EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 28, 1996

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[English]

The Vice-Chairman (Mr. Valeri): Pursuant to Standing Order 108(2), I would like to resume consideration of quarterly reviews of financing to small business.

We are beginning this afternoon's session with an introductory comment by Mr. Leckie.

Mr. John Leckie (Senior Vice-President, Business Banking Services, Toronto Dominion Bank; and Chairman, Independent Business Committee, Canadian Bankers Association): Thank you, Mr. Valeri.

I'm of course now accompanied by my colleagues from the other major banks. Before we move on to Mr. Harrison, who is going to provide you with some statistics, I'd like to bring you up to date since our meeting in November 1995.

The banks that are here today met with this committee at that time to identify the information we could provide on our activities in the small business market. During that meeting we identified a series of initiatives to provide a comprehensive set of data on the bank relationships with small and medium-sized business firms.

We're here today to present the results of some of those initiatives and to update you on the status of projects that are still in development.

Our first initiative is, of course, the survey of small and medium-sized firms that was conducted by Thompson Lightstone this morning. I won't talk any more about the survey right now, except to tell you that we will be repeating the study again next year. This will allow us to continue to increase our understanding of our business customers.

The second initiative we have now completed is our quarterly business credit statistics. For the past year, the Canadian Bankers Association has been reporting quarterly credit statistics on the banks' business credit portfolios. In consultation with this committee, these statistics have evolved into the most comprehensive set of data available on lending to SMEs. For today's meeting we have provided you with a copy of the business credit statistics for the fourth quarter of 1995, the most recent data we have.

Further to commitments made last November, we have begun to report the statistics at authorization thresholds of under $25,000 and at three additional regional break-outs. As a result, the data are now broken out into eight regions, 17 industry classifications and eight authorization bands. In addition, we are pleased to announce that the Hongkong Bank of Canada has now joined this initiative and will be reporting its credit statistics on a quarterly basis.

The third project we would like to report on is the breakdown of the quarterly credit statistics to show the distribution between operating loans and term loans. This operating term distribution has been provided for the September and December 1995 statistics.

These data are currently available for five of the seven banks that are here today. Due to systems design, the National Bank of Canada and the Hongkong Bank of Canada are not yet able to provide this breakdown. We will begin reporting the statistics for these two banks when they become available.

Commencing with the data for fiscal year-end 1995, the Canadian Bankers Association has also begun to report loan loss statistics on banks' business credit portfolios. Loan loss statistics for fiscal year-end October 31, 1995 have been provided to you in advance of this meeting. Tom Harrison will provide further explanation in a few minutes.

In addition to the projects I've just described, there are two more important initiatives currently in development. First, we are all working to collect data on new credit connections. Over the next year the banks at this table will start to produce quarterly statistics on the number of new credit connections made in each reporting quarter. These statistics will include information on the employment level, sales level, and age of the business that receives new financing.

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We are also in the process of collecting data on credit to knowledge-based business, KBIs. Early in the year we established a special working group of bank representatives and asked them to identify knowledge-based firms using SIC codes for the purpose of reporting lending to this sector. Working closely with Industry Canada, our working group has identified a list of KBI-intensive SIC codes that can be used to provide an indication of lending to high-growth, knowledge-intensive firms.

The banking industry is awaiting Industry Canada's final approval of the proposed strategy that we understand is now being drafted. Once approval is received, we will begin reporting quarterly statistics on credit extended to the identified number of firms.

We understand we are presenting you with a great deal of information today. As we continue with this initiative, even more information will become available. There is an opportunity this afternoon for you to ask us questions about the projects or the results. However, we expect this information will form the basis of an ongoing dialogue between government, small business and the banking industry on how we can continue to improve our service to these important customers.

I'll now turn the floor over to Tom Harrison, who will speak for a few moments on loan loss statistics.

Mr. Tom Harrison (General Manager, Risk Management Division, Canadian Imperial Bank of Commerce; and Representative, Business Credit Advisory Group, Canadian Bankers Association): Good afternoon. As John has mentioned, the Canadian Bankers Association has begun to report loan loss statistics on the business credit portfolios of the participating banks. The first report, which covers the year 1995, has already been provided to you. Future reports will be completed annually, following the banks' fiscal year-end, which falls on October 31.

As discussed with the committee last year, loan loss data is most meaningful as reported on an annual basis at the end of the banks' fiscal year, because this is the same time the banks do an annual review of their loan losses.

At this time I would like to take a few minutes to explain to you how these statistics have been calculated and what they represent. The loan loss report is a summary of specific provisions. In the case of this report, it's all of the specific provisions that have been taken against the Canadian business loan portfolios of the participating banks in 1995. This amount totalled almost $1.2 billion.

A specific provision is an estimate of the total loss that will be incurred on a particular loan. It is charged against a bank's income in the year it is taken and has the effect of reducing the outstanding amount of the loan to its net realizable value. Provisioning is only done for loans that are in default and only when full repayment is unlikely to occur.

I'll give you a quick example to illustrate this point. Let's say we have a loan for $250,000. After reviewing the loan, we realize the security is only worth $100,000. A specific provision would then be taken for the balance; that is, $150,000. The bank's income would be reduced by this $150,000 in the year the provision was taken, and the loan would now be reported on the bank's balance sheet at the reduced amount of $100,000.

This type of review is done every year-end for all business loans in default. The sum of all these specific provisions, plus any specific provisions taken against other loan portfolios, and any general provisions the bank may take, will equal the loss experience that will be reported by the bank as part of the year-end results. As a matter of interest, the $1.2 billion we refer to here represents 42% of the total loan losses experienced by the banks in 1995.

I would also like to make a few comments on the format of the report that has been provided to you. The information has been presented in much the same manner as the business credit statistics you receive at the end of each calendar quarter. That is, the specific provisions have been broken out firstly by geography into five regions and then by industry into 15 groups. In each of these cases the results have then been further divided by loan authorization levels.

For each of these authorization levels, we've included four columns of information: the specific provisions that have taken place during 1995; the number of customers involved with these provisions; the total outstanding loan balances as at the end of September; and finally, the loss ratio, which expresses provisions as a percentage of outstandings.

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This last ratio is an effective means of comparing the relative performance of different long portfolios. As an example, a loss ratio of 1.3% means that the banks have established provisions totalling $1.30 per every $100 of outstanding loans in that particular sector.

Unfortunately, the data collection process for 1995 loan losses had already begun when the banks agreed with the committee to report statistics using additional regional breakdowns and an additional dollar break at the $25,000 authorization level. As a result, the 1995 statistics do not include these additional categories. However, commencing with the loan loss report for the current year, we will report these categories to the extent that they do not violate the confidentiality rules.

On the topic of confidentiality, there were only a few instances where the data could not be reported for 1995. You will note on the regional schedule that a couple of provinces had to be blanked out in the $500,000 to $1 million range. On the industry schedule, a couple of the sectors and dollar bands had to be combined. These represent instances where there were fewer than 13 observations per specific industry or region.

As well, it is worth mentioning that it was not possible to release loan loss data for individual banks in 1995. This was due to the small sample size at each bank; it would have resulted in a number of violations of client confidentiality.

As a final comment, because there is only one year's data available for loan losses, any comparisons or conclusions regarding trends would be highly speculative at this time.

If you have any questions on the loan loss provisioning process, or the contents of this report, I would be pleased to deal with them.

Thank you.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Harrison.

We'll begin with Mr. Leblanc.

[Translation]

Mr. Leblanc (Longueuil): On page 79 of the document you presented this morning the personal guarantees you require from small and medium-sized businesses are mentioned. I am trying to understand the table which is why I'm asking this question again this afternoon. According to it, only 5% of loans to small and medium-sized businesses are guaranteed by personal assets. Have I got this right?

[English]

Mr. Leckie: We have Ian Lightstone here to answer that question in a technical sense, and then we might brush it up in a practical sense.

Mr. Ian M. Lightstone (Director, Thompson Lightstone and Company Limited): I think it's important to understand how the question was asked of these individuals. This chart relates to individuals who were asked whether or not they made a formal representation, or did provide formal documentation, or made a formal request for their loan request. If they said yes, we asked them what documentation was presented. So it wasn't a case of what was required; it's what these individuals felt they had presented with their loan request.

As we commented earlier, 5% said they had provided a personal statement of guarantee or a personal statement of their assets. So it's not a case of what they were specifically asked or demanded but what they said they presented as part of their formal request to the financial institution.

[Translation]

Mr. Leblanc: Then I will ask the bankers. On average, what is the percentage of personal guarantees that you require for small and medium business lending?

[English]

Mr. Leckie: We'll perhaps gather a comment around the table, but I would refer you to the account managers' sample. It probably is as good a number as any. The account managers feel it's roughly 50%.

I don't think we know. We've never gathered this data before. My intuition says, yes, that 50% probably makes sense.

Ms Catherine A. Taylor (Associate Vice-President, Women Entrepreneurs and Business Relationship Standards, Toronto Dominion Bank): I would like to ask Ian, perhaps, for some clarification.

When it says here that 5% provided personal statements, does that mean they also provided a personal guarantee, or they simply provided a personal statement?

Mr. Lightstone: These could be in duplication. They may have provided different documentation, a number of them, but this is either a personal statement or a personal guarantee. Again, it's how the respondent verbalized it. I'd have to check a little bit further in terms of specifically how they defined that.

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Ms Taylor: So a personal statement would simply list assets and liabilities, but it would not be a piece of security. A personal guarantee would be a piece of security, and we haven't segregated it.

[Translation]

Mr. Leblanc: In Quebec in particular a number of venture capital funds have been set up over the years. The Fonds de solidarité, the CNTU Fund, the SAGE Fund and regional funds. Most of these venture capital corporations available to small and medium-sized business are profitable.

Why is it that the banks didn't get involved in venture capital sooner? Do you intend to broaden your activities so as to help small and medium-sized businesses expand or get off the ground?

Mr. Paul Toriel (Senior Manager, Small and Medium Enterprises, Royal Bank of Canada): First I would point out that there's a great deal of venture capital available that is not being used, particularly in Quebec. Fifty per cent of venture capital is available in Quebec and the rest of Canada.

Our bank has a venture capital corporation with $150 million which has been made available for about the past two years. The money is used to make investments across Canada including of course Quebec.

Furthermore, we have struck up a series of alliances with regional agencies and in Quebec with the Federal office for regional development which is part of the federal government. Through these we offer term loans to expanding export businesses in Quebec on much more generous and flexible terms than they would normally get from the banks.

We have set aside $50 million for Quebec, over and above the patient capital available through the venture capital corporation.

Mr. Maurice Hudon (Senior Vice-President, Personal and Commercial Lending Services, Bank of Montreal): If I may, Mr. Leblanc, I will speak on behalf of the Bank of Montreal. We also have a program that provides capital to businesses which otherwise would not be able to obtain backing. It was set up early this year and is intended for small and medium-size business. We are looking at investments in the $500,000 range, and sometimes as low as $100,000, for businesses that need capital that won't add to their debt load and offered on terms not usually available from the banks.

I think you have made a very good point. Obviously, the Bank of Montreal, or the banking sector as a whole, must offer new types of financing to business. We have already begun to do so. We are pleased to announce that we have already invested $120 million in our small and medium-sized business program across Canada.

Mr. Tom Cormier (Senior Manager, Corporate Account Management, National Bank of Canada): Let me tell you what we do at the National Bank, Mr. Leblanc. We are involved in nine regional investment programs as well as four other capital investment programs. We too will also be participating in the federal program very soon. We are talking with other levels of government about establishing venture capital investment programs.

Mr. Leblanc: I know that the National Bank is participating in regional funds with other financial institutions and sometimes with private capital. Why haven't the banks done this on their own? Do you intend to provide such services yourself?

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When small businesses need funding they have to go through a fund, which requires a lot of effort because they must then deal with two or three financial institutions. Couldn't the banks provide this funding themselves, perhaps as a specialized service?

Mr. Toriel: Perhaps I didn't make myself clear, but at the Royal Bank we do have a specialized service, the Royal Bank Capital Corporation which makes such investments on behalf of the bank. The $150 million that I mentioned earlier is a part of the bank budget.

Now, of course, over and above that we have a $300 million fund from which we make loans ourselves. These are programs which we have set up together with federal agencies, but we are the ones who contracted the loans, nobody else. It is our money.

[English]

The Vice-Chairman (Mr. Valeri): You still have a few minutes, Mr. Leblanc.

[Translation]

Mr. Leblanc: Do you think that the federal government's programs for small businesses are adequate? Do they meet the needs of small businesses and are you satisfied with the way the federal government works with financial institutions?

[English]

Mr. Leckie: The small business loans program - I wish I could quote you the numbers, but I believe they have almost doubled since the parameters for SBLAs were changed in about 1993. The number of branches we have that are now able to provide small business loans to our customers has increased because of that program.

I think it's a prudent approach to small business lending. I went to a seminar that Industry Canada set up back in January. If you look at the U.K. arrangements similar to the SBLA program, or the one in the U.S., the write-offs they encounter are enormous - something like 40% in the U.K. and 20% in the U.S. I believe the claims for SBLA are running about 5%, give or take a bit. I think it's a slightly higher risk level that allows the banks to work in conjunction with government to provide - I wouldn't call it venture capital, but it's a little further than a normal low-risk loan. The portfolio is growing and I think it's an attractive government program.

The Vice-Chairman (Mr. Valeri): Mr. Shaughnessy has something to add.

Mr. Kelly Shaughnessy (Senior Vice-President, Small Business Banking, Canadian Imperial Bank of Commerce): We have noticed that agencies of the federal government, whether the Business Development Bank of Canada or a western economic development fund or something of that nature, are much more willing today to work in partnership with the banks as opposed to working alone, and I think that is having the effect of getting much more funding out to small and medium-sized businesses in this country. It's a partnership and I think this committee has had a lot to do with that type of partnership. These are the types of things that we've been talking about with this committee - to work in partnership with the government and the banking industry - and I think that partnership is beginning to pay dividends to small and medium-sized businesses in this country.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Shaughnessy.

