thank you.
[English]
The Chairman: Thank you, Mr. Rocheleau. Mr. Mitchell, please.
Mr. Mitchell (Parry Sound - Muskoka): Thank you very much, Mr. Chairman, and welcome, Ms Sinclair. I share the chair's opinion that this was a very good presentation. I was very pleased to see some of the initiatives you are going to undertake.
I have a couple of questions about those. Before I get into that I want to bring up something I had an opportunity to read while I was back in my riding. One of the major Toronto papers had a front page story in which your predecessor was quoted and referred in general terms to the process that was being undertaken as ``bull - - ''. From my conversations with you and from the testimony I've seen you make in front of this committee I suspect you don't share those particular viewpoints. My concern is that those viewpoints might reflect an attitudinal situation that exists in the banking community or a culture that exists in the banking community that was demonstrated by that interview. I'm wondering whether that in fact is the case, that it is permeating the industry, and what your comments on that would be.
Ms Sinclair: Mr. Chairman, if you will permit, I would like to read, for the benefit of the committee, a letter that was sent by our organization to The Toronto Star, which I believe produced the article Mr. Mitchell is referring to.
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The letter is dated April 10 and reads:
- Dear Editor: The Canadian Bankers Association is sensitive to the fact that a recent article
entitled ``Let's Hear Your Bank Credit Tales'', authored by Jonathon Ferguson, has caused
concern within segments of the business community. The CBA reaffirms that the Canadian
banking industry is dedicated to working closely with its small business clients, cultivating
strong relationships, and continues to improve small business services and products on an
ongoing basis. Comments made by Bob MacIntosh, who retired six years ago as CBA
president, were strictly personal.
On the issue of benchmarks, would it then be appropriate in your opinion that this committee would examine those statistics you are providing to us or for us or for the general public and, based on what we see from year over year or quarter over quarter or whatever timeframe we use, that in fact would be our benchmark, our examination of the changes in those statistics?
Ms Sinclair: That's an excellent question, Mr. Mitchell. It is one that we ourselves have been wrestling with.
Let me answer it this way. My sense is that you will approach the volume indicators a little bit differently from the service indicators. The volume indicators will fluctuate over time. They will fluctuate with the economic cycle. They may fluctuate as you see structural changes going on in the economy. So to look at those numbers and to expect a non-ending upward movement would probably not be a good use of those statistics. You will need some backdrop for your assessment. You will need some backdrop of economic data.
On the other hand, as you look at the service indicators, I believe - and time will tell - you will develop a sense of benchmark from what you will see as the better performers in those areas. Let's look at training, for example.
The better performers will become, not just for you but for us, a benchmark and you will have a sense of dynamic over time as well. You'll have a sense that those numbers, at least for the foreseeable future, should be going up, not down. If that happens, you'll be happy and I think we'll be happy. If it doesn't, there will be some questions.
Just one aside, those numbers are not entirely impervious to economic cycles either. In tough times organizations do cut costs quite generally. They may well be faced with having to cut training costs in a given year, a bad year, but over the longer run or the medium run you should expect to see those numbers, which I have used as an example, rise on a fairly steady path.
Mr. Mitchell: There is a little bit of an inconsistency between your testimony and some of what we heard from the banks a couple of weeks ago. I just want to explore that to make sure that everybody is on side here.
In terms of some of the statistics you were going to provide, particularly what you call approval ratings and I will call turn downs. You are examining the turn downs and you are going to provide that. All of the chartered banks that were here a couple of weeks ago and last year as well said they couldn't do that; they just don't have the facility so they can't define what a turn down is.
You also mentioned gender and they were very insistent that they were not able to and were not prepared to provide those kinds of statistics. So something seems to have changed.
Ms Sinclair: In my opening comments I did not refer to the methods by which we were going to collect those data. Indeed, data collection will be a big challenge for us, particularly in the short term. A certain amount of the data will come through regulatory reporting. There's a certain amount though that we are now going to have to obtain because it's not readily available, either by surveying our customers or by retaining a third party to sample our loan files.
That is really the route we have decided to go. When we said the data weren't readily available, it's true they weren't. We did hear a fairly strong call from your committee.
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On reflection, I should tell you we also saw a fair degree of usefulness in those numbers for our own business purposes.
Mr. Mitchell: Are your members committed to providing those data? Are you speaking on behalf of your members?
Ms Sinclair: I am. I should tell you that Mr. Melville is the one who has spent a lot of time negotiating this. I don't know if you have anything you would like to add, Doug.
