INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, March 2, 2000

• 0909

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm going to call the meeting to order. Pursuant to Standing Order 108(2), this is a consideration of business lending to small and medium-sized enterprises.

We're very pleased to have with us this morning, on behalf of the Canadian Bankers Association, Tim O'Neill, the executive vice-president and chief economist from the Bank of Montreal; Edmée Métivier, the vice-president of small and medium enterprises, Royal Bank of Canada; and Alan Young, the vice-president of policy.

Everyone should have in front of them two presentations. I would propose that we would hear the presentations first and then move to questions.

We'll turn it over to you.

Mr. Alan Young (Vice-President, Policy, Canadian Bankers Association): Madam Chair and members of the committee and special guests today, thank you for having us this morning. We want to thank you for inviting the banking industry to participate in this very important discussion about Canada's small and medium-sized business community.

• 0910

The health and growth of the small-business sector in Canada is the responsibility of a broad spectrum of stakeholders. The banking industry, as one of those stakeholders, welcomes the opportunity to talk to you about how it is working to fulfil its role.

I would now like to ask Edmée Métivier to conduct the formal part of our presentation.

Ms. Edmée Métivier (Vice-President, Small and Medium Enterprises, Royal Bank of Canada; Canadian Bankers Association): Thank you, Alan.

Madam Chair, members of the committee, this morning I will spend most of my time discussing with you Canada's banks' commitment and support to small-business clients.

Although I will spend most of my time discussing the SME financing aspect, it is important for us to remember that financing is only one component of the success of entrepreneurs. In my view, it is important to remember also that access to information is another important component. As a result, I will also focus some attention on bank initiatives that are enhancing the skills of Canada's entrepreneurs.

Mr. O'Neill has also joined us to comment on the factors influencing the economy and the small-business community.

[Translation]

The operative for today is “change”. Small business owners are facing a world that rarely experiences a moment of calm. Before you know it, what is isn't and what never could be is reality. Just think about the rapid rise of e-commerce. It is transforming the way a business functions and the traditional models of competition and market expansion. The challenges are multi-dimensional, as are the tools and resources required to meet those challenges.

[English]

Canada's banks are learning about where they can add the most value in helping entrepreneurs manage their diverse and changing needs. It is a unique challenge and certainly an ongoing process. In those areas where banks cannot meet certain needs, efforts are made to work collaboratively with other stakeholders in the private sector, the association, and government.

To highlight the extensive nature of the banks' support for small and medium-sized enterprise, the CBA recently launched an information section on the main CBA website entitled “Serving the Needs of Small Business”. Since its launch in November 1999, it has become the third most accessed page on the CBA site.

Building something solid and stable, whether it is a relationship, a house, or a business, starts with a strong foundation. Independent research and practical experience show that knowledge and information are the core components of the business foundation. In today's world it is even more important to have the skills and knowledge in place to be able to manage and cope with day-to-day business operation and inevitable change. Ultimately it allows for a greater chance of building a successful enterprise in the long term.

This is why the banks are contributing to small business skills development on many fronts. Small-business owners and would-be small-business owners can access a myriad of information from Canada's banks. The banks and CBA have produced seminars and over 150 different educational tools for small and medium-sized business owners on many issues. Canada's banks are also supporting many entrepreneurial studies programs at post-secondary institutions across Canada in an effort to help business owners develop the skills and knowledge they need to manage the challenges of a rapidly changing world.

As well, the CBA has published a booklet, Getting Started in Small Business. It emphasizes the importance of up-front planning. More than 240,000 copies of this booklet have been ordered since it was first released in September 1998, 1,500 of which have been ordered in alternative channels for the visually impaired.

Operating a business is also about success or access to financing. Banks are keenly aware that it is an important issue. However, successful financing of small business is more than just access to debt financing. It is a matter also of access to equity capital. As well, it is a matter of determining the most appropriate financing options. Although a firm's success hinges on many factors, businesses that maintain a balanced capital structure are in a better position to deal with economic uncertainty and growth.

• 0915

To increase small-business owners' awareness of the various sources of capital, and which may be appropriate to help finance their operations, the CBA is working with Industry Canada to promote the website, “Sources of Financing”, housed on the main Strategis website.

[Translation]

In today's increasingly competitive marketplace, our responsiveness to the needs of the small business sector is important. The banks are continuing to implement initiatives that will attract new business and better serve their existing small business customers.

It may be of interest to know that approximately 55 per cent of the banks' business-borrowing clients have authorizations under $50,000. As a result of technological advances, many banks now offer more diverse product lines that improve small business owners' ability to access smaller amounts of credit, particularly for amounts under $50,000. Many of these are card-based products that allow for 24 hour a day access to accounts through electronic banking services.

[English]

Banks have also simplified the application process for smaller amounts of credit by using a one-page application form. Some loan applications can be assessed based on an individual's personal credit rating, which can be particularly beneficial for new start-up businesses.