Mr. Schmidt.

Mr. Schmidt (Okanagan Centre): Thank you, Mr. Chairman.

I have a couple of questions. We'll start at the beginning of the report on page iii, which deals with the highlights. In terms of percent changes of one quarter over the previous quarter, if we look at the top of 1995, the authorization between zero and $499,999 - there are two numbers there. Quarter 4 with footnote 2, and another one with 3. Quarter 4 with the 2 has an increase over quarter 1 of 4.1%, and when we go to quarter 4, sub 3, it's a 7.2% increase. The footnote on 2 suggests that is the fourth quarter statistic excluding the Hongkong Bank, and the next one includes the Hongkong Bank. Is it correct to interpret that as meaning there's roughly a 2.9% increase due to the Hongkong Bank's activity alone?

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Mr. Harrison: Yes, that's a correct interpretation. Because Q4 was the first time the Hongkong Bank was included in the statistics, we broke it out with their results and without their results.

Mr. Schmidt: The other numbers include all the other banks.

Mr. Harrison: Q1 to Q3, plus the Q4 with the small 2...those are all the other banks excluding the Hongkong. The only number that has the Hongkong in it is the Q4 with the small 3.

Mr. Schmidt: Oh, I'm sorry. The others are all excluding the Hongkong. Thanks for the clarification. That helps.

My next question, Mr. Chairman, has to do with the SBLA and other government-guaranteed loans. In your loan loss provisions, what is the relationship between the loan loss provision and a government guarantee for a loan? Let's take your $250,000 loan, to use the same example we had before. After analysing the thing it came out to a value of $100,000, with a loan loss provision of $150,000.

If in that $250,000 loan there was a guarantee by the government of, say, $90,000, does it figure in the $150,000, or where does it figure?

Mr. Harrison: It would be in the $100,000, which is the realizable value to the bank.

Mr. Schmidt: So, in other words, the real value of that industry could be $100,000, with $90,000 guaranteed...it would be in the $100,000. That's very interesting. Thank you very much.

The other question has to do with the authorization that goes all the way through here. When you have the authorization and the outstanding, it seems to me, at least reading through the tables quickly - and I wish, Mr. Chairman, just for the record, that next time we get this piece of paper a little bit earlier than the day we have the actual presentation. To go through these hundreds of pages of stuff is almost insurmountable.

The Vice-Chairman (Mr. Valeri): Mr. Schmidt, thank you for making that comment.

Mr. Schmidt: I think it's grossly unfair to think we can ask decent questions about this mammoth bit of information. Nevertheless, we'll try our best.

On the authorizations and the outstandings, the ratio between what is authorized and outstanding runs somewhere between .63 and .78, if I read my numbers correctly. It runs pretty well all the way through, whether it's the regions or whether it's Canada as a whole. This is complete as of December 1, 1995. Is this the plan? Will there always be roughly about 75% or less of the authorization actually working and applied in the various businesses out there in the world of economics?

Mr. Leckie: I don't think there is a plan, Mr. Schmidt.

Mr. Schmidt: It's so very consistent. That's why I asked.

Mr. Leckie: From our standpoint, to write up a credit is the same amount of work whether it's all drawn or none of it is drawn or outstanding. In the end, it's the same exposure, because it can be drawn any day. There isn't really a plan in that regard, at least not in our bank.

Ms Taylor: If I may, going back to my experience in the branches, if a customer says they need an operating credit, what we do is try to figure out what is the maximum we'd feel comfortable with if the whole credit was drawn. We set it at that maximum. It doesn't mean normally they would use that much.

Also keep in mind this is month-end data, so during the month the lines conceivably could have been drawn to a higher level and then paid down before the end of the month.

The Vice-Chairman (Mr. Valeri): The Hongkong Bank would like to comment.

Mr. William MacLaney (Vice-President, Credit, Hongkong Bank of Canada): And add to this that in most cases when you have an operating line of credit you do allow a degree of buffer in the number so that the client isn't coming back to you for minor overages. If a client really needs $500,000, it would be quite normal to authorize $600,000 or $650,000, if the client is creditworthy, so that you're not facing a lot of dialogue for credit from time to time.

For a good operating business, a buffer is quite acceptable, and 30% would not be unusual.

Mr. Shaughnessy: I tend to think, Mr. Schmidt, it also depends on the type of facility too. If it is a term loan facility, obviously the authorization and the outstanding in most cases will be equal.

Mr. Schmidt: I would think so.

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Mr. Shaughnessy: If it's an operating facility, the small business person should be arranging an operating loan facility with their banker for the maximum amount that the business could project utilizing during the course of a twelve-month period. If it's an agricultural client, for instance, at this point in time, in December, that line of credit is probably down to its lowest point, whereas at this time of year, in May-June, it's probably at the peak.

Mr. Schmidt: I appreciate the answers.

Is it correct then to suggest that access to capital by a small business is different when it's an operating loan or when it's a term loan. A term loan with the authorization and the outstanding would be pretty well the same. With an operating loan, if a business applies for a $100,000 loan, there would roughly be, under the blotter or something like that, an additional $30,000 written down as the authorization.

Mr. Shaughnessy: I would hope that the amount that is under the blotter as such is the amount that is communicated to the client and in the loan agreement with the client. I think the point is that if the business projects on a likely scenario that they'll need $100,000, they'll probably ask for $130,000 to cover off that worst-case scenario, and they haven't been placed in a situation of deciding whether to pay cheques or not.

I don't think it would be under the blotter, but it would be asking for an amount of credit, or the bank agreeing to give you an amount of credit, that will cover the worst-case scenario in your cashflow.

Mr. Schmidt: Is that the way the loan applications are worked out with the applicant?

Mr. Shaughnessy: That is most certainly the way we encourage our clients to apply for their loans. Don't go in for an amount that's very low because you think that's all you can get. Go in for the amount you think you need because that gets rid of all the surprises. The last thing in the world you want as a small business person is to be faced with a surprise and having to negotiate with your bank at the 11th hour whether or not you're going to be paying cheques.

I think the small business person is well advised - and I've said this publicly - to ask for the amount that he or she needs as opposed to the amount that he or she thinks a bank will only be giving in that week, or something of that nature.

Mr. Schmidt: This sounds very rational and very reasonable. Does this fit into the presentation we had earlier today, that this means 85% or better of the applicants are treated in this way? Is this the same across the industry, that in fact 85% to 87% of all applicants are treated that way and granted the application they're looking for?

Ms Anne Sutherland (Vice-President, Small and Medium Enterprises, Royal Bank of Canada): By and large, all of the applications that the Royal Bank gets across the country are treated in that manner.

However, that being said, as pointed out this morning, there is a percentage of applicants whose loans do not get approved in full. You will remember that, but for the vast majority, absolutely. It's to any business owner's best interest, as Mr. Shaughnessy has pointed out, to make sure that the peaks and valleys of cashflow requirements over the course of the year are covered in their application.

Mr. Dieter W. Jentsch (Senior Vice-President, Canadian Commercial Banking, Bank of Nova Scotia): I just want to underscore what the Royal Bank and the Bank of Commerce have said to Mr. Schmidt.

Certainly at the Bank of Nova Scotia we go even one step further. We will make sure that we have communication and that the customer really understands their needs as they go forward. Ten percent of the small business term loan applied for is provided automatically through an overdraft capability. Even if customers don't fully understand what their needs are, we'll try to provide the facilities so that they're aware of them.

The thought process underscores all of our respective organizations: try to really understand what the customer may need, ensure that the customer asks for it at the outset, and provide those requirements in the most simplistic manner possible.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Schmidt.

Mr. Ianno.

Mr. Ianno (Trinity - Spadina): Thank you very much for coming once again. It's becoming a regular occurrence after two and a half years.

The Vice-Chairman (Mr. Valeri): Every quarter.

Mr. Ianno: Unfortunately, I guess we all know where we stand. The numbers, in terms of the pie, have not been increasing to small business. In fact, they've been decreasing. The reason I have been actively involved here for the last two and a half years is so that I can try to effect change and increase the amount of money in the hands of small business, which is, in effect, as we all know, the engine of job creation in this country.

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At first when I was preparing my chart, as some of you have called it, in terms of the amount of money lent to small business compared with the overall loan portfolio, the goal I was hoping would be achieved in due course over a number of years was 33%. The industry was at 26%. Now it's just above 25%.

It's very nice to have this morning's presentation on how you micro-manage and deal with your people. I think that's fantastic. But I don't want to get into micro-managing. I want it to be macro. I want it to be so that, in effect, after a four- or five-year stint here there is more money in the hands of small business. Unfortunately, I'm not seeing that take place.

I know I've spoken to many of you on an individual basis. I know sometimes it's a bit difficult, with the changes overall in terms of businesses, large or small, and it takes time to get to that point. But when I see quarter after quarter, from September 30, 1995, to December 31, 1995, that SMEs' authorization of $1 million outstanding is actually decreased by $97 million as compared with large corporation loans, which increased by close to $7 billion, it doesn't make me feel good. I don't know where I can take any credit in moving things. Yes, the ombudsman, and yes, a few other items you're working hard on, working in partnership with the Federal Business Development Bank, and the SBLA. It's great that the government is guaranteeing the small business loan. It's important.

But how are we going to change this? How are we going to find some effective change? We know the Bank of Montreal is at roughly 32.5% in terms of their small business loans compared with their overall loans. So that's good. I'm not going to complain, even if it goes up or down a bit. The Royal Bank has stayed relatively the same, at 27%. I know it takes time, especially if you're a larger bank, but we'd like to see more growth. Then we get to the CIBC. It went from 24.68% to 22.91%. It's not in the right direction. Scotiabank went from 20.06% to 20.41%. At least it's in the right direction, even though it's abysmal in terms of the amount to small business. Then the TD went from 23.09% down to 22.25%.

I don't know what to attribute this to. I guess when I look at your loan loss ratios I see every time, in I guess the last two and a half years, that the loan loss ratio for small business is equal to or better than the loan loss ratio to large business. So it's not because the small businesses are riskier. Yes, it might cost a little bit more to administer, but on the other side of the coin, as some banks have found, you get from the small business sector the RRSPs, the mortgages, lots of fees. So there are some merits to it.

I guess I'm just at a loss. I don't know how we're going to deal with this. I'd certainly like to see if the banks have anything to say on how we're going to improve and to actually go towards increasing the capital for small business.

Mr. Leckie: I'll begin and then ask some of my colleagues to jump in here with me.

The statistics you quote are undoubtedly right. I haven't worked them out. In our own case, we've had a lot of growth in small business in terms of the number of customers, in terms of the number of borrowers. What I'm finding is that they just aren't borrowing to any great degree. We're setting up the credit, and we have overdraft protection for them now. We had about 300 branches in Canada available to service small business. By the end of the year, we'll have all 943 branches open, and we're finding that more and more borrowers are streaming in.

I agree, though, that they're not borrowing more dollars, and I really don't know the answer to that. We are making it available to them, though. That is one point.

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Mr. Ianno: What you're saying, then, basically, is what's been said the last two and a half years, that there is no credit crunch, that most of our constituents that have small businesses have no difficulties getting access to capital as long as they're viable, that their lines of credit have not been cut or reduced. Is that what we're still sticking with for two and a half years?

Mr. Leckie: I think that's basically what the task force came up with as well on the green book. Carleton University professors and so on agreed to the same thing. It did point out that there were some shortfalls, and that's what we're trying to correct by opening up more of our branches.

I have two more points. First of all, the ratio of the small business loans relative to the rest of the portfolio is an irrelevant calculation. I'd like to try to convince you of that. We could theoretically sell off the whole portfolio. There'd be nothing left but small business. We'd then have 100% in small business, if you wanted to use that ratio. That's what many small banks in, for example, the United States do, because they don't have the capital to carry it. We have no shortage of capital in the bank.

We'd be delighted - I would be, running a unit - to have more borrowings. We'd make more money.

Mr. Ianno: Mr. Leckie, basically what you're saying is that this committee is wasting its time, because in effect there is no credit crunch. Small business out there has all of the money available through the banks. All they have to do is qualify for it. So what we're doing here is just seeing how you operate. Is that what my interpretation is?

Mr. Leckie: No, I'm not saying that at all. We've tabled today what is I think an outstanding study by Thompson Lightstone, which wouldn't have happened were it not for this committee. There's a lot of information in here that we can all use. One of the things we need to do - speaking on behalf of Toronto Dominion - is to communicate better with our clients.

Mr. Ianno: Mr. Leckie, what you're saying, then, is that between the Bank of Montreal, which is at 33%, and your bank, which is at roughly 22%...it's the market that the Bank of Montreal deals in, and they are able to find small businesses that need money, but you are satisfying all of your customers.

Mr. Leckie: No, I don't even think it's that simple. It's a function of what's in the numerator and the denominator. We may have a lot of corporate loans that we decide to hold in other parts of our global activities, and therefore as a percentage this comes out for us at 22%. We have no shortage of capital.

Mr. Ianno: What does that have to do with Canada? Let's deal with Canada instead of using the foreign term, so that we change the denominator.

Mr. Jentsch: I'd like to talk to two issues here. One is that the hon. member Mr. Ianno is saying that the Bank of Nova Scotia's record indicates it's not doing very much for small business. I'd like to talk to that, because it's on record and it's inaccurate. I'd also like to talk -

Mr. Ianno: Are my numbers inaccurate or is it my interpretation?

Mr. Jentsch: - about the activity we're undertaking. I want to be allowed the latitude,Mr. Chairman, to speak to that. But I also want to talk to the ratios that get brought forward, and the commonly held one of one third, or 33%.

I also agree with the Toronto Dominion Bank that it doesn't really represent an accurate representation of the customer profile of the Bank of Nova Scotia. Mr. Ianno is accurate when he says 20.4% of outstandings are in the $1-million-and-under category as of December 31. In that he's correct.

But allow me, Mr. Chairman, to discuss the issue in terms of customers and the influence of the large corporate base on outstandings versus authorization it has on that ratio. Allow me some latitude to discuss some of the numbers, which are publicly available and are calculated from these numbers.