Mr. Douglas Melville (Director, Financial Services Policy, Canadian Bankers Association): The only thing I would add to Ms Sinclair's points, Mr. Mitchell, is that part of the benefit of this process of the banks talking to you a few weeks ago was to remind our industry of the point that Ms Sinclair raised earlier. That is that there are many types of information on this important sector that we ourselves didn't have as an industry and that really the importance of this sector had grown beyond our capacity to collect them. We've acknowledged that now.
What you've heard here is a statement of commitment from all our members to obtain certain types of information, as was described. As soon as we are done here today we have to go back and work with our members to figure out what is the most effective, statistically viable and cost-effective means of collecting those data.
In many cases over the short term that will be by survey. But there is a commitment from them to have it become statistical gathering to the extent possible over time.
Mr. Mitchell: You made the comment in your presentation about de facto quotas coming about as a result of undue political oversight. I ask the question of you, do you believe the process that has gone on in the last 14 months, primarily through this committee but through a lot of other ways, represents undue political oversight, or are you comfortable with this process and the ongoing examination?
Ms Sinclair: We're entirely comfortable with the discussion that has gone on within this committee, with us and others. We have noted in the case of the United States which has wrestled with this question a fair bit that this has been a recurring theme. It is on the basis of that experience that we raise the concern.
The Chairman: This post-Easter rebirth is certainly healthy. I'm glad to hear that the CBA was able to convince its member states that this is a useful exercise.
I think that we all, as committee members, feel it is pretty useful. What you have come forward with this morning has certainly proved that point.
Mr. Schmidt.
Mr. Schmidt (Okanagan Centre): I want to add my congratulations to you as well. It is very refreshing to see this commitment. I think I will be even happier when it actually happens, as you will be as well.
It's one thing to make all these commitments. I can see a tremendous task. You said you felt daunted by the task ahead of you. I can well appreciate that you must be because it's a big task you've undertaken.
I want to commend you for wishing to do that and also I want to help you in doing that. As well, I want to ask some very specific questions on this.
For instance, it is one thing to say you will work with the knowledge-based industries as to what is the definition of a knowledge-based industry. Having achieved that definition then, my question is a very fundamental one for a banking institution, or any financial institution. How does one value a knowledge-based industry?
Ms Sinclair: That's one of the toughest questions we're trying to address at this very point in time. The real issue is, how do you value intellectual property? How do you evaluate for security purposes things you can't touch?
I am going to turn this question, having taken an initial few tentative steps into it, over to Mr. Melville.
Mr. Melville: Mr. Schmidt, that's a key question with which the various members of the banks who deal with independent business have wrestled.
If we are going to be looking to the Department of Industry and the Department of Finance, I think in the coming weeks and months, to assist us in identifying what they think is a workable definition of knowledge-based industries, if it's possible to do the breakout by identifying SIC codes, that would make it an easy task. On first blush we expect that's not going to be the case because there will be businesses within individual industry codes that may or may not fit what I think we would all generally accept as the definition of a knowledge-based industry.
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So, definitional issues aside, in terms of taking steps to see that their needs for finance are served to the extent that we can as an industry, you've seen a lot of banks have started up their own specialty units in dealing with high-tech and knowledge-based areas. We also have recently started some discussions with a group called ORTECH. I don't know if members are familiar with their operation in Ontario.
They are a quasi-governmental unit that specializes in doing technology assessments for the private sector. They already have relationships with several of our members for doing technology assessments of businesses. I think the benefits of that are that we accept our limitations as bankers. There are certain things that we have difficulty valuing, and that has two problems for us. One, it means you can get into a situation where you do not truly appreciate the risks a certain technology poses for you and therefore you run the risk of making inappropriate loans. On the other side, there are situations where perhaps the technology does not represent an unbankable risk.
By gaining outside input and by helping our bankers be more comfortable with partnering with people who have that type of experience and expertise, more of the businesses out there that we would call knowledge-based industries will be bankable, in our view. They will represent risks that our industry is comfortable taking and therefore make some movement toward closing the gap between bank credit and venture capital in that important sector of the economy.
Mr. Schmidt: That's really interesting. You tied together venture capital...and those are not necessarily the same.