Banks are also forming strategic alliances and are working cooperatively with other stakeholders to enhance financing options. Many of these specialty programs have a particular focus on supporting the activities of knowledge-based industries. Banks are also developing other innovative financing solutions.

As many members of this committee are aware, since December 1995, the seven major banks have released detailed information concerning the amount of credit provided to SMEs in Canada. This report, “Business Lending by the Major Banks”, published quarterly by the CBA, is a 140-page document that includes the banks' business credit data—authorizations, outstandings, and customers—broken out by the seven reporting banks, eight regions, eight dollar bands, and seventeen industries. This reporting structure was developed in consultation with the banking industry and this committee.

For the purpose of the banks' business lending data, and as agreed to by this committee, small and medium-sized enterprises are defined as businesses borrowing less than $1 million. Within this group, small businesses are defined as businesses borrowing less than $250,000.

I am pleased to report that the amount of credit authorized to small and medium-sized enterprises in Canada increased from $70.2 billion in Q3, 1998, to $71.7 billion at the end of Q3, 1999. This represents a 2% increase.

The amount of credit actually used by SME borrowers increased from $47.4 to $48.2 billion over the same period. This is an increase of 1.7%.

The banks' small and medium-sized business-borrowing client base is also expanding. The number of SME business customers who borrow from banks has increased by 4.6% over the last year. There are now over 777,800 small and medium-sized businesses borrowing from the seven reporting banks. Small and medium-sized business borrowing from the banks accounts for 95% of the banks' total business-borrowing clientele.

As we now look at small businesses only, we find that lending to the small-business market segment increased from $32.7 billion to $33.4 billion, which represents a growth of 2.2% since the third quarter of 1998.

• 0920

Small-business owners are using approximately $22.3 billion of the credit authorized to small-business borrowing clients. This represents a 0.6% increase over Q3, 1998.

There are over 696,000 small business customers borrowing from the seven reporting banks. This represents a growth 5% over the third quarter of 1998. Small businesses borrowing from the banks represent 85% of the banks' business-borrowing clients.

The CBA's figures indicates that the banks are now giving smaller loans to more small businesses. This trend reflects both steady economic growth and the fact that the banks are focusing more attention on the smaller end of the market. As I noted earlier, through better technology and innovation, the banks are providing a higher number of convenient and simplified credit products to their small-business borrowing clients.

I would like to stress that although banks are the largest source of financing for small businesses, they are not the only source. The business credit information collected and reported by the CBA is only half of the debt-financing picture. The Conference Board of Canada, in their 1997 study “What's New in Debt Financing For SMEs”, estimates that banks provide just over 50% of total SME debt financing.

Assessing the effectiveness of all SME financing providers remains a concern of the banking industry. It is clear that more information is needed from other suppliers of credit and about other types of financing, including equity, to truly understand the depth and breadth of SME financing market.

The government's policy framework document, Reforming Canada's Financial Services Sector, released on June 25, 1999, reinforces this point. It acknowledges that the information gap relating to the SME financing market hinders the ability of policy-makers and stakeholders to properly assess and act on the financing needs of SMEs.

The banks are pleased to support the government's decision to give Statistics Canada the mandate to collect and publish data on the supply of debt and equity financing from all suppliers of SME financing. The banking industry is confident that expanding data reporting beyond just the banks will benefit the small-business community in Canada.

Before I conclude, I want to take a moment to thank the members of this committee. Last spring the banking industry launched the seminar “There's Something About Money”, a program designed to help Canada's youth develop good money manangement skills, which are a key component of running a successful business and planning for personal financial goals. “There's Something About Money” was born out of the work with this committee. To date, over 130 sessions have been held in local community high schools across Canada, benefiting over 4,000 students, and we are planning new sessions on a daily basis.

The banking industry is receiving tremendous support and response from students, teachers, parents, and members of Parliament. Most importantly, over 95% of the students are rating the session as good to excellent. Thank you for supporting this program and for your participation.

[Translation]

In summary, I want to reinforce that Canada's banks believe in Canada's entrepreneurs. They make an important contribution to our economy, we support their efforts and we want them to succeed. All stakeholders have a role to play in ensuring that as Canada's small business owners enter the new millennium, they are well prepared and have a solid foundation in place to face the challenges of a changing global economy. Independently and working with others in the private sector, associations and government, banks are committed to working to fulfil their role. We look forward to responding to your questions at the conclusion of our presentation.

• 0925

[English]

In summary, I want to reinforce that Canada's banks believe in Canada's entrepreneurs. They make an important contribution to our economy, we support their efforts, and we want them to succeed. All stakeholders have a role to place in ensuring that as Canada's small business owners enter the new millennium, they are well prepared and have a solid foundation in place to face the challenges of a changing global economy. Independently, and working with others in the private sector, associations and government, banks are committed to working to fulfil their role.

We look forward to responding to your questions at the conclusion of our presentation.