First, 96.3% of the Bank of Nova Scotia's customers borrow under $1 million versus 94.7% for the industry. That's a difference of 1.6%. The difference becomes even more pronounced as you move down the authorization tiers and each becomes more of the smaller segment. Now, 88.7% of our customers borrow less than $250,000, versus 84.8% for the industry, a difference of 3.9%.

Mr. Ianno: Aside from the numbers -

Mr. Jentsch: Allow me to continue.

Mr. Ianno: No, no - I have a limit of only ten minutes and this is not going in the direction in which I need to go.

Mr. Jentsch: Mr. Chairman, I think it's an important enough point -

Mr. Ianno: What we have -

The Vice-Chairman (Mr. Valeri): Order, gentlemen. We're here to have a dialogue, not a shouting match.

Mr. Jentsch: Allow me to conclude on this point.

The Vice-Chairman (Mr. Valeri): If you would just make one final point and conclude,Mr. Ianno has a couple of minutes left.

Mr. Jentsch: Okay.

We've certainly shown that, in terms of the small-end customers our profile represents, we exceed the industry in terms of authorizations and customers. On the large corporate customers, in fact, our authorizations are 49% larger than the industry, and outstandings are 73% larger than the industry. It is those disparities on the large corporate end that influence the ratio.

So our customer profile in terms of actual customers is remarkably similar among the banks. But it is the large corporate end, which is the denominator in this equation, that tends to skew the results.

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Mr. Ianno: When I speak to Bank of Nova Scotia account managers and business managers all over, I try to do it within reason because I'm sensitive to the low numbers of the Bank of Nova Scotia and the TD. They tell me that they wish they could lend more, but somehow when it goes to head office, a lot of good business opportunities are not worked on or are not allowed because of head office's policy.

Mr. Jentsch: That's an inaccurate statement given by the survey -

Mr. Ianno: The account managers, I gather -

Mr. Jentsch: Given the results of this survey, it shows that we approve nine out of ten applications, and in fact that we as a bank are the leading lender in the small business loan program.

Mr. Ianno: That's the government-guaranteed one, is it?

Mr. Jentsch: Yes, and we increased our overall lending to small businesses under $500,000 in 1995 by 9.2% versus 4% for the industry.

Mr. Ianno: What was the percentage of SBLA loans in that?

Mr. Jentsch: I don't have that particular number.

Mr. Ianno: I see. Thank you.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Ianno.

That ends the first round at ten minutes. We have Mr. Leblanc at five minutes.

[Translation]

Mr. Leblanc: Let me ask you this. I don't want to point the finger at the banks, of course, but in the 1970s and perhaps even earlier, it became clear that federal government intervention in the economy had created high inflation rates. Over the 1980s, as a result, interest rates rose at an alarming rate up to 21 per cent. The same thing occurred later on between 1984 and 1990; the federal government created inflation and then had to raise interest rates.

As you know full well, many small and medium-sized businesses went bankrupt as a result. In 1981 and 1982 in particular the banks were forced to call in loans which caused many small and medium-size businesses to go under and led to economic and social hardship.

You weren't responsible for this economic and social upheaval. In many instances lending institutions had applied reasonable basic criteria at the time. But when interest rates began to spiral, these criteria no longer applied and then the banks had no choice but to call in their loans.

I know that you are now much more cautious and tolerant, but I imagine that the same sort of situation could happen again. I don't know whether the banks have given thought to these phenomena of change, inflation, recession and interest rates etc. in order to plan more effectively so that fewer businesses go under and less economic and social disruption is caused.

It's a vicious circle since you face this problem because new businesses need financing to start up. In my view, this is a fundamental problem. I know that it's mainly the federal government's fault, and not yours. I don't mean to sound partisan, but this is nonetheless the case. Since 1970, the federal government has created inflation and then increased interest rates to slow down economic growth which in turn leads to bankruptcies. I've been in politics for over twelve years and I have seen this happen. It is tragic for our society.

I was wondering whether the banks have people who consider these issues so that our small and medium-sized businesses do not have to face the same economic,social and family upheavals again. I don't know whether you have given any thoughts to this, but it seems to me that you should.

[English]

Mr. Leckie: Unless somebody wants to jump in first, I'll take a shot at it. I'm just going to say very briefly that we are much more sensitized, in this cycle, to exactly what you're talking about than we ever have been in previous cycles within my own organization.

We are undoubtedly, on average, pushing towards the end of the growth cycle. We talk a lot internally about trying to make sure that we don't load up small business people - or any kind of business for that matter - with a lot of debt they might not be able to service. If you overextend credit, it could be to the detriment of a lot of businesses. Trying to find the right level of debt for a company that will take it through the whole cycle is a fine balance. There isn't a think tank per se. We are very sensitive to that issue and our senior lenders in the bank talk a lot about it. We're always trying to find the right balance.

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Does anybody else have a comment?

The Vice-Chairman (Mr. Valeri): Mr. Hudon, from the Bank of Montreal.

[Translation]

Mr. Hudon: Mr. Leblanc, at the Bank of Montreal, we have the Institute for Learning where our employees are trained.

We also have the Institute for Small Business which is independent from our operations and where we conduct research on issues of interest both to the banking sector and to the public and the government as well as small business.

One of our first studies made just recently was on entrepreneurship. The study looked at helping people understand how to succeed in business.

To answer your question certain banks such as ours have begun to do research into helping small businesses succeed.

I wouldn't say that our research focuses on the economic cycles that you have described, but that the banking sector does acknowledge its responsibility in helping small businesses succeed.

[English]

The Vice-Chairman (Mr. Valeri): Mr. Jentsch, from the Bank of Nova Scotia.

Mr. Jentsch: The question posed by the honourable Mr. Leblanc is a very thoughtful one and really takes into account some of the history that's happened and how we go forward.

To underscore the points of the Toronto Dominion Bank and the Bank of Montreal, we've all certainly learned a lot from what happened in the last couple of years, both as lenders and as customers. The customers have recognized the need to prepare themselves for unforeseen challenges and we, as bankers, have recognized that we need to train ourselves better in order to better understand businesses and economic cycles and how to communicate so we better understand our customers.

I think the whole interaction in the customer-bank relationship has improved such that we can foresee some of these challenges that come towards us as we sit through various conferences and seminars that we as an organization hold - like every other organization - but we certainly recognize that we learned there are some things we shouldn't do again. I think your point is a very good one.

The Vice-Chairman (Mr. Valeri): A final comment from Mr. Coffey.

Mr. Charles S. Coffey (Executive Vice-President, Business Banking, Royal Bank of Canada): Thank you, Mr. Chairman.

Mr. Leblanc, I must disagree with one point you made. You suggested or stated that the federal government created inflation. I don't think there's any evidence, at least from my perspective, that the federal government or any federal government has created inflation.

Secondly, what we need and what small business needs is economic stability. With respect, economic stability comes through political stability.

Voices: Hear, hear!

Mr. Coffey: Thank you, Mr. Chairman.

The Vice-Chairman (Mr. Valeri): Mr. Leblanc, that's your five minutes. You had quite a lengthy preamble, that's the problem.

A voice: He can't resist that.

Some hon. members: Oh, oh!

The Vice-Chairman (Mr. Valeri): Can we get you on the next round? I'm sure you'll want to respond.

[Translation]

Mr. Leblanc: Everybody knows that Canada's problems are not political but rather economic. The federal government has overspent and created inflation. This is a well known fact.

Let's be honest about it, sir. When the federal government borrowed $35 to $40 billion from the United States and elsewhere to inject into the economy, it fuelled inflation. It created an artificial economy. This led to high inflation.

The Vice-Chair (Mr. Valeri): Merci, Mr. Leblanc.

Mr. Leblanc: So it is responsible for inflation. It caused high interest rates. Yes, it created inflation and you know this full well.

The Vice-Chair (Mr. Valeri): Merci, Mr. Leblanc. Mr. Lastewka.

[English]

Mr. Lastewka (St. Catharines): Thank you Mr. Chairman. I'd like to go forward if we could.

It's no surprise that one of the reasons the industry subcommittee continues to want to discuss our future with the banks is that it gets down to the bottom line, which is more jobs for Canadians.

A voice: That's right.

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Mr. Lastewka: We really want to get more clients. I tried as best I could this morning to get an answer from our consultants on the best thrust forward as a result of all that information and data, and failed.

I hope some of you might share with me what you got out of that study, out of the detailed data - which was excellent as far as I was concerned - on how we can grow more clients. I understand Mr. Ianno's concern and his debate, and I do the same thing with him that some of the banks do in discussing how we get more clients. Has the study revealed a new thrust or a different thrust that you would work on? That's my number one question.

My number two question, which I want to repeat from this morning, is about the communication between the client and the account manager as seen in some of the charts. As our experience has shown when we deal with a case, when we really get into it there's a story from the client and there's another story from the banker.

Could we come up with a way to close that communication so that communication is not the problem and resolving the client's situation is the problem?

Mr. Coffey: Mr. Chairman, I'm going to ask Mr. Lightstone to indirectly answer your question this morning by asking Mr. Lightstone to tell me and my colleagues from the Royal Bank that if he is advising the Royal Bank, not the industry, to deal with these issues, what would he suggest we do?

We will take those recommendations and run with them, Mr. Lightstone.

Some hon. members: Oh, oh!

Mr. Ianno: His contract depends on it.

Mr. Lightstone: I don't know if I would direct this question and my answer specifically toMr. Coffey in terms of the Royal Bank. Again, I understand where you're coming from, sir.

As we pointed out in the report, I think there is certainly a need, a desire and a call from small business to see more flexibility from the banks. I'm sure this comes as no surprise. They're looking for that.

When we've talked about the drivers of satisfaction and what the small business owner is looking for, that commentary of being more flexible - of understanding - certainly comes through consistently. This is something I would certainly report to the banks: ensure that you're listening. I think they do. This study certainly says they're willing to listen, but I think the situation is that they should listen in terms of what the needs are and demonstrate that flexibility.

The other issue is that when you look at the information we've received, I think there is a communication gap at times. What the small business owner is aware of or not aware of and what he or she understands is, again, another important issue, the issue of working together and communicating.

In communication there's a role and a responsibility on the part of the banks to communicate and to do a better job of communicating what they have to offer, to do a better job of communicating the services and the lending available. Again, in terms of looking at the numbers here, when you see only a small percentage actually approaching the banks, that says there's something that's not being fully picked up from the business community. I think communication is an issue, as is willingness to listen.

I hope I have answered your question and Mr. Coffey's question better this afternoon. I think the flexibility, the communication and the listening to each other is probably what's coming out of this document and this study.

The Vice-Chairman (Mr. Valeri): Mr. Shaughnessy from the CIBC also wants to comment.

Mr. Shaughnessy: From looking at that survey we wanted to make three points.

First, we're satisfied with the loan approval rate for the CIBC. It's one of the higher loan approval rates. We're satisfied but we are not going to stop there. We're going to try to see what we can do to improve that rate even further and to get ourselves up to the number one point.

When we talk about customer satisfaction, if you look at the customer satisfaction statistics for the CIBC and isolate them, you see that the clients are very happy with the people they're dealing with. They're very happy with the branch personnel.

They're not as happy, though, sir - and I'll be the first to admit this - with some of the convenience banking. They're not as happy with the line-ups and things of that nature.

So how are we going to get more clients? We're going to have to make banking more convenient to our clients, and we have a number of initiatives under way to do that.

What I share with you, though, when I look at that chart, is a deep concern about what our account managers are saying are the reasons why a loan is declined and what the clients are hearing, or at least what the clients are saying they're hearing. There's a massive gap there.

In our service commitment to business we have a commitment to our clients to first communicate the reasons why a loan is declined, and second, to tell the client what can be done to mitigate those reasons so the client can perhaps seek financing or can obtain financing from the bank.

We're going to have to look at that. Maybe what we're doing is communicating that verbally. Maybe when we communicate things verbally we say one thing but somebody hears another thing or hears what they want to hear. We're probably going to have to look at the way we communicate. We're probably going to have to look at the way we communicate. Maybe we have to put it in writing - not in some legalistic form - and find a user-friendly, reader-friendly method of putting it in writing.

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So those are the three things we're taking away at a very high level on the survey.

Mr. Jentsch: The Bank of Nova Scotia also looked at the survey, and we're pleased with our loan acceptance in 1995 and our 5% decline rate. We believe we're offering the money where we need to offer it.

There are only two key areas where we believe, as an organization, we can continue to improve and can never end that pursuit of excellence. We really need to continue to underscore the importance of communication and fostering the opportunity to communicate at all levels. We need to recognize customer confidentiality, make the credit process easier, and simplify the terms so the customer can have an appreciation of what the terms mean.

Communication is absolutely crucial, and I can only again underscore what Mr. Lightstone said: it's very important. We're fostering that through various programs to have our lenders understand the importance of that as it translates into customer satisfaction.

It is also key to us to really understand our customers' businesses, how they function and how their needs change as their business cycles change. We believe that's very fundamentally a question of training - understanding the nuances of niche markets that tend to function in some areas. For example, the greenhouse industry in British Columbia works differently than the dairy industry in Ontario. It's all really comparing apples and oranges. Lenders need to be trained to understand that.

The onus is on our organization and the rest of the banking industry to train our lenders who deal in those specialized markets to understand the needs through those various industries and life cycles. In that regard, our training programs, typically to the small to medium-sized enterprises, have changed substantially over the last three or four years, recognizing that need. We'll continue to emphasize that because it is a very important need.

Mr. Lastewka: I have a question about when account managers change, and this issue has come up over and over again. The amount of overlap or understanding that is passed on from account manager to account manager continues to concern me because the client is not involved enough in that transfer. It is almost done in the office and then it goes out to the client. Could someone tell me about any programs or any initiatives you have to make sure the transfer of account manager to account manager is improved?

Mr. Leckie: We just had our line regional senior vice-presidents in from across the country and I can assure you that item was number one on the table. It's a serious issue with us. It also ties in automatically with communication.