The access to the capital really has two parts to it. There's the initial access to establish a business, to expand a business, or whatever the case might be. There's also the continuing of that access through operational loans. In some cases, where the fortunes of a company experience a sudden temporary downturn that, in the immediacy of the day and looking at the other aspects of its portfolio, the door had better be closed on the business. Even though the future looks pretty good, right now it looks really bad on the balance sheet. Unless it is closed, the shareholders, or whoever, are going to say to wait a minute, that this isn't very good. Yet the continuing access to capital by that business may be good, both for the financial institutions and for the business itself. It's this that I am just as concerned with, as the initial access to capital.
Ms Sinclair: Mr. Schmidt, hopefully when you look at the statistics related to alternative dispute resolution, you will see that particular concern broken out. The question of whether the bank was overly hasty in withdrawing credit when I ran into trouble would be conceptually one of the problem areas that one should see highlighted in the statistics as they come out.
Just as a general proposition, a good banker, faced with a loan problem, should do everything possible to keep the company going if there is a reasonable chance of the company making it through the cyclical downturn. That is one of the distinguishing traits between a good banker and a not-so-good banker. It's clearly in the bank's interest to stay with a company that is simply going through a temporary downturn.
We don't always do it right. Hopefully you'll have a better sense, once this information is being produced, of how often we do get it right as opposed to wrong. But there's clearly a reason for staying with a company that is just going through a temporary set of problems.
I will just go back to your opening comment on the production of the statistics. You will see the statistics. I assure you, you will see them. If you know the culture of our organization, we agonize before the fact, and once we say we're going to do it, we do it.
The code of conduct, the alternative dispute resolution mechanism, our privacy code, our anti-money-laundering procedures - we agonize about them up front. Once we commit, they come out; we can't afford to act otherwise.
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So you will see this information, I can assure you.
Mr. Schmidt: That's good. There are so many questions I'd like to ask as a follow-up, but there are a couple of things that are really gnawing at me here now. We've had a lot of emphasis on the knowledge-based economy, and I'm personally very concerned about that part of the business, that it grow, because that is probably going to be the major engine of our economy. We can't forget either that there is still the conventional, if you like, part of the economy.
My real concern is that financial institutions not get into an unbalanced portfolio in their asset base in terms of the loans that are outstanding. I would like to ask you if there is any attempt in all of this that will give some indication of a prudent portfolio so it in fact is a balanced one so that the financial institutions as well as the businesses, the whole thing, doesn't become warped because there is access for one sector in the business field but not for another sector, or the two things are not working in proper progress relative to one another.
Ms Sinclair: You will see an industry breakdown of our numbers.
Mr. Schmidt: I'm not asking about the industry breakdown so much. I am really asking for a definition of a prudent portfolio. Will that be indicated in the statistics to show that yes, this is a prudent portfolio or no, this is not?
Ms Sinclair: Those data were not going to be indicated. It is the primary job of the regulator to ensure there is that balance in industry portfolios over time, and to ask banks that show imbalances that are generally not evident in other banks' portfolios why they are there. To answer your question very crisply, Mr. Schmidt, we were not going to address the question of a prudential portfolio mix.
Mr. Schmidt: I could ask another question if I have more time.
The Chairman: Is it on the same point?
Mr. Schmidt: No, it is on a new point.
The Chairman: Let's move on then. Mr. Ianno.
Mr. Ianno (Trinity - Spadina): First of all, I would like to commend you on the shift of the banks and the CBA. Hearing you this morning I think it's a major change from 14 months ago when we met up in your boardroom with many of your members. I commend you for that. I guess, Mr. Chairman, your definition of benchmark is one of behavioural and attitudinal change, so from that perspective we've already accomplished your goal.
The Chairman: Our goal.
Mr. Ianno: Now in terms of trying to increase access to capital and the amount lent to small business, I think the statistics you will be providing will be helpful, because we can see from year to year how some of the changes are occurring.
Seeing the information you supplied on this sheet, I need a couple of questions answered, if it's okay. Other banks, some of your members, have indicated that they define small business as loan authorization of a million dollars, which in effect times ten means $10 million of revenue. Is that the same kind of definition you are placing on small- and medium-sized business, or is there a difference? I also see you have on this sheet up to $5 million of authorization, which, if you use the same formula, comes out to $50 million of revenue or sales. I would like to get a definition of that.
Mr. Melville: Mr. Ianno, a lot of the testimony both last year and recently from some of the banks focused on the difficulty of establishing a particular definition of what constituted a small business and the broader one of what a small- and a medium-sized enterprise was.
For the purposes of assisting the committee, the agreement we reached among our members was that for the purposes of statistical gathering we would arbitrarily cut at the $500,000, at the $1 million, and at the $5 million mark because that accommodated, more or less, the majority of our members' methods of collecting loan value data within their own organizations.
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I should emphasize, however, that each of our members does not define small business that way. That was the way we defined this statistics-gathering exercise for the purpose of coming before you with consistent data.
That was one of the difficulties flagged last year in their appearance before this committee. The objective was to establish a standard for statistics gathering, so everyone who comes to the table is singing from the same hymn sheet and the comparisons can be made.
Mr. Ianno: From your members, the banks, when we asked for the definition - I don't have the sheet in front of me but I think three of them indicated $500,000 as being a small business, an SME, and the other three or four indicated $1 million. For my purposes, I guess I'm most concerned about the million or less, or the $500,000 or less.
The other stat missing here that I would like to see is that once you get to the million, I'd like to see what is the total corporate loan overall so I can then compare, as you may have seen the benchmark I created for myself -
Mr. Melville: The table as was done in the report.
Mr. Ianno: Yes. It shows in effect x amount for small business, whichever of the two you want to choose and let everybody use the same one, and the overall corporate loans by individual banks. That way we can then see a general percentage of where it's at and, more from my perspective, the year-by-year increase can then be seen.
In that way I can feel I've contributed toward seeing more capital available for small business. I'd love to see 33% as a benchmark, and I chose one of your banks as the one. I chose the Bank of Montreal, 33% of their corporate loans that they lend to small business. I would see that as the ideal but as long as I see progression year after year, I will start to see, at least from my perspective, a positive turn. Of course, those that move faster make me happier. But at least we see some progress and we feel we've made a difference in the process. Is that possible?
I understand there are many ways of playing with statistics, but I guess when I look at the overall numbers, here I've added your numbers as $36 billion. What I had last year was $33 billion, which may not be one and the same because you also have line of credit and other things. That's fine. Let's use your numbers and use that as $36 billion.
I would assume that the overall corporate loan will be in the range that I used last year of $147 billion. I'm sure if you use the same lines of credit and all the rest it probably is even larger than $147 billion. It might even be $200 billion if you take into account Labatt's purchase potential, Ted Rogers and all the rest that go along with it, on whether it's outstanding or authorized.
If we're using the tables I have, at least I could feel comfortable that there is progress.
As I indicated to you, Helen, when we met that time, we want to work with you. We don't want to tell you whom to lend to except to increase the small business loans. If we can accomplish that together without putting the banks at risk or anything of that nature, I think everyone will be happy in the process.
That's where a lot of us, at least myself, are coming from.
Ms Sinclair: That's very helpful feedback in terms of how we structure the data. Yes, we can give the overall numbers. That would be $5 million and above. We can structure the totals below $5 million in whatever way is going to be seen as most useful. Right now you can get the $1 million and under by adding the first two columns, but it might be better to present it as you are suggesting.
Any input we can have on the structure and presentation is something we would appreciate as quickly as we could get it.
Mr. Ianno: There is something else to mention. Could we have it by individual banks?
Ms Sinclair: You will have it by individual banks.
Mr. Ianno: I think that works toward the direction in which we want to see things go.
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Ms Sinclair: Mr. Melville is just pointing out to me, Mr. Ianno, that you will be seeing the individual banks. They will be releasing their own information because they would like to be able to comment on it individually. We will be releasing the industry total.
Mr. Ianno: If you don't mind, if it's possible, even though they will be introducing it separately, if on your sheet you could also take their numbers - you're not divulging anything - and compile them for us. That way they are all in one place.
Ms Sinclair: Let us take that back.
Mr. Ianno: Thank you very much.
Thank you, Mr. Chairman.
The Chairman: Thank you, Mr. Ianno.
Everybody is getting along today so well, there's nothing for the media to write about now. Mr. Ianno and I are agreeing and that's wonderful.
Mr. Schmidt: This is the Ianno-Zed show, isn't it?
The Chairman: I'm not sure who agrees with whom, but I'm glad Mr. Ianno now agrees with me.
I'm going to invite Ms Bethel, and at the same time I'm going to have to excuse myself from the chair. I've just received a note that our lobby bill is in the House. Mr. Mitchell, would you replace me in the chair? I apologize, but I'm sure you're well served with Mr. Mitchell.
The Vice-Chairman: Ms Bethel.