I think what's going to help Toronto Dominion a lot is that as we open up our whole branch system to be able to provide loans to small business in over 900 branches instead of 300, the turnover issue will be mitigated significantly. Customers will be able to deal conveniently with their local branches versus being guided down the street to bigger units where there had historically been more turnover. We take it seriously and it ties in with communication. We're trying to deal with it.

Ms Sutherland: I just wanted to add, Mr. Lastewka, that we also try to improve the transition between account managers by making sure our clients know more than one person in the branch or in the business centre in which they're working. All of our senior managers are making sure the client knows more than one person, preferably the manger of the branch or the manager of the business centre, in addition to the account manager.

The other really important thing that was pointed out is the whole methodology of communication. I think - as further congratulations to this committee in working together to get this study done - this study points out unequivocally the very strong need for improved communications with our clients and with each other, as bankers, to make sure our clients are better served and the knowledge we have about our clients is passed on, so the service level does not deteriorate when somebody moves on.

The Vice-Chairman (Mr. Valeri): Thank you, Anne.

I have just one final comment from Ms Rozsa and then we have Mr. Mayfield.

Ms Marilyn Rozsa (Vice-President, Independent Business and Agriculture, Bank of Montreal): In line with what Anne has been saying about the Royal Bank, for the last four or five years we have been working on community banking, where a community would be made up of four or five branches. Within that community there would be a couple of account managers but they would book together as business teams. The team would include the account manager, the community manager and some of the commercial services people who are involved in those particular businesses within that local community.

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When that relationship is established, clients know they can contact any one of these people in order to get questions answered on their accounts. Therefore, if one individual in that team is moved to another job, there is some continuity in who clients will deal with for the rest of the relationship - somebody who already knows a lot about their businesses.

The Vice-Chairman (Mr. Valeri): Thank you.

Mr. Mayfield, please.

Mr. Mayfield (Cariboo - Chilcotin): Thank you, Mr. Chairman.

I'd like to pick up on your last point and perhaps just modify it a little bit.

I come from central British Columbia, which many people consider to be a rural area. It's an interesting part of the country in that there are some large corporations there such as mills, ranches and mines. At the same time, there are many small business people.

As I look at the history of the company, I read about and remember a couple of banks - I think of the Bank of Commerce and the Bank of Montreal - going into Williams Lake when it was a very small town. The managers were going around trying to talk people into taking their money out of the woodpile and putting it in the bank. That really was competition.

What we're finding now, though, particularly where there is a single branch of one bank in a small community and no competition with another bank, rather than increasing its share of the market the bank is pulling right out of the community.

In one community I'm thinking about, the word went out that the bank was not making enough, although it was not losing money. Even though some of the ranchers in the area took their accounts from other banks in larger centres and put them in the little community, after a period of time the bank said it wasn't making enough money and closed.

I'm wondering if there is a corporate mentality or thought process - to keep it on as positive a note as possible - that needs to be re-examined so the communities themselves understand that even though they are not competing in downtown Vancouver or Toronto, the banks do stand behind them. We're not talking about hard times; we're talking about relatively good times, although perhaps not as rich a time as that bank would have in a larger centre.

To suggest to people that they can drive 25 or 50 miles to do their banking really infuriates them. They won't go to the bank. They'll bring in a credit union or something like that to take its place.

I'm wondering what it would take to change that thought process to be more supportive of smaller communities. I'm not asking the banks to lose money. I'm asking them to perhaps not take as large a profit as they might in a larger centre and to bear in mind that the communities need the services banks provide. What would it take?

Mr. Shaughnessy: It's a very interesting question. You talk about rural communities in central B.C., but what about remote communities on the coast of Labrador, communities in the territories and places like that?

I don't want to sound futuristic, but when we talk to people in the bank about how banking is done today, 10 to 15 years ago most bankers never even had computers on their desks. I don't think there's a banker or parliamentarian in this country today who could operate without a computer.

I think you're going to see two things in the communities. First, those communities that can support a bank branch will continue to do so. But there are some communities out there that probably can't economically support bank branches, post offices or basic services such as government offices.

My vision of what banking will look like in those very remote communities 5 to 10 years down the road is that they'll probably be the leaders in electronic banking. It's funny that we think about electronic banking benefiting urban areas and things of that nature, but I think you will also find that the leaders - the people who will really use electronic banking capability at very high utilization levels - will be remote communities of that nature.

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The Royal Bank, the CIBC, and the Hongkong Bank have a pilot going on in Guelph with telephone banking. We're about to take off in Guelph with MONDEX cards. Literally, if that takes off, you'll be looking at a cashless society and things of that nature.

So you can see the banks would be able to serve the remote communities better and with electronic banking capabilities will also be able to serve the rural communities that probably can't support a bank today because of some of the costs involved today.

Mr. Mayfield: Kelly, you have a great way of foretelling my next question. It strikes me that as we talk about futuristic banking and using computers, San Francisco or New York is as available as Vancouver or Toronto from Clinton, British Columbia, which is the little community I'm talking about. I'm not talking about a remote community that was not providing a profitable business for the bank. I was quite clear about that.

Is this an area the banks and the bankers are actively planning for, that people in remote communities can have the same services, or relatively the same services, as the larger centres by use of a computer and a modem?

Mr. Shaughnessy: I can't speak for the other banks, but I can speak for this bank, and most certainly we view Canada, not San Francisco or the States, as our target market, especially in the retail and small business market. Canada is our market for retail and small business. We would like to be able to serve all Canadians, from coast to coast and in every community, at the CIBC, and one of the ways we will have to do that is by enhancing our electronic banking capability.

Mr. Hudon: With our bank, Mr. Mayfield, I think there are two issues here. There's no doubt the move towards using different channels that are indeed electronic and should provide for adequate serving of the needs is upon us, but we also have to be respectful and mindful of the transition period and how difficult that can be on some communities. We are not alone in this.

We have found some imaginative ways in making that transition. For example, we are working with Canada Post in putting a bank employee in a Canada Post office in Saskatchewan, providing banking services to a community that did not have a bank until very recently, and thank you very much, that's working out for us, to everyone's benefit. I think we have to understand that is the kind of imaginative solution we are going to have to bring in, particularly in environments where there are no financial institutions in the town.

On the phenomenon of having to compete without borders, with banks on the Internet inSan Francisco, that age is upon us, and I think it is in the interests of all Canadians for our industry to be able to provide those services so the consumers can choose the channel and the access means they find suit them best. I'm sure there are very few people around this table who aren't actively pursuing their ability to compete with the best of those.

Mr. McLaney: I could add, Mr. Mayfield, as a representative of the smallest of the 7 banks here - we have come from 8 branches to something like 112 now, but we'll never reach the level of branching the major banks have been at - that is going to be the lifeblood of the long-term success of our organization: alternative distribution systems to Canadians throughout. We, like our colleagues, are clearly going to be spending lots of time and effort on computerized and longer-term projects in this area, stealing ideas from our sister banks around the world that have been able to do that successfully, in Asia or the U.K. or wherever. An era is certainly coming in that regard, and it is an area where some of the smaller banks, either here or not here today, can certainly contribute to going forward.

The Vice-Chairman (Mr. Valeri): Mr. Bodnar.

Mr. Bodnar (Saskatoon - Dundurn): Thank you, Mr. Chairman.

It's really going to come down to one question I have. This morning we received information on loan approvals and factors that are considered, and in particular matters such as cashflow being an important factor, the collateral that's available, the experience of the applicants in loans. Of course these are long-time factors that have been considered for many years by banks.

Within the last two years we had a caucus committee dealing with western diversification. This committee looked into western diversification and the needs of small business, in particular in western Canada. The theme that came out during this hearing was that there is a gap in financing, primarily for small businesses and new businesses that are starting up. The gap is in the area from the conceptual stage to the commercialization of the product. Generally, that's where western diversification and hopefully some of the other federal lending agencies came in. The businesses said that banks just wouldn't lend in those areas because of the risk involved.

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First of all, I'd like to know if you agree with that. I'm not blaming you if you say yes, the risk is high and it's difficult to lend when people don't have experience. If all they have is an idea, or sometimes a patent, and it's pre-commercialization, it may take another six months or a year before it's commercialized.

If you do agree with me that maybe the banks have been a bit reluctant to lend in those areas, do you feel the regional or federal agencies should still be involved in those particular areas in the lending of money? Should the banks more aggressively pursue those areas or should there be a partnering between the banks and the government, as was done in certain areas such as WD with the Royal Bank in Saskatchewan and some of the other banks involved? What are the alternatives? What should be adopted?

Ms Sutherland: Mr. Bodnar, we believe very strongly that as a bank, our ability to serve growth businesses and businesses that are supporting the new economy is a responsibility we have. We feel it's a market that's growing. We also believe that we, as a bank and as an industry, as demonstrated by the survey, need to learn to be more flexible and identify opportunities and we need to learn how to finance the types of companies you're talking about.

That being said, we believe very strongly in alliances, not only with governments but with other private sector partners, that make sure we serve the needs of those growing companies more effectively at the pre-commercialization stage, at the R and D phase, and so forth.

You're probably also aware that the Royal Bank has teamed up with Quorum Funding and a number of universities to launch an initiative called the Technology Launch initiative, which is exactly aimed at helping commercialize the technology that currently resides in universities and get it out in the hands of the marketplace. This is about alliances; this is about cooperation and working together to support the new growth sectors in Canada and to help create jobs. As we all know, it's the growth sectors and the growth companies that create most of the jobs in this country.

Mr. Jentsch: Your point is an excellent one and I think it deserves some comments from Scotia's point of view.

Innovation and growth companies and where they are in the life cycle from conception stage to commercialization is an area where we in the finance community all have a role to play in some form or fashion. Our belief is that in the early stages we should foster the alliances, and certainly we and all the other organizations are pursuing some of those alliances with the federal agencies. I think there are excellent opportunities available to partner together and work together. That's the first point I'd like to make.

The second point I'd like to make is that there is a point of continued training and understanding of these innovation and growth companies. Each organization represented at the table here has various initiatives under way to identify innovation and growth centres, and we're no different from the rest. Saskatoon is one of our designated spots for the biotech business. We'll continue to pursue niche business, which is important in knowledge-based banking or innovation and growth, because it's really important that we understand how the business functions, how it works.

As colleagues mentioned earlier, we also recognize the importance of a different mix of financing alternatives very early on in the cycle. We have merchant banking capabilities for small and medium-sized enterprises, and we have had that for many years. We haven't talked about it, but RoyNat, our subsidiary, is actively putting $25 million to $50 million out in equity capital into small and medium-sized enterprises and those growth companies.

We firmly believe in recognizing all financing alternatives in the full stage of the company - strategic alliances that will foster relationships and promote businesses to grow. Third, we need to underscore the need to train our officers to ensure that we really recognize the good opportunity that many of our Canadian business people are offering us.

The Vice-Chairman (Mr. Valeri): Thank you.

Mr. Leblanc.

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[Translation]

Mr. Leblanc: Mr. Chairman I would like to say quickly to Mr. Coffey that we have heard the same thing from the Royal Bank. I don't think this is a good way to expand in Quebec. I just wanted to make that comment.

It's not that we have anything against the Royal Bank, but comments like that are not appreciated by us Quebeckers. The last time around, it cost them dearly. This time, I hope they won't play politics and that they will act like bankers this afternoon.

Let me ask this, because he didn't answer my question earlier. I think it was the only bank that didn't answer.

Last year the Royal Bank made a profit of about $1 billion. It seems to me that they should be able to afford a small fund to provide transitional loans for small and medium sized businesses facing temporary difficulties because of the federal government. Instead of calling in their loans, the bank could get them transitional support.

Has the Royal Bank ever consider giving these businesses temporary support rather than calling in their loans? Perhaps it would cost less and provide greater economic and social stability.

Mr. Toriel: Mr. Leblanc, I believe I told you earlier that we have a $50 million small and medium-sized business fund in Quebec. It is designed specifically for small and medium-sized business. Loans are limited to $500,000. We make loans of between $50,000 and $500,000, which are very small amounts. These are five to seven-year loans and payment options are very flexible. This is what our clients tell us they need.

In fact they prefer investment loans because very often these small businesses are not willing to accept third party foreign investors as shareholders. They prefer a flexible patient capital arrangement.

We provide that. We are indeed very interested in increasing our share of the market in Quebec and elsewhere in Canada.

[English]

Mr. Coffey: Mr. Chairman, whether it's in Quebec or Newfoundland or British Columbia, my bank, every bank represented here today, is in the business of keeping businesses in business, not encouraging their exit.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Coffey.

Ms Brown.

Ms Brown (Oakville - Milton): Mr. Chairman, I've been listening to what our banker friends have been saying, and I want particularly to welcome the delegation from Oakville - Milton that came to this meeting today.

An hon. member: Now don't get parochial.

Ms Brown: I liked what I was hearing from one of their spokespersons about partnerships. I also listened when someone said some small businesses are not coming forward for loans as much as they would like.

I wondered if that had something to do with something we found in this study this morning, which suggests that when the public encounters the bank in a business session, such as one in which they are trying to borrow money, the two parties emerge with totally different recollections of that encounter. I believe that shows up in four different charts in the study. It would seem to me that begins to set the stage for misunderstanding, for resentment, and for a negative feeling about the banks, and I think today it's true some members of the public see the bank as the enemy instead of the partner they should perceive the bank to be.

It seems to me that could be pretty well alleviated, and quickly, just by taking the four charts where that was identified and having some kind of form, putting it on paper and giving it to the applicant. For example, it could say ``You have requested the type of financing'', for example renewal, new loan, or increase; ``You have submitted for my approval the following documents...'' It's surprising the applicant doesn't remember clearly what kind of documentation was submitted, but obviously they don't. There's a tremendous discrepancy on that chart.

.1655

Then it's followed up with ``I have accepted your application'' or ``I have turned down your request for the following reasons, in writing''.