Ms Bethel (Edmonton East): Mr. Vice-Chairman, I too am really encouraged by what we're seeing, but I'm a little concerned that so much has yet to be decided and determined.
I met with what I consider to be the best and the brightest of Edmonton's entrepreneurial women. We discussed the barriers that women experience with banks. I think it's fair to say that they do feel they have additional barriers and would really like some kind of consideration of that.
The other thing that came out of my meetings in Edmonton was that they experience some difficulties with customer satisfaction. I wonder what are the indicators. You have said they have yet to be determined, but are you doing some consideration of indicators? Can you give us some ideas of what those would be? Will you determine customer satisfaction based on gender?
Ms Sinclair: To the last question, yes, we will break down the satisfaction level by gender.
We have not yet finished the task of actually determining the precise indicators of satisfaction that we will be using. If you don't mind, I will give you a bit of a personal sense -
Ms Bethel: Yes, what are you mulling over?
Ms Sinclair: - of the type of thing I think customers are going to feed back to us.
They will be interested in developing some indicators on the question of the harmony of the relationship with the bank. They will be very interested in questions of timeliness. For instance, how quickly does my account manager get back to me to say yes or no? They will be very interested in questions on the kinds of assistance that are provided by the banker in the course of the credit application process. They will be very interested in the kinds of recourse they get when things do not go as they should. I'm not talking about a difference in credit judgment because that obviously is being covered in other areas. I'm talking about glitches in the system.
Ms Bethel: What about value for money for bank services, service charges?
Ms Sinclair: That is certainly one that we could take a look at, value for money, yes.
Ms Bethel: Those are all my questions. I just wanted you to know that we're going to meet again in Edmonton. I'm delighted to hear that your conference will be here this year. We'll be happy to provide input as best we can. I would certainly like to lead the Alberta delegation anyway.
The Vice-Chairman: Thank you very much, Ms Bethel. Mr. Discepola.
Mr. Discepola (Vaudreuil): Ms Sinclair, the statistics portion, in hearing the optimism around the table you seem to have no problem with that. You even seem to be offering us ways of giving us the data in the format we want.
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You also seem to indicate, and correct me if I'm wrong in any of these assumptions, that we could use those statistics to develop a year down the road or whatever time we judge, possible benchmarks based on those statistics we have gathered over a year. However, in your presentation you say you are afraid that we will impose quotas. I see no difference between the words ``statistics'', ``benchmarks'' or ``quotas''. Aren't you afraid that those benchmarks will eventually become quotas? If they don't become quotas then what in the world is our role? Frankly, the statistics aren't going to mean very much if we have no way of measuring them. I'm very concerned, personally, that the statistics are going to be just that, and you can have 101 different interpretations of those statistics.
I believe some banks have said one in five of their small business customers actually require access to capital. My main motivation, as is Mr. Ianno's, is to see if there is a problem, and according to the banks there are no problems of access to capital, so maybe that study you are doing on barriers to access to capital should focus more on whether or not there is a problem. Personally, as a parliamentarian, if there is no problem out there then I don't want to dictate to your industry to whom you should lend, to what sector you should lend, how much you should lend, etc. That's your job. But we're hearing differently in our constituencies.
I think that's the biggest stumbling block right now. If the view of your member associations is there is no problem out there, then maybe we should prove that once and for all; talk to business people, talk to the banks and financial institutions, and agree to disagree or agree there is no problem. I have a concern when you deny that these benchmarks or the analyses of these statistics turn into potential quotas. That's where my optimism all of a sudden dwindles.
Yes, we've had an Easter break and there was a beau virage in Quebec; maybe there was a beau virage in your association too. But as the beau virage in Quebec seems to really mean the same thing, I'm wondering whether we're going to advance by having these statistics and these different benchmarks.
I'm wondering if you do not feel that your industry, and the banks in particular, have a certain responsibility. You've performed very well; the industries have performed very well. Even in the recessions of 1980-81 or 1990-93 the banking industry seemed to be immune to the recessions. As a matter of fact, you seem to perform better when there is a recession. That leads me to believe that maybe you're being selective and, contrary to your claims before that bankers should be more responsible - I think that was the word you used - actually a good banker is measured by how he or she performs in difficult times. In other words, when a company is doing badly, we should measure a banker by how that person performs in helping the company and the small business overcome those difficult times.
The actual reality of the situation is totally contrary to that statement. The actual reality of the situation is that you're given x days, not x months, to all of a sudden renew your line of credit with another bank because we choose no longer to do business with you, Mr. Discepola, or Mr. ABC or Mrs. ABC. That is what is happening out there.
I'm not feeling very comfortable that we're going to advance. We're going to get those statistics. When I see that 80% of small business people first of all require less than $100,000, as per some claims from some of the banks already - here we are, we're going to produce statistics of half a million. I think we can come up with a definition we feel comfortable with.
I doubt the whole process will eventually prove fruitful. I am just wondering whether some of these presentations, especially by the big banks, were just a smokescreen and whether we're actually going to accomplish something. We've been in government almost a year and a half, and I don't think small business can wait another x months until we gather these statistics and then develop benchmarks. It's going to take another year or two. That I don't think is acceptable.
Ms Sinclair: Let me try to take the question in parts, if I may, Mr. Chairman. The question of what the difference is between a benchmark and a quota or are we really just mincing words, we see a very big difference.
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We see information in the marketplace as carrying a dynamic of its own and as being the absolute basis of ensuring an efficient allocation of resources. In this case we're talking about credit.
If you don't have information out there, economics 100 says you cannot get an optimal allocation of resources. Having listened to the committee, talked among ourselves and looked at the data that are out there now, we have a view that there is more information needed. It is not the type of information, in our view, that will lead one to say that a given percentage of a portfolio in a given area of our business is what should be.
What Mr. Ianno described is the dynamics we think we'd like to see happening. That is, have in place a momentum where, because we see ourselves measured against others, we ask questions. Why has so-and-so managed to grow his or her portfolio in a way that we haven't? Does so-and-so know something we don't? When we look at so-and-so's training numbers or turnover numbers, why has so-and-so managed to move so much faster than we have? What are we not doing that we might be doing?
Does this work? I will give you one example. The reason I have become so sold on numbers is that this has really been borne out by the data we now produce in the employment equity field. It carries a dynamic of its own.
I can tell you that every year I see these numbers and I see the banks look at their numbers against each other and ask questions. Why has so-and-so advanced women in senior management faster than I have? What are we not doing that we should be doing? That is the dynamic of a private market. If it doesn't work, you should be asking us some very hard questions.
Mr. Discepola: We are. That's the purpose of this committee. You seem to be saying that you are going to use those benchmarks and those statistics to compare one bank and their performance to another bank and their performance or lack of it.
Let me just finish for a second. That's great from the industry perspective. Now look at it from our perspective.
If bank A can lend 22% of their portfolio to small businesses defined as having a requirement of less than $100,000, for example, and bank C is only lending 12, and we analyse that statistic, how does it help my constituents who can't get access to capital?
Therefore, why would your industry be so afraid to say that those banks that achieve the 22% level, well, the $100 million slap on the hand that the Minister of Finance gave you this year, you guys only get that little slap again. But those that perform substantially below that, maybe we'll have a second surtax on those banks or those industries that don't perform.
What you're saying is that if one bank is able to provide 30% of financing to small business - and this is the thrust of Mr. Ianno's proposal - and whether it's 20 or 30 I don't really care, why shouldn't the rest of the industry follow suit? Say they don't follow suit. I'm a small business franchise owner. I have quotas to meet. I have x per cent of sales I have to pay. You guys have a franchise and you pay nothing for it, nothing whatsoever. Eleven percent of my sales go to the franchiser, whether I make a profit or not. Yet you and your industry have what I consider a franchise. You are performing extremely well when I look at last year's figures and this year's first quarter figures.
The distraught, almost a fear I would say, that I see in small business people when they come to my riding. They say they can't have access, or their line of credit was just cut off -
The Vice-Chairman: We will have to let the witness answer and then we will have to move on.
Ms Sinclair: We believe what we have tabled with you today, Mr. Discepola, is something that effectively is much better than quotas. We've gone beyond the volumes. We've gone into the service indicators that will drive the volumes down the road.
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We are concerned, as I indicated in my opening remarks, with quotas because we're concerned about anything that will supplant the private sector's resource allocation decisions with those that come out of the political domain. We're concerned because it undermines our accountability. We're also concerned because we think it potentially endangers our depositors.
Our job is to allocate resources. We do not believe it's optimal for everyone to do it in exactly the same way. We do believe there should be freedom of choice among the players. I believe it's entirely within Canada Trust's prerogative to decide it doesn't want to be in the independent business market at all, which it has decided. They aren't one of my members. That is a decision that was driven by their perspective on their strengths and on the market. It is the same way the Hongkong Bank's 80% was driven by its perspective on its strengths and on its market. The Bank of Montreal's 30% was driven by its strengths and its perspective on the market. I don't believe that political judgment can really improve on those perspectives.