Next is ``You have an opportunity to rework your request. I suggest the following areas might be the areas you would concentrate on in reworking it. If all of the above fails, you might try to secure capital from the following sources...''

That way, people who may not be so experienced with the whole process and who are nervous when they go into the bank would come out of the bank with this piece of paper, which is in a file and which they could refer to as to what actually happened when they approached this specific financial institution. That doesn't seem to me to be too hard to respond to.

The second thing that struck me on this partnerships idea is the partnerships we have with you in trying to revitalize the economy and trying to nurture the emerging players. In this book with the statistics I see some emerging players. It seems to me women entrepreneurs...I think the average age is 41, as opposed to 44 for men, and there was some figure around 26-year-olds. These are pretty strong statistics suggesting that is a growing sector. While we know they don't borrow as much, we know they're not comfortable carrying as much debt, it also says their repayment is very good.

I take what I learned from those statistics and I take the other issue, which tells us the driving factor in loan acceptance. They have taken several factors and rolled them together and called the result ``net worth''. My conclusion is that if you continue to loan money on the basis of net worth, the emerging players will never get access to capital.

It seems to me this book tells us all that access to capital has to have some new criteria. My question is this. Are you willing to develop them?

Earlier someone mentioned intellectual property, for example. That is certainly one of the emerging needs of the business community, that somehow or other it be valued in such a way that capital can be accessed. But women entrepreneurs are another place.

What the study tells us, it seems to me, is where changes need to be made. We really seriously need to assess that concept, so well explained this morning, about net worth being the main factor. Is it doing the job for us in the revitalization of the economy and the creation of jobs that maybe a different set of criteria might?

I say that because a long time ago Paul Martin told us women entrepreneurs in the small business sector were creating jobs at the rate of two to one. That's why I'm saying maybe by changing the criteria, getting them some more money, we would all win.

The third concern I had about partnerships is the whole question of Canadian unity, which doesn't function just around Quebec but rather is all the regions of Canada feeling fairly treated as we try to move towards the next century.

As a member from the greater Toronto area, I was a little concerned about several of the charts in here where it was compared with other regions of Canada. For example, I'll compare it with Atlantic Canada. The final loan request outcome in the GTA was 72% approval, in Atlantic Canada 86%. I would like to have somebody from some bank try to explain that to me. Account manager turnover, which we identified a long time ago as an important thing in making customers feel comfortable: in the greater Toronto area, 57%, I guess in a year; in Atlantic Canada, 49%. Then we get to overall satisfaction: in the greater Toronto area, 66%; in Atlantic Canada, 75%. I'd be happy too if 86% of my loans were approved and my branch manager turnover or account turnover was the lowest in the country.

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These statistics all connect. I want somebody to explain to me why things are so great in Atlantic Canada if you want to make a loan and you're a small business person and they're not so good in the GTA. My understanding is that the GTA is the engine of the national economy.

Those are my three questions, Mr. Chairman.

Mr. Leckie: I'll perhaps position a little bit of this and be brief, and then hopefully somebody will move in here.

Just for the sake of the history of the committee, in the past a number of MPs have heard complaints that in fact it was the other way around, that Toronto was getting all the loans and northern Ontario, for example, wasn't getting its fair share. So this has been bouncing around a lot. At least we have some data to start looking at.

By the way, I don't have the answers to anything you've mentioned. As I said, I'm going to try to position some of this stuff.

The Vice-Chairman (Mr. Valeri): I saw everyone nodding approval.

Mr. Leckie: I agree with you that communication is the key. That's the big thing I've learned from this study. I'd also like to make two more quick points.

Historically, I would think probably since the Second World War, lenders have been trained to be risk managers. It's only very recently, I think maybe as recently as five years, that in the North American economy we've moved our account managers to be more sales and service oriented versus risk management oriented. We're still going through that transition, and that's why you see a lot of disparity in thinking.

You've asked the question of whether net worth has to be the key criterion. Historically, I think the account managers have answered that in an honest way. In my mind, at least, one of the bigger items is support for small business, and that may be why you're seeing a lot of credit card items jump in there.

I think I saw some eyes roll when you saw that. It was a surprise. There may be $10,000 or $15,000 credit card limits provided to a number of employees of a small firm who travel. Knowledge-based companies travel. They sell advice. They get on planes, and if they all have credit cards, that may be the single most important way they finance themselves.

In that case, not so much weight is put on net worth as on their credit rating. Small business has been telling us that for years. They say look at me, I pay my bills. We're starting to listen to that. I think we're going to shift gradually from this net worth component over to whether the person is creditworthy, whether they have the stamina to stay through the cycles, and issues like that. If we're going forward, such issues are going to be very important.

Mr. Shaughnessy: I feel obliged, as one of Ms Brown's constituents, to reply to your question. I'm one of the Oakville - Milton delegation.

I can't agree more with your point on partnerships and communication. We do attempt, and we certainly have policies, to communicate to our clients what we need to make a loan decision. We communicate it up front, give them application forms, and things of that nature. As I said earlier, I believe to Mr. Lastewka, I'm happy with the ratings, but I think we can do better on loan approval rates and things like that.

I made reference to a gap. When it comes down to telling clients why their loan has been declined, there's a gap the size of the Okanagan Valley there. It's just massive and we have to close that gap. Communication is vital and I think there's a lot of work that we as a bank and perhaps, if I may be so bold as to say, we as an industry can work on.

I think the industry and the banks are working in partnership with the government for emerging industries. Some of my colleagues cited some of the programs. They are working with the government. We are doing it. I think those partnerships are really beginning to make a difference in this country and are really bringing capital to companies that did not have access to it before. By that I mean that capital, patient capital, between that conceptual phase that Mr. Bodnar was referring to earlier and the commercialization phase. I think that is beginning to work. It's beginning to work in some of the high-tech industries, in some of the biotech industries, etc.

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You made reference to the GTA. You made reference to Atlantic Canada. You can probably find the same thing if you isolate any rural area...and with a large urban area. You get higher customer satisfaction ratings in rural areas than you get in large urban areas, because in the rural areas people are all working in the same community, they're members of the same church, they're members of the same organizations, they know each other much better.

I live in Oakville and I work in downtown Toronto. I don't believe I live in the same community in downtown Toronto as I work in.

Account manager turnover. In a rural area it's much more difficult to move. I'd have to get up and move my family; whereas if I'm in the greater Toronto area I can move from King and Bay up to Yonge and Bloor very easily. It doesn't disrupt my life at all. But it does disrupt that customer base. In our organization we have an open job-posting system, so if one of our account managers sees an opening at Yonge and Bloor and he or she is working at King and Bay today, they're very free to apply for that job, and if they're the best qualified person for that job they get it. But I don't think they would apply for a job quite that easily to move from, say, rural Atlantic Canada or from Moncton, New Brunswick to Halifax or something of that nature. It is this large community-small community shift.

The only thing I can say to you, Ms Brown, about the loan approval rates is that the greater Toronto area was the centre of the last recession. Small business, all business, in the greater Toronto area was devastated in the last recession. We're still suffering from some of the scars of that recession in the greater Toronto area, and I think some of the memories are still there, on both sides, both the borrower side and the banker side. There's still a lack of confidence in the greater Toronto area today. That's something we as an industry, something the federal government, the provincial government, the municipal governments, and the GTA probably all should be working on: how the heck we can get confidence back up in that area after the devastating recession the GTA went through.

The Vice-Chairman (Mr. Valeri): Mr. Schmidt, from the Okanagan Valley.

Mr. Schmidt: Thank you, Mr. Chairman. It's quite an analogy: that's how big the gap is.

I think we've been skirting all around a pretty significant word here this afternoon. That word is ``partnership''. I sometimes wonder whether that partnership is between banks and government or the partnership is among banks and industries.

I like the point Mrs. Brown made just a moment ago about this antagonism. The banks are over here, businesses are over here, and they have to fight with each other, or they have to confront one another. I don't think that's the right thing.

I've been very interested in reading some of the annual reports that came out last year for the various banks. In particular I was intrigued by the CIBC annual report. The thing that intrigued me in particular was the absolute insistence, about three years ago, that there would be an iron wall between what the bank does, what the insurance business does, and what the securities branch of the bank does. Lo and behold, in the last annual report there's a complete amalgamation of everything that happens. Wood Gundy is now simply an entry on the masthead; it's not really within the annual report. It's all integrated into one report.

What I was particularly intrigued by was that the profits the bank has made came more from the securities business and from the underwriting side of the operation than from the loan portfolios. It leads me to a very interesting observation. If that is the case, the banks must now have experts in their employ who can indeed get into this partnership with business and get into the underwriting business. If you know anything at all about the prospectuses that have to be written by business just to go into the stock exchanges and into the securities market, it seems to me it's a whole new way of providing access to capital for businesses through the banks, in this case, because the four pillars have effectively been removed.

So I'm going to ask the banks whether indeed this whole package of statistics reflects more the old way of doing business than the new way that's going to come forward, or is there some combination that can be made between the two. You'll probably always have to have some loan capital. If banks are going to get into the equities business - and they are in the equities business to a very small degree at this stage - is that really the trend, and does the bank industry see itself getting into this kind of partnership with industry in Canada?

The Vice-Chairman (Mr. Valeri): Who's going to answer that - Mr. Leckie?

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Mr. Leckie: I don't think I can answer it.

It's a fascinating question. I've been on this job for about one year and, frankly, when I first took it over I got all gung-ho on trying to figure out how to get the kind of product that's available for large medium-sized business, you might say, that comes through the Working Ventures funds and to see if we couldn't... It seemed to me that was a waste of money, because it isn't utilized, and Paul Martin has dropped the tax rate from 20% to 15%, the provinces have matched that so it's also down at 15%, and those funds are not fully drawn down. They can't get the money out.

So what was going on in my mind was, ``Okay, I know where there's a real need and that's with small business. Never mind the guys up here. What about the ones down here?'' I wondered if it would be possible to get into some sort of quasi-equity structure for small business. I haven't lost my zeal for that, but I'm still looking for the Holy Grail.

The difficulty comes with the size of the deals. The small business deals are so small that you can't afford to do the necessary due diligence. You discuss prospectuses and so on. I guess to do a prospectus...it costs about $300,000. You need to have a pretty good-sized deal to undertake something like that. I'm still working on it.

Mr. Schmidt: But don't you do due diligence when you give a loan to a business?

Mr. Leckie: But a loan is low-risk capital.

I think, Mr. Schmidt, what you were alluding to is definitely what small business needs, and that is patient money, quasi-equity money, mezzanine financing and Working Ventures funds they are able... I agree that's what they need, but if the Working Ventures fund can't get its money out in chunks of $2 million or $3 million, how can we figure out how to get it out in chunks of $50,0000? It takes just as much work and analysis to do that kind of quasi-equity issue as it does to do the big ones.

Mr. Schmidt: I might take some exception to that. I understand some of the difficulty that's being alluded to, but I also recognize that the electronic media is now available to manipulate information very easily and the due diligence now doesn't require the hands-on that it did in the past. Couldn't certain kinds of predetermined information that's absolutely essential...? You don't have to have a human mind doing it. There's no judgment factor involved. It's simply an analysis of what is there. I think the large part of the due diligence could be relegated to some kind of electronic manipulation of information.

Mr. Leckie: I think there's an answer in there somewhere.

Mr. Schmidt: I think there is.

Ms Sutherland: Mr. Chairman, might I add that in some cases, as we look around the world and see how other banking institutions and financial institutions are finding ways to serve various sectors of the small business community more effectively, the types of networks and scoring mechanisms you talk about are available, but our experience... And yes, those need to be developed. Most of the banks sitting around this table - and other financial institutions - are working on that, and in fact in some cases are delivering, as against a more automated decision-making process.

However, it gets down to the issue that Ms Brown brought up just a few minutes ago in terms of what the other criteria are that can be used in order to assess business viability. At the end of the day, what we're talking about - whether we call it intellectual property or whatever - is our ability to assess management and management's ability to manage, whether it's a smaller firm or a growing firm.

Bluntly, I think that is probably the most challenging thing we face as bankers. It's to make sure that the skills that not only Charlie Coffey or Anne Sutherland have, but also the skills across the country account managers consistently have... That is very subjective. A scoring system gives you some of the more obvious stuff, like the networks, staff, the personal credit history, the sizes of the loans, the balances and accounts, and so forth, but the art, if you will, of investing in a company or lending to a company is about the management piece.

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We've spent quite a bit of time talking to venture capitalists - not only our own venture capital arm, but others in the community - to try to find out how to do this more effectively. We've spoken to business people, as well, who tell us we need to have better business acumen, which we accept.

We believe that developing the art of assessing those opportunities more effectively at this time is still something human beings do best, and this is where the partnership comes in. We have to find ways of partnering with other organizations and harnessing that expertise to be able to better and more efficiently assess business acumen and management expertise. Hopefully, that will bring down the due diligence John's talking about that will enable us to provide better access to capital for those young entrepreneurs, women entrepreneurs and growing businesses that don't have twenty years of history by which we can judge their success.

So that's really where it's at. It's not a cut and dried thing; it's a learning thing, and it's critical to all our survival, to be blunt. If we do not do this well, we will have real difficulties in terms of our ability to prosper as an industry. It's that simple.

Mr. Schmidt: My purpose here isn't to criticize the banks. The intent here is to utilize the specialized skills that are found in the personnel in the banks and use them in a way that is not mundane, that can't be relegated to a machine. Let the machine do that kind of stuff and you do the judgment, the art thing, if you will.

I think if we had used certain kinds of machines to do the analysis on the GTA when it went down to the recession instead of using some of this other stuff, we probably would have made a better decision. I think a lot of that information was pretty clear in terms of the balance sheets and what was happening. That was a pretty significant issue. The wrong mix was put into the pot. I'm suggesting that maybe there are whole new ways of thinking.

I think Mr. Leckie put it extremely well when he said we really have to have a new kind of manager who is sales oriented and innovation oriented, rather than risk management oriented. Let the insurance companies manage the risk.

The Vice-Chairman (Mr. Valeri): Mr. Schmidt, that's a totally different debate and we don't want to get into it today.

Mr. Schmidt: I just thought I'd throw that in.

The Vice-Chairman (Mr. Valeri): It's interesting - just to follow up on Mr. Schmidt's comment about the due diligence - that Wells Fargo in the U.S. is now lending up to $50,000 on a one-page application with a 1% loss ratio, I understand.

Ms Sutherland: However, to qualify for those loans you need to have had two years of profitable business before they'll even look at you. So because of the lending criteria, it doesn't help the issue we were talking about in terms of start-ups and those emerging businesses. But there's no question there are things to be learned from what's going on around the world to help us serve Canadian small businesses more effectively.

Mr. Shaughnessy: The banks and the CIBC are using automated scoring systems similar to Wells Fargo. If there's a bank at the table that's not using it today, I'm sure it will be using it in very short order.

But that's not Mr. Schmidt's point. We're talking about loan capital today and what about more patient or equity capital tomorrow. I think Mr. Leckie and Ms Sutherland made very good points about the costs and I can't add to their points there.

I'd also like to just lay something on the table. I don't know the answer really, but I can certainly see the ad hoc evidence. Small businesses don't want banks as equity partners. They don't want to have to have formal board meetings. They don't want to have to go through the regulatory process of having external shareholders. What they really want is patient capital. They want loans where perhaps they won't have to make any payments for x number of years or pay any interest. But most small businesses don't want the CIBC to own 25% of their companies and to put members on the boards, etc.

Some of the upper mid-market accounts do want that and can live with the regulatory burden of it. That is why the road we've been going down most recently in bringing in some of that patient capital is more the partnership road and the venture road of bringing in patient capital as opposed to equity capital to meet some of these needs.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Shaughnessy.

Mr. Shepherd.

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Mr. Shepherd (Durham): To follow up on this morning's conversations with Thompson Lightstone, I'm still somewhat concerned about the size of your sample. As I understand it, the 64% of your larger sample, if you will, got rejected. You didn't make positive contact and so forth. Could you provide us with an analysis of why they were people you couldn't contact directly, or you did contact them and they refused to answer the question; that kind of analysis?

The second part of that would be the specific question, 6(b) I think, which talks about the people who said they basically didn't require bank financing. I notice that's an open-ended question. Could we have some kind of larger analysis of how people really did respond to that, or whether they will fit specifically in the classifications you gave them, so we can deal with that at a later date?

Some of the other issues I wanted to talk about or address are some Mr. Ianno has already talked about. I looked mainly at the statistics from September 30 to December 31. I noticed the authorization levels for loans over $5 million had increased in that period by 6.1%, but for those under $500,000 it was only 1.35%. In other words, you are increasing the larger loan portfolios six to one.

I think it is a relevant analysis because it tells us the management structure within the bank and how they are allocating their resources. I think it is reasonable to use those kinds of ratios to determine how your management practices look at lending to small and medium-sized businesses.

The one issue that bothers me when I see the aspect of credit cards, and it also came through the study, is the possible changes in financing to small and medium-sized businesses, because basically what we're saying to small and medium-sized businesses is we're extracting higher fees from you, higher interest rates. Using credit cards as a source of financing at 18% as opposed to prime plus 1% lending rates on operating loans obviously concerns me very much.

I look at that aspect as falling very much in that category. Those people who fall in that under-$500,000 classification are also being forced into higher costs of maintaining those loans in those lending lines. I look at that and I also look at our statistics here showing the rise in corporate bankruptcies that also seem to follow in that category. They somehow go together. In other words, your fee structure and so forth are forcing some of these people into bankruptcy. That would be a partial conclusion.

Having said that, and getting on to what you were saying earlier, John, about due diligence and those small and medium-sized businesses, I think there may well be a question about whether the chartered banks, the way they are set up today, can effectively service that sector at all. Can we actually service it? We say we need higher fees and we're going to charge...

I can understand it's a lot easier to arrange a $5 million loan if we look at the cost structure related to a $25,000 loan. Is there a feeling somewhere, just based on the cost structure and the way the banks are organized today, that this is a market they are not particularly interested in? These statistics seem to tell me that, that we're certainly not increasing that. At the same time, I suspect, we're increasing our fees for those people, because we're saying they're not economically viable to maintain.

My final question would be directed to the Bank of Montreal. It comes from an earlier discussion we had. I was very interested that you were talking about the Small Businesses Loans Act and whether, if the federal government could do away with the Small Businesses Loans Act, the chartered banks would be willing to occupy that field without the guarantee and it could actually lower costs to small and medium-sized business at the same time.

Mr. Hudon: If I may, I'll start with the point that elicited my interest in responding to your question, about some of the costs of borrowing for small business. Let me preface even that by making it abundantly clear that a small or medium-sized enterprise is a key segment for this organization and it is not one we would ever consider abandoning. We view it as absolutely key to our mandate in Canada.

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We are preoccupied, and in fact we are quite adamantly and aggressively going after finding ways to bring credit to small enterprises in small numbers. One of the issues that comes out of this morning's study is the overwhelming number of people whose borrowing requirements are less than $25,000, never mind the $500,000 you referred to.

The challenge we have is to find ways of bringing to the small office sector, or the home office sector, as it's typically known, credit at an affordable cost that's accessible, easy to obtain, clear to obtain, based on the business requirements of the individual, and not using personal debt. There's a tremendous opportunity here for us to provide that need and there's a vacuum in that market right now. I'll speak from our perspective, in any event.

I think this reflects the changing nature of our economy. There are 750,000 such enterprises in this country today, forecasted to go to one million by the end of the decade. It's a marvellous opportunity for us all to look at. To say that it doesn't show promise or have any interest for our institution would certainly not be the case.

Let me also point out that there are credit cards available for rates as low as 10.9%, by the way. They're not all at 18%.

With respect to the comment on the Small Businesses Loans Act, I think there's an awful lot to be gained. At the margin, after our own analysis, there is that additional support provided by the federal government. That enables us to effect a loan and in fact share some risk, because that's exactly what it is with the federal government.

I think our job is to make sure that we don't miss the opportunity not to use that facility when it's not necessary. It's also our responsibility to the federal government to make sure that when we make those loans we do it on a sound basis. It does have a role and I think it has a useful role in today's economy.

Ms Rozsa: The question that was asked at the time was whether we would continue lending the way we have been if the program were done away with.

Mr. Shepherd, my comments there were that we've increased the fee to banks, which is then passed on to the client. If in fact we can manage that program so that we keep the loan ratio below the 5% - and Bank of Montreal has kept it quite a bit below that - we in fact could offer our own program similar to a government guaranteed program and not necessarily have to charge as high a fee. We would be interested in exploring that opportunity and talking to government and seeing where we could go with it.

I think that was a conversation that happened in March or April of last year at the hearings at that time. That's when that proposal came forward.

Ms Sutherland: I just wanted to talk a little bit about the issue of small businesses using Visa cards for purchasing.

Some time ago, when we talked with this committee in terms of putting statistics together, you may recall that one of the things we as banks mentioned to you was that a number of small businesses do use credit cards to finance their purchases from their suppliers because they don't want to send them cheques. Instead they purchase with a credit card what it is they need to buy, especially very small businesses, such as home offices, whether they go to Business Depot or whatever.

Rather than making assumptions about what balances people are keeping on their Visa accounts and so forth, I think perhaps that's something that would be worth while to further investigate in our research. Our experience in the Visa business - and I think this applies to most of the other banks - is that well in excess of 70% of the customers pay off their Visa bills monthly and therefore pay absolutely no interest on their accounts. This may very well be the case for many small business customers as well, although we cannot say today without the facts.

The Vice-Chairman (Mr. Valeri): Mr. Leblanc.

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[Translation]

Mr. Leblanc: With changes at the international level and especially with North American free trade and open market, small and medium-sized businesses that want to develop exports, new trading relationship or mergers and associations with offshore businesses. What are canadian banks doing in this regard?

Mr. Toriel: Mr. Leblanc, I am very glad that you have raised the issue of small and medium-sized business exports. It is an area that is very often underestimated and yet which is becoming more and more important.

We feel that more and more now even very small businesses need to export and we have seen from our clients that even home based businesses are now exporting goods and services. Therefore, it's a very important area and I thank you for mentioning it.

At the Royal Bank we are trying to find new solutions for these businesses. For instance, aside from the United States and Canada we now allow businesses to open up lines of credit in six European an Asian countries based on their accounts receivable in those countries.

More and more businesses are turning to our subsidiary REFCO which purchases small business' accounts receivable, thereby giving them access to almost 100% of these holdings in cash. These two services reflect our growing commitment to smaller export companies.

Mr. Cormier: At the National Bank we finance many small business exports through our subsidiary Bannatex which offers loans as low as $15,000 to $25,000. As well, we hold lots of seminars for small import-export businesses on the various provincial and federal assistance programs that will help them develop foreign markets.

Mr. Leblanc: I know there are federal programs such as the CCC that provide lines of credit support.

Do you think that the government is doing what it can for you and for small business? Are government services for small business properly coordinated with the banks? Are there any changes that you would like to suggest today?

Mr. Cormier: The banks and the various federal, provincial and even in some cases, municipal government agencies are working closely to support small and medium-sized business through very dynamic and imaginative programs.

Of course there is always room for improvement. However, a lot of imagination is being put into developing programs in particular for leading edge technologies and many strategic programs alliances and partnerships are being set up to help these new businesses get a foothold in international markets.

Mr. Leblanc: The service sector is very strong at least in Quebec which I know better than the rest of Canada. But it isn't easy for the banks to assess, among other things, accounts receivable. How would you go about helping out small businesses to merge or set up associations with other service industries in other countries? Do you have an approach that you can talk to us about here?

Mr. Cormier: Like other banks represented here today the National Bank provides what I would call non-traditional banking expertise which is specifically intended to help businesses link up with semi-public companies and with government.

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We take part in conferences organized by universities and local and national associations that help businesses overcome the limitations of restricted resources or a lack of capital.

Mr. Toriel: At the Royal Bank, our $300 million program that I mentioned earlier is designed for export companies providing, for example, funding to develop offshore markets for these businesses be they in the service or manufacturing sector. This program even provides funding for trips abroad to see how these markets can be developed.

[English]

The Vice-Chairman (Mr. Valeri): Mr. Jentsch wants to make a comment.

Mr. Jentsch: I believe the whole concept of the global economy and helping Canadian businesses become more competitive as we go forward underscores some of the things we've brought out here. We as banks have a large part to play in providing financing or providing alternatives to helping businesses sell their products outside of the boundaries of this country.

Certainly, from our perspective, we are similar to the Royal Bank and the National Bank in offering, in a limited size at this point, discounting of U.S. receivables to access some immediate working capital needs and really in providing trade finance capabilities around the world. The Canadian banks are well represented in many countries, and it's one of our strengths as an industry to be represented in Europe, South America and the Caribbean. There are opportunities for small businesses to access those markets by virtue of the strength of the Canadian banks in those international markets.

In terms of your point about how we as an organization - I'm speaking on behalf of the Bank of Nova Scotia - view the EDC and some of the provincial or federal programs involving export finance, I believe there's a positive evolution in finding the right needs as we go forward. The attitude is right in both camps to build on what we have, and I am certainly pleased with the cooperation we've had with respect to federal and provincial organizations, to see some of these things happen.

The Vice-Chairman (Mr. Valeri): Mr. McLaney and then Ms Skoke.

Mr. McLaney: Thank you, Mr. Chairman.

Just to reiterate some of the comments of my colleagues, I think this is an area where the banks have made great strides in the last little while in terms of being willing to finance foreign receivables, which are usually as creditworthy as any Canadian company you're selling to. We've gotten over that hurdle.

A bank such as ours, which operates throughout the world, is also able to help Canadian companies make contacts anywhere in the world, to have the creditworthiness of the people they're selling to checked out in advanced and arrange for documentary payment collections back and forth across the world on an automated basis.

It's clearly an area where the banking system has made great strides and has joined the international banks in terms of offering a very positive service to Canadian exporters.

Ms Skoke (Central Nova): Thank you, Mr. Chairman.

You will find that my comments are probably rather simplistic and not very sophisticated, so bear with me with respect to my questions.

First of all, with respect to the issue of communication, I would appreciate very much receiving some information from all of you at a later date with respect to the contact persons in the Atlantic region in regard to the various banks. I note here that Ms Taylor has...with respect to women entrepreneurs in business relationships, and I would be interested in that area as well.

Also, I'd like some information regarding what training is given, if any, to loans officers in Atlantic Canada, specifically with respect to small and medium-sized business.

I have a question to direct to Mr. Leckie. You mentioned previously that there was no shortage of capital. In fact, I think you said that so many times that...``I want your capital''.

Will you undertake to make more capital available to Atlantic Canada, and what capital is available at this time?

With respect to the Bank of Nova Scotia, Mr. Jentsch, you indicated that you're offering the money ``where we need to offer''. Where in Atlantic Canada, according to your perception, do you feel you need to offer the money?

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Also, we had a lot of discussions - and certainly the statistics show - that in Atlantic Canada people are relying on other methods of financing other than the financial institutions, some relying on credit cards and borrowing money from family, and so on. I want to know if it's appropriate for me to ask the banks to undertake to have their account managers do a review of their small and medium-sized business loans just to see to what extent they are using credit cards to finance and to see what are their operating lines of credit. I think it would go a long way to relieve pressure on our small and medium-sized business to have a review of their interest rates, their operating lines of credit. I'm asking you to undertake to do that in the Atlantic region because I think it would certainly serve the interests of small and medium-sized business.

My last question, which I can't resist, is directed with the greatest respect to Mr. Coffey.Mr. Coffey, you made the statement that the banks' role is keeping business in business. I respect that. However, some businesses have expressed apprehension that they are dealing with banks on a regular basis. They rely on you for venture capital, for operating lines of credit, for credit cards, for their personal lines of credit, their mortgages, or whatever. As well as operating businesses, they're consumers, and so they have a considerable amount of apprehension...they feel threatened when the banks seem to want to enter into insurance and auto leasing, even in legal business in terms of taking over accounts.