[Translation]
Mr. Rocheleau: One of the recommendations of the report of the committee deals with the creation of a code of conduct governing the relations between a bank the its clients. We know that the Canadian Bankers' Association acted upon it and it seems to do very well. There is another recommendation dealing with the possible appointment of a bank of ombudsman, who would be independent from banks. I would like to know how you react to this recommendation.
Ms Sinclair: We are opposed to the appointment of an ombudsman who would be independent from the banks themselves, and our opposition mostly stands, Mr. Rocheleau, from the submission you received from Mr. Shirley himself, who created a position of ombudsman in his bank. We all made a decision - and you can see it in our code of conduct - to implement in our institutions a mechanism for solving complaints and identifying someone who is responsible.
This person, at the Canadian Imperial Bank of Commerce, is called an ombudsman, and in some other banks they call this position otherwise. We believe we now have, as you can see in our code of conduct, a mechanism for solving disputes. Once again, I think that you are going to see, in the statistics that we are going to provide you, if we really managed to do it. If we did not, you are going to ask us questions, but we are convinced that this system will work as it should.
Mr. Melville had something to add.
Mr. Melville: The benefits we can see as regards a solution such as the one Mr. Shirley submitted to the committee are related to the higher rank he has in the bank. He is related to the market, but he does not operate in the market. In the organization of the bank, he does not have to worry about the obligation of operating in the market. In the bank, he is independent from that group. He can ask for explanations on the credit decisions.
But that is something that is not possible for someone from outside, whether he is from the government or from the industry. He can have an effect on the bank culture and this is what is the most important. The goal of all banks, when they have meetings with the committee, is to aim at their future, to change the inside culture. This is what Mr. Shirley told us and told the committee. Whether you call this person an umbudsman or a vice-chairman is of little importance.
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Mr. Rocheleau: When it made this recommendation, the committee relied greatly on the British model. Does that cause you any major concern?
Ms Sinclair: The main concern from the clients perspective is that it taken on average 8 months to seetle a problem under the British system. A few weeks ago Mr. Shirley testified that it took him on average 6.6 days. A system that requires 8 months is not in the public interest.
Mr. Rocheleau: Thank you, Mr. Chairman.
[English]
The Vice-Chairman: Mr. Schmidt.
Mr. Schmidt: Just one very simple, short question. It has to do with the actual publication of these numbers and what form they will take.
The committee recommended that we meet with you on a quarterly basis. I'm wondering, Mr. Chairman, whether it would be possible, if we're going to use these as benchmarks - and I think we will, as performance indicators, year to year, quarter to quarter - to have a compilation of these on an annual basis, perhaps a semi-annual basis or an ongoing revolving basis. As we start now, let's say we start with this benchmark, we're going to do this now. Then we compile these statistics. They come to us over the years as a picture of actually what has happened, when we've gone up and when we've gone down. That would be there in one publication and we wouldn't have to go searching all over the place.
Ms Sinclair: Mr. Chairman, the intent would be first of all to bring all the data together in one bound format and also to show you the time perspective, the time series of the data. You won't be left with a given year and no basis of comparison with previous years.
Mr. Melville: If I might follow on Mr. Schmidt, it sounds to me that what you're proposing would be almost along the lines of an annual report on the situation of small business in the banking sector.
Mr. Schmidt: I think that would be very good. It is a nice way to summarize that.
Mr. Melville: That is probably an excellent suggestion and perhaps something we'll take back to our members, as distinct from our statistical and regulatory reporting.
Mr. Ianno: Just a point of clarification. You said it was an excellent suggestion. I thought that's what you were suggesting all along.
Mr. Melville: Not necessarily. I think what Mr. Schmidt is suggesting is that it be packaged as distinct from a lot of the other reporting we do in the industry in a separate bound format, perhaps with some commentary from the industry.
Mr. Ianno: So that's just their own reporting to their shareholders as compared to our reporting.
Mr. Melville: Yes.
Mr. Ianno: That's fine.
The Vice-Chairman: Mr. Bélanger.
Mr. Bélanger (Ottawa - Vanier): I have just a few quick questions.
In your discussions with your members, has venture capital entered into those discussions as it relates to small business financing?