How can you serve the interests of our local small business and also serve the interests of the bank? Do you see a potential conflict of interest here?

Mr. Coffey: I'll deal with that last question.

Our interests as a bank, your interests in representing your constituents, the interests of communities, are not mutually exclusive; they are one and the same. We are part of the fabric of this great country. It is in our best interest to see it grow and prosper.

I talked about economic stability, and I will continue to talk about the need for it because I fundamentally believe that small business, as others have said, is the engine that will drive the creation of wealth and well-being. We have a role to play in that, as do other financial institutions, as do you as a parliamentarian in terms of creating an environment that is conducive to growth in terms of tax regimes.

The chairman indicated earlier he didn't want to pursue a discussion on insurance and auto leasing, and I'll respect that decision.

Ms Skoke: I saw the look on your face, so I couldn't resist raising it.

Mr. Coffey: I appreciate that, but there are a couple of other things. The banks of this country are in every community. Our people are involved in community activities in your home town, whether it be with scouts, guides, hockey, soccer, etc. We are part of the fabric and it is in our best interest, in that of our shareholders and our employees, and, yes, governments because we have the highest taxed industry in this country...so absolutely no conflict. I'll make one five-second commercial: we need these additional businesses to survive internationally. We will continue to work on this government and other governments to ensure that Canadian banks prosper with the biggest banks in the world. To do that we believe we need insurance distribution, we need auto leasing, and maybe some other things.

Ms Skoke: What are some of those things? Can you forewarn us?

Mr. Coffey: Mr. Chairman, I said a couple of things today I regret saying, and I may want to take that one back.

The Vice-Chairman (Mr. Valeri): We're still trying to deal with those first two issues.

Mr. Coffey: To make one last point, while almost the whole focus today has been on credit, small business needs advice and counsel. They might need a technology application; in order to export they might need some information on the People's Republic of China. We helped a lot of Quebec companies move into the PRC. So it's more than credit that small business needs. We, through the professionals around this table, are providing that.

Credit is a product. I'm in the solutions business. Credit is only one part - an important part, obviously, to this committee.

Ms Sutherland: Ms Skoke, you may be interested to know - in regard to particular solutions - that the banks around this table were specifically involved in establishing with the provincial governments and the federal government, through ACOA, the ACF Equity Atlantic Inc., which is a $30-million fund specifically directed to small businesses in Atlantic Canada to help them grow. This is exactly the patient equity Mr. Schmidt was talking about. That fund is actually up and running. The CEO has just been appointed. So has the board, which consists of seasoned Atlantic business people. Its whole function is to try to increase access to capital for smaller firms, getting well below the $1 million threshold some people around this table talked about. That's one very specific, tangible example of partnership, of trying to find new ways of doing business, and hopefully servicing the needs of smaller businesses throughout the communities in Atlantic Canada.

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Ms Rozsa: The Atlantic investment fund has actually done its first deal.

Mr. Jentsch: There are a couple of points I think are worthy of note. Certainly Atlantic Canada is a place of strength for us as a bank. We have 31% of the loans outstanding under $250,000. That's where our roots are; that's where we began. We believe we are an influential player in the Atlantic.

Your specific question is where are the needs and how are you responding and how are you going to go forward. My colleague coined a phrase: ``solutions''. That's actually one of our trademarks: Scotiabusiness Solutions.

Thank you very much for that, Mr. Coffey. That was a good idea. You took your idea from us. I appreciate that.

All kidding aside, Mr. Coffey's point about finding solutions is very appropriate.

The solutions need to be found in two key areas, as we see it. One is the export finance area - to focus on the point brought up by the honourable Mr. Leblanc - continuing to find innovative solutions to provide export finance and capabilities that include information and advice as our companies in Canada enter foreign markets. That's a very important component.

That ties very closely with the innovation and growth sectors. When you think of it, 75% of our high-technology software companies export their product into the U.S. That whole area ties into export finance and financing the innovation and growth companies. Both areas, I submit, are two key areas all of us need to continue to investigate and learn from to provide solutions.

Your point about sitting down with our customers and looking at the areas they access credit from and finding ways and solutions to reduce their borrowing cost - that's done on an annual basis with our customers, where we review their requirements. If they wish at any time to sit down and say, look, here's an opportunity, can we reduce our borrowing costs... Our lenders are focused on trying to find...their businesses survive and prosper, and they do ask the question, can we roll some of this debt into some other form of vehicle. The questions are supposed to be asked.

That's a very good question. All banks at the table, I believe, do have an annual review process to look at the credit to ensure the needs of the customers are met.

The Vice-Chairman (Mr. Valeri): Mr. Mitchell, please.

Mr. Mitchell (Parry Sound - Muskoka): A question to Mr. Leckie to begin with. For authorization level zero to $500,000, Q4 over Q1 has increased 4.1%. Does that represent better access to capital by small businesses?

Mr. Leckie: Q1 and Q4? Are you asking whether this is satisfactory?

Mr. Mitchell: Yes, Q4 has...the amount of authorizations for under $500,000 is 4% higher than it was at the beginning of the year. Does that represent better access to capital?

Mr. Leckie: I don't think it's enough. It's ahead of the inflation rate, but I don't think it's satisfactory.

But other things going on in the economy trouble me a little with the trends here, Mr. Mitchell. There's a lot of evidence that as you move from a manufacturing or traditional economy to a service economy the need to borrow plummets. As that happens to us, I think we're going through quite a transition in that regard.

Mr. Mitchell: Then let me word it differently. If you don't think that represents a meaningful increase in access to capital, then I take it the proactivity that has taken place over the last two and a half years has not resulted in increased access to capital.

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Mr. Leckie: In Toronto Dominion's case, the increase in the number of borrowers has shot through the roof. The number of borrowers who have lines of credit with TD versus the number from one year ago is significantly higher, but the absolute dollars outstanding, to my chagrin, are about the same.

Mr. Mitchell: Okay. I have another question. Using the same comparable figures, the growth for loans over $1 million is 9.4% and the growth for loans under $500,000 is 4.1%. That seems to indicate that access to capital is being increased by almost double for the largest of businesses. Is that a fair evaluation of those stats?

Mr. Leckie: No. I think it's a fair evaluation of the stats, but I don't think it's the right conclusion. I think this gets back to the point of the hon. member from the Maritimes who was saying that I was harping on the fact that we have plenty of capital.

I would like to try to get closure on this point. I haven't been able to articulate or to persuade anybody that the ratio analysis is not relevant. We do not have some sort of a micro-strategy or macro-strategy on our portfolio to say, ``A certain chunk is available for this segment of the market and that's it''. Business loans are not growing. Banks are being ``dis-intermediated'' out of the market.

Mr. Mitchell: But that's not the suggestion. I'm not suggesting small business as a percentage of your overall portfolio. All I'm suggesting is that your large loan portfolio is growing faster than your small business loan portfolio. That's what I'm saying.

Mr. Leckie: That's a fact.

Mr. Mitchell: I have a couple of other quick points. The fact is that your institution has six times the turndown rate of another major institution. Is that an actionable item for your bank? Does that concern you?

Mr. Leckie: It concerns me, and I think it has to be looked at in the context of the big five. We're rated number one on service. We're rated number one on commendations. In other words, our clients will refer us to their associates. There are two more on value provided -

A voice: Come on...

Mr. Mitchell: Okay. We don't have a lot of time left.

Let me put it in another context, as a parliamentarian in public policy issues. Such a wide variance among the five chartered banks, from as low as 5% to as high as 29% in your turndown ratios...is that something we public policy individuals ought to be concerned about, or is this just an anomaly we shouldn't concern ourselves with?

Mr. Leckie: No. I think it needs to be analysed. I think I need to articulate to my own people what is going on there. I have some thoughts on it. If it were to be looked at in isolation, I would be very concerned if it were not for these other highly satisfactory ratings in four other areas.

I might also mention that this gets back to the point of the banks' geographical representation. We're heavily represented in Ontario in urban areas. They're service-based kinds of clients.

When we did some regression analysis with Thompson Lightstone and looked at the kinds of clients who were being turned down, they tended to be new clients. They did not have a long track record. They were in the service industry. They did not have a high net worth and a long track record and so on. However, it heartened me that when we reworked the credit, a high percentage of the reworks tended to get approved.

For me the trick is to keep getting more people to come in and to have an opportunity to communicate better, which is what everyone's been talking about here today, and show these new service industries - which we seem to get a higher proportion of than others - how to get their financing done in the future.

Mr. Mitchell: I have one last quick question to do with process. You've provided about19,000 separate pieces of information about lending. I just did a rough count. It's going to take some time for me to analyse it and, I suspect, it will also take some time for my colleagues to do so.

Have you established a process whereby I can say, three or four weeks from now, that I have a problem with the construction loans in northern Ontario, in the type of authorizations or the decline in authorizations, whatever it happens to be? Will you or the CBA have a structure in place where we as parliamentarians can ask these specific questions about these statistics and receive some sort of answer or explanation?

Mr. Leckie: You're certainly free to ask me about anything involving my own bank and my own statistics. We have not discussed -

Mr. Mitchell: Can I have that commitment from everybody? From the Royal Bank?

Ms Sutherland: Sure.

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Mr. Jentsch: To respond to Mr. Mitchell about involving parliamentarians in the turndown, given that the Bank of Nova Scotia is nine out of ten, I suggest we simply let the free market let Scotia take care of the ones TD turns down.

Are we still travelling together tonight, John?

Some hon. members: Oh, oh!

The Vice-Chairman (Mr. Valeri): A quick intervention by Mr. Shaughnessy.

Mr. Shaughnessy: Mr. Shepherd asked a question earlier and I do not think it was properly addressed. He asked whether we're interested in small and medium-sized businesses. I can say, on behalf of the CIBC, that we're very interested in the small and medium-sized businesses. We're not only interested in lending to small and medium-sized businesses, we're interested in being the banker and meeting all of the needs of the small and medium-sized businesses.

When we look at it from an industry point of view, and you look at the quality of the people around this table representing the industry today, I think - if I may speak on behalf of my colleagues here - we are very interested in small and medium-sized businesses. I have no doubt they're looking at it the same way we are.

We're not only interested because it's good for the country but, very frankly, it's good for the banks. Small business people are profitable business for the banks, period. If you look at it not only as a commercial lending opportunity but as an opportunity to provide a broad range of financial products and services to small business people, they're as important to the banks as they are to this country.

I think this committee has assisted the banks in focusing on small business, and it should be congratulated for working with the banks in getting that focus on small and medium-sized businesses.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Shaughnessy.

I have four questioners left on my list. I'd like to get everybody on, which means we may run a little over 6 p.m. I ask for your indulgence.

Mr. Murray, then Mr. Schmidt.

Mr. Murray (Lanark - Carleton): Thank you, Mr. Chairman.

I think Mr. Leckie may have partially answered my question.

I was looking at that box on authorization levels that Andy Mitchell referred to. If you look at outstandings rather than authorizations, it's even more interesting, compared to the change in customers. When you look at the growth in customers and the growth in outstandings, the growth in outstandings is minimal and substantial. I was looking at up to $500,000 because I think two-thirds of the businesses surveyed had revenues under $500,000. If you go up to $1 million, it's even more dramatic, I believe.

I don't want to pick on Mr. Leckie here, but in your experience is this relationship between the increase in number of customers with the outstandings staying almost flat something new?

Mr. Leckie: Thank God the number of borrowers is increasing. That's taking place because, as I've mentioned, we've moved from 300 branches to almost 900 branches that now have access to capital available for small business. If that were not occurring, we might be showing a decline.

We have definitely not changed our credit policies, I can assure you of that. I think it has a lot to do with the service economy we're entering. The Business Banking Board in Washington - I don't know if you folks attended, but I know Paul Zed went down there - has stats that show a manufacturing economy borrows at a ratio of 1.7:1 relative to a service economy. The U.S. banks are experiencing this same phenomena as they move to this knowledge-based economy. It makes sense, because you don't need to buy a plant and equipment if your business is service and you're selling knowledge.

Mr. Murray: What does this do, then, for the profitability of banks when they're dealing with small business loans? Do you have to service that many more customers?

Mr. Leckie: Frankly, lending has never been hugely profitable, if you add it up through the cycle. As Kelly expressed already, the whole relationship is profitable. We've been through that. Don't forget that over half of our small business customers don't borrow at all. We tend to concentrate on the borrowers, on encouraging them to borrow more. I'm suggesting that may not be the answer. We make our profitability on the total relationship - on the personal requirements of the entrepreneurs and their employees. That's the name of the game.

The Vice-Chairman (Mr. Valeri): Mr. Coffey has a comment to make as well.

Mr. Coffey: Thank you, Mr. Chairman. I think the statement I wanted to elaborate on has been partially answered.

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Mr. Murray, I think you should understand, although it's not in this book, that in theSME market, at least in our bank, there have been significant growth rates, well into the double digits, on the deposit side. As I said earlier, we have to look at this market in a holistic sense. Lending is important, but in our bank we're experiencing significant double-digit growth on deposits in the SME market at all levels.

Mr. Murray: That's an indication of health in the United States.

Mr. Coffey: I don't want to get too far into this, but I think there's some uncertainty around investment decisions, and cash has been built up in some sectors.

Mr. Murray: In the interests of time, I think I'll pass on to the next person.

Mr. Schmidt: I want to change my questioning just a little bit to the industry breakouts for Canada and the overall picture. I've taken the top three sectors by authorization levels and compared them, and I've made some very interesting observations. This is why it would be nice to have these tables a little more ahead of time, to get some of this stuff.

Here's what happens, for instance. In the authorizations from zero to $249,999, the top three sectors are agriculture, retail, and business services, in that order. In that area the ratio between outstanding and authorization ranges from 0.78 as a high to 0.58 as a low, so there's a pretty high ratio there as to how much is actually in service.

Now we move to the area from $250,000 to $499,000, and the third spot moves into manufacturing and business services drops. When we go to $500,000 to over $5 million we get a whole new set of sectors that come into play: manufacturing, construction, and then agriculture comes in as number three. In the $1 million to $5 million category, it's manufacturing, wholesale, and retail trade, and in the $5 million and over category it's finance and insurance, manufacturing, mining, quarrying, and oil wells. These are the top three.

It's very interesting what happens in the ratios here. In agriculture the ratio is 0.73 outstanding to authorization, and in finance and insurance it's 0.1. So the question I have is for the bankers assembled. Does this mean that as we increase the authorization level, the ratio of outstanding to authorization drops dramatically and that in fact the small businesses really have a much higher outstanding to authorization ratio than do the larger businesses? If that changed, would that in fact draw down so much of the banks' capital that it could affect the lending pattern to the small businesses?

Mr. Leckie: I'll begin that. I think the higher you go in terms of the size of the business, there are all kinds of different lines of credit that get added in there, such as foreign exchange and contingency credits of a whole variety of issues, particularly as you get well up into the mid-size kind of business, with $5 million to $10 million in sales. Consequently, you end up with lines of credit that really never get drawn down and never show up in that regard.

Mr. Schmidt: But they're all included in the authorization.

Mr. Leckie: Right. They show as an authorization, but they don't show as outstanding.

That's one quick thought. There may be more to it than that. Are there any other ideas at the table?

Mr. Shaughnessy: The only thing I can say - and I guess you just have to take it at face value - is that at the CIBC there is absolutely no restriction on the amount of loans we will make available to the small business sector today. We have industry limits and things of that nature in the CIBC; we will lend x% of our capital to a given industry. We're nowhere near any of those limits, so there's absolutely nothing that could impact that.

Mr. Schmidt: Nowhere does it show that you're anywhere near those limits. The highest ratio is 0.78.

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Mr. Shaughnessy: No, I'm talking about loans... One of the things you have to do in managing the portfolio is that you only want x percentage of your capital base for a given industry, or something of that nature. We're nowhere near that in any of these things, so there is nothing restricting our ability to lend money to small business in this country.

Mr. Leckie: Likewise.

The Vice-Chairman (Mr. Valeri): Mr. Schmidt, Mr. Lastewka, and finally, Mr. Milliken.

Mr. Lastewka: I'm not sure whether this is perfect timing or not, but one of the questions I wanted to ask and be focused on is the access to capital for small business. The question is, are there any regulations or situations the government or this Standing Committee on Industry should be facing to help the banks in loaning to small business? Are we holding you back on anything? I just wanted to make sure I heard from everybody that there weren't regulations or anything that were holding you back from helping small business grow.

Mr. Leckie: If this question was coming from Queen's Park, I'd say surtaxes on the small business portfolio don't help, because in my mind, I just add them to the loss. We have loan losses and we have surtaxes. They're one and the same. Not that that's going to preclude us from the direction in which we're going, but it doesn't make us happier about it.

Mr. Lastewka: What about from the federal government side, especially any items that our committee should be facing?

Mr. Leckie: I think I would like to get closure to the extent that 70% of these meetings are productive. I keep stumbling with this axe in 30% of them. We have plenty of capital. Kelly just articulated it. I'd like to find some way to find closure on that. I'd like to find some way to continue to close the gap on the trust at the table here.

We do not hold money back in the greater Toronto area and not lend it in northern Ontario. There's no big plan hidden from the consumer. We want to grow small business.

I find we're wasting 30% of our time due to this continuing lack of trust. It's there. It's there in the Thompson Lightstone study. There is this lack of trust. We're a relatively small country on the globe, and some people want to make it smaller. We ought to be working harder together to close these gaps.

Mr. Coffey: Mr. Chairman, I would like to add to that.

Mr. Lastewka, this is directly to you. As I said earlier, one role of government, in my view, is to create an environment that is conducive to economic growth in our tax regimes, and so on and so forth. I'll just leave it at that.

Second, we are asking you - I would personally say that I'm insisting on it - for an open debate on issues impacting financial institutions in Canada. The fact that the Minister of Finance announced in the budget a certain item was not lost on us. Lobbying by the groups has not been lost on us.

This is all I'm saying. I'm asking you. You asked me the question and I'm responding by saying that I would like open debate. We'll let the cards fall where they may, so to speak. Let the consumer decide, in the final analysis, what is best for him or her, and we will deliver accordingly.

Mr. Jentsch: I want to narrow the scope of the narrative a little bit. If I had one sort of view of what I'm facing in the marketplace as a bank vis-à-vis the federal outreaches, so to speak, whether that's through lending agencies or regulation, certainly one area in which we're facing increasing competition - we believe it's unfair - is through the Farm Credit Corporation, which tends, to put it mildly, to go for some of our best customers in rural parts of the prairies where we have had branches and infrastructure and commitment since the turn of the century. We're finding it very challenging, at the least, to lose our business to the Farm Credit Corporation in those areas. That's one area in which we find increasing competition.

The Federal Business Development Bank is very complementary to what we're doing. As an organization, the Bank of Nova Scotia very much enjoys the working relationship it has with the FBDB.

Certainly the Farm Credit Corporation, over the years, has filled a much-needed void in the marketplace through innovative products and these type of things. They had a real place in the market. We find they're becoming increasingly aggressive in going after our tier-one accounts and making it increasingly competitive to remain open in some of those rural parts of the prairies.

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Mr. Lastewka: Do I understand you as saying that rather than partnering in projects they're actually competitors?

Mr. Jentsch: That's correct, sir.

Mr. Shaughnessy: Yes.

The Vice-Chairman (Mr. Valeri): Mr. Milliken.

Mr. Milliken (Kingston and the Islands): I don't know who to put this question to, so I'll throw it out and see who would like to respond.

In the report we went through this morning, on page 85, there's a final loan request outcome table, table 23. The loans approved in full in eastern Ontario were the lowest of any for the regions cited in the study and the numbers turned down were the highest in that particular part of Ontario; that part of the country.

Eastern and northern Ontario, it was. I'm sorry if I said ``eastern''. I meant to include northern in this figure.

I'm wondering if anybody can offer any reason why it would be so difficult for people to get loans in eastern and northern Ontario in comparison with anywhere else. I notice in Atlantic Canada the approval rate was 86% compared with 68% in eastern and northern Ontario. Alberta was 89%. I know there's Western Economic Diversification. I know there's ACOA. Do those have any influence on those figures? If so, perhaps you could tell me a little about it, and perhaps I'll speak with the Minister of Industry to see if he could set up a similar fund for eastern and northern Ontario. He might have an interest in that.

I'd be interested in your opinions on that issue.

Mr. Leckie: May I just ask Ian how, statistically... I notice B.C. is at 18%, southwestern Ontario is at 18%, and eastern and northern Ontario are at 22%.

Mr. Lightstone: If you look at the results in our inscription on the chart on page 85, the 22%, yes, in absolute terms is higher, but it's only directionally higher than the national average, from a statistical point of view. We're looking at a sample of 133 in eastern and northern Ontario. There's a statistical sampling error range in any of these numbers. In an absolute sense, yes, it is higher, but statistically it's only directionally so. That's why we have that dotted circle as opposed to a full circle around that 22% versus the 15%.

Mr. Milliken: But you don't have a dotted circle around the...you have a solid square around the 63% approved in full.

Mr. Lightstone: And that number is significant. That's correct. So in the absolute number there is a lower significance compared with the full number.

As you were discussing, we were just talking about whether it's related to the profile of the companies, in terms of smaller operations. We don't have a full answer for you.

Certainly that's a number to be concerned about, and I hear what you're saying, but from a statistical point of view there is a directional difference in total on the turndowns and definitely a significant difference in the approvals in full. It warrants being addressed.

Mr. Jentsch: I believe every bank at the table will say we have no different lending policies in eastern Ontario that would account for that. It's an interesting observation that we as organizations will need to look at. Directionally, in terms of higher turndowns, it's much greater in that part of the world, but there's no lending policy differentiation between that region and any other region. I can say that honestly on behalf of the Bank of Nova Scotia. The Commerce or anyone else may want to add to that.

Mr. Shaughnessy: I think it would be wise, Mr. Lightstone, if we did some crosstabs and gave it to the clerk to see if there's an industry bias or sectoral bias in there.

Mr. Lightstone: Certainly that's available. The information is there in our data set to see profile-wise whether it may be a concentration. We did notice the accommodation sector... Of all the SIC groups, that was one area where there was higher... That could be a correlation. Certainly that's something that could be addressed and looked into, yes.

Mr. Toriel: Mr. Chairman, I would like to tell Mr. Milliken there is an agency in northern Ontario from the federal government. It's called FedNor. It has actually been recapitalized and improved recently. As a matter of fact, the Royal Bank of Canada has signed a strategic alliance with them to provide about a $310-million program of additional funding to that region.

So something is happening now. I cannot comment on the statistics, but something is happening in the region and it should help the region eventually.

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Mr. Milliken: Is the answer then that ACOA and these regional diversification groups or organizations assist the banks in insuring these loans? Does it help result in a higher approval rate in those areas where there is such an operation in existence?

Mr. Toriel: Mr. Milliken, wherever we have made a strategic alliance with our bank and other banks, in the new way of working together in partnership where each of us is doing a part of the work in order to help the client, small business, yes, it is helping. I think that new way of working together is really working.

The Vice-Chairman (Mr. Valeri): Mr. Ianno, do you want to make one little comment?

Mr. Ianno: Yes.

The important point that Mr. Lastewka put out and I think all the banks agreed on was that there's still a lot of availability by industry in terms of the limits the banks set. Taking that into account, I recall that in one of the past meetings we had, the goal of the TD, if I understood it correctly - please correct me if I'm wrong - is that you wanted to reduce a $3.2-billion exposure in real estate construction to $2 billion. We can go back to Hansard and get the information if necessary.

The question on that is that when you take into account what you said earlier about lots of capital being available, I wonder how the people in the businesses and those industries would feel with your definition that there's no credit crunch, yet there's a reduction and a desire to reduce from$3.2 billion to $2 billion. How would you define that?

Mr. Leckie: I'm afraid you'll have to get it out of Hansard. I'm not aware of it.

Mr. Ianno: I'll get that and then we'll discuss it.

Mr. Coffey, I have a last point. Mr. Lastewka opened the door in terms of saying what you'd like to see. When you deal with other issues, there's a fundamental difference in terms of this regulatory body, with the Parliament of Canada dealing with what the banks would like in terms of other opportunities, such as insurance, auto leasing, etc. As part of Parliament, I don't feel yet that we've seen some of the things that could be done with the powers you have available, and that is small business.

As the representative of Trinity - Spadina, I at least am certainly not going to be in favour of giving you more unless I see some growth in this perspective. As I said with many of you in the past, I don't have a problem with you making profit. Make much more, because I know that translates into tax. I don't have a problem with that, but I do want some growth and I'm not seeing it, and that's where I came from before.

Mr. Leckie, in terms of that 30%, I'm assuming you'd prefer not to have to deal with that. I would just like to see the industry move as an overall industry, in terms of improving the amount of money in the hands of small business that they are actually utilizing so that they can expand and grow and create more jobs.

So that's where I'm coming from. I haven't changed for two and a half years. I've put the cards on the table and I continue to deal with that. I get frustrated when I see the overall numbers being reduced, and at that point you know you're going to come here and I'm going to react this way. One way to silence me is to work towards improving if you can. Some banks do; some don't. If we all work towards that, I think we'll all be happy and maybe some of the other things will come forward.

Mr. Coffey: Mr. Ianno, I want you to understand that we are committed to achieving your objectives. I would not under any circumstances want to silence you or anyone else, because your feedback to us has been very helpful.

As for the discussion earlier this morning on your ratio, I want you to understand that I respect your position on that ratio. Whether I agree with it or not is not the issue, quite frankly. You've said to me and others that you are looking at that ratio and when you see that moving in the right direction, you will be convinced that we are putting our money where our mouth is in terms of small business. I respect that and accept it, and you will see that.

Mr. Ianno: Thank you.

Mr. Coffey: There is one last thing. It's related to the member from Trinity - Spadina and it was referenced by Mr. Shaughnessy, and that is the committee. I don't want to overdo this, but let's not pull any punches here, folks. This committee has done a great deal. Whether you're Liberal or Bloc Québécois or Reform or whomever, it doesn't matter what the political stripe is, we all have a common interest here in working for small business.

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Again, I'll go back to that point about stability. I can't say often enough that stability is what will help drive your issues and small businesses' issues and many others.

The Vice-Chairman (Mr. Valeri): Thank you, Mr. Coffey.

I'd like to thank Ian Lightstone, David Jamieson, the bank representatives and the CBA for being here today and for all the hard work and the effort that they've put into preparing the data and the statistics, but I must also echo the comment made earlier about having that information to the committee well in advance so that we're able to digest the statistics in order to continue to have an intellectual dialogue.

I'm sure my colleagues have appreciated your presentations. I also want to echo another comment made this morning. We now have a good baseline from which to start moving forward.

The committee started this dialogue with the Canadian banking industry to improve access to capital for small business, which is such a vital part of the growth of our economy and of the creation of jobs.

We will soon be starting a review of science and technology and the innovation gap, which will focus attention on the question of the creation of high-quality jobs by firms that survive and prosper on their ideas and knowledge. We know that banks have traditionally found it difficult to make loans based on intellectual capital or on bright ideas. We've discussed some of that here today and we're making progress in that area.

How well banks are meeting the financing needs of Canadian small businesses is such a vital issue that we will continue to have meetings with you to review the quarterly report on SME lending. By that time, I am sure we will have had ample opportunity to digest the information we got here today and the survey presented this morning.

I hope that together we can find ways to continue to improve the chances of success for Canadian small businesses in an increasingly competitive global economy.

Before we adjourn, I'd like to indicate to the committee members that we will be meeting again at 9:30 a.m., Thursday, May 30, when we will be considering the main estimates with the Western Economic Diversification agency.

The meeting is adjourned. Thank you very much.

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