Ms Sinclair: Yes, it has. There has been a question we've asked ourselves as to whether it would be useful for you to know how much venture capital is coming through the industry. It did strike us that the annual report, which is provided by the association of venture capital companies and which is capable of breaking out venture capital coming from the industry, would probably serve that purpose. So as we saw it, those data are already there and available.
Mr. Bélanger: So if it was there and already available, would you be prepared to include it?
Ms Sinclair: I would think we could.
Mr. Bélanger: Thank you.
You mentioned in your presentation, and I'm not sure I fully understood, that you were proposing to track those small business applicants who are not accepted, who are turned down. How do you propose to do that, if I may ask?
Ms Sinclair: Through the survey. This particular set of statistics is going to come through a survey of our customers. We will not have in our files a method of tracking people who no longer deal with us. But you can imagine if you survey a sample of small business people and you ask them the question....
Mr. Bélanger: What is it exactly you're proposing to track?
Ms Sinclair: We're proposing to track whether people who have been turned down at a bank ultimately receive credit either from another bank or from another lending institution.
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Mr. Discepola: How do you do that if all you're going to do is serve your own customers?
Ms Sinclair: We don't have every ``i'' dotted and ``t'' crossed yet. As we see it now, in this particular area we would not survey our own customers but would go out and get a sample of small business people generally. We would ask the question that way.
Mr. Bélanger: Has there been any discussion on having a level that is less than $500,000?
Ms Sinclair: Yes, there has.
Mr. Bélanger: Have you resolved that it's going to be at $500,000?
Ms Sinclair: No, we haven't resolved that it is going to be at $500,000. In my opening comments I indicated we would be prepared to produce breaks that are relevant below $500,000. We need to have the discussion about what is relevant below that level, but we would be prepared to do it.
Mr. Bélanger: You need to have the discussion with whom?
Ms Sinclair: We'd like to have it with yourselves and with other stakeholders, certainly with the officials in the Department of Finance. We'd like to seek their views, and I would imagine interest groups.
Mr. Bélanger: Finally, will these statistics be part of the annual audits?
Ms Sinclair: Would they be done by the shareholders' auditors? That's an interesting question. That had not been our intent, and of course to the extent that they are produced through surveys -
Mr. Bélanger: I understand that, but to the extent that they are produced from your own data -
Ms Sinclair: It would seem to me, and I would have to think through your question a little bit more carefully, that the only stats that could actually be subject to audit are the ones produced through the regulatory reports of the banks themselves.
Mr. Bélanger: The volume stats -
Ms Sinclair: At this point I would say the auditors do have a responsibility, in any event, relative to the integrity of those reporting systems.
Mr. Bélanger: So there's a likelihood that on the volume stats, at least, those would be subjected to -
Ms Sinclair: Again, some of the volume stats we will have to get through sampling and through surveys but -
Mr. Bélanger: How many you turn down -
Ms Sinclair: The ones that come through regulatory reports would be subject at an integrity level to an auditor's overview.
Mr. Bélanger: I would be curious to know how the survey portion of tracking will actually produce some legitimate data to analyse. I'm intrigued. It may be possible but I just need -
The Vice-Chairman: Certainly it could be the subject for this committee after we see the first set of statistics, to take a look at how you came about them.
Ms Sinclair: Just to remind you, a lot of data you see produced by Statistics Canada comes through survey. In fact, that is one of the options we're considering.
Mr. Ianno: My understanding is that this information is going to be hard data. The service side will be statistical and general, and that's fine, but this is going to be from an audited perspective, so in effect it is real numbers we're getting all the way through the system. They may not have to be audited, but as long as they are standing by their numbers, correct?
Ms Sinclair: Our objective is to have those data pass the Bank of Canada's test for getting into the Bank of Canada review.
Mr. Ianno: I just wanted to make sure there was a division between the two samplings.
The Vice-Chairman: I'd like to thank the witness for a very thorough presentation. I feel as though we are halfway through our process. In any examination of a problem you first have to understand the dimensions of that problem and then act on it.
I believe the testimony you provided, as to what you and your members are going to do, is certainly going to give us the ability to quantify exactly what's taking place. I think that's a major hurdle that needed to be overcome. On behalf of the committee, I'm pleased that the Canadian Bankers Association has addressed that.
The second part of our work, of course, is to take those data and analyse them in terms of the needs of the small business community we represent.
The committee stands adjourned until 3:30 p.m. when we will begin the estimates.