Now I would like to ask Mr. O'Neill to address the members of the committee.

The Chair: Thank you, Edmée.

Mr. O'Neill, go ahead.

Mr. Tim O'Neill (Executive Vice-President and Chief Economist, Bank of Montreal; Canadian Bankers Association): Thank you for the opportunity to talk about my favourite subject, which is the Canadian economy.

The last time I was here with the CBA was in October 1998. At that point, a lot of people were worried about whether we would be facing a recession because of the turmoil in Asia, then in Russia, then in financial markets generally. I'm pleased to report that what was seen as optimism at that time was actually pessimism. The recovery from Asia went a lot better than anybody anticipated, and instead of worrying about deflation and recession, people are now worried about inflation and growth being too strong.

I would start with the U.S. outlook, simply because in the Canadian context about one-third of the Canadian economy is directly linked to what happens in the U.S. Of our output, 40% is sold externally, and 80% of that goes to the U.S. So we have a very strong connection to the U.S. economy, and what happens there has an influence here.

Let me just quickly go through what I see happening in the U.S. economy—a situation where labour markets are very tight, and the unemployment rate is now at a generational low and at risk of going lower. We'll get data on that tomorrow from the U.S. There's a very strong domestic economy right across the board, whether you're talking about consumer spending or investors, and government spending is now rising in the U.S., especially at the federal level.

The other factor playing out here that isn't reflected in the charts is that with the global economic recovery being so much stronger than anticipated, we're seeing exports from the U.S. to the rest of the world growing faster than had been anticipated. So in almost every conceivable respect, there's lots of stimulus in the U.S. economy.

In my view, that will ultimately mean that inflation will rise in the U.S. You can see from the next chart that we're anticipating inflation to reach 3% from its current 2.5% by the end of this year. Then it will head toward 3.5% by the end of next year. Hopefully that is the pattern we'll see, rather than something less benign.

That means, inevitably, that the Federal Reserve, the central bank in the U.S., will be tightening further. It will be raising interest rates. They've already done so once this year, so far. I anticipate we'll see another 0.75% increase in interest rates in the U.S., with the federal funds rate—the rate they have control over—rising to about 6.5% by about August of this year.

That will mean not only short-term interest rates in the U.S. will be going up, but long-term interest rates as well. So bond yields—I have a chart—on the 10-year treasury note will be increasing. You can see that in 1998, when I last visited the committee, the 10-year treasury note was below 5%. I think it will be 7% by the middle of this year. That's quite a substantial increase in long-term rates. That will have a dampening influence, which is an economist's way of saying a negative influence, on stock markets, as well. I'll leave commentary to any questions you may have about the stock market in the U.S. I suspect there may be some interest in that.

• 0930

What this means is that growth will slow in the U.S. It will begin to show obvious signs of that late this year and certainly through 2001. You can see the profile on our next page, which shows an economy that has averaged about 4% growth for four years running now. At the end of 1999, in fact, growth was actually accelerating. Because this chart is about a week old, it doesn't reflect the fact that the updated numbers for the fourth quarter in the U.S. indicate that growth was almost 7% in the fourth quarter. It's just an absolutely booming economy, and most of that relates to the domestic economy.

The tightening by the Federal Reserve will slow growth. You can see that in 2001 we're looking at growth that will be below 2% for several quarters. That will take pressure off inflation and off labour markets, but as I indicate on the next chart—risks associated with the U.S. economy—I think the risks are almost all to the upside for growth, which means there's a risk that the Federal Reserve will have to tighten more aggressively than I have just described. Our forecast is suggesting that it will.

One of the risks here is that instead of growth beginning to moderate this year, we actually see it staying almost as strong as it was in the latter half of last year. That sets up the possibility of a boom followed by a bust, so that you actually don't have growth slowing to, say, 1.5% to 2.0%, but you actually have a mild recession.

A second factor here is that the U.S., unlike Canada, has been faced with an increasingly large trade deficit. That will inevitably put downward pressure on the U.S. dollar, which will further stimulate export growth in the U.S., putting even more pressure on the Federal Reserve.

Finally, what's unclear at this point is just how significant the impact will be of any rate hikes by the Federal Reserve, how big an impact they'll have on the stock market. I never formally forecast the stock market, but let's say you're talking about a correction in the order of 20% to 25%, causing a slowing in wealth growth or an actual decline in the value of wealth in the U.S., thus slowing consumer spending. If the effect is more dramatic than that, then of course you get a sharper decline in the growth rate and consumer spending. Those are risks not really forecast at this point.

If we look at Canada, then, the Canadian economy has been doing extremely well over the last three years, really, in total. As you may recall, 1998 was on the weaker side because we were affected by the slowdown in Asia, the recession in Asia, and the impact that had, particularly on our resource industries.

If you look at what happened in 1999—again, the charts don't quite catch up to the latest figures—we got not only revised figures for the first three quarters of last year but we also got a very strong number in the fourth quarter. It looks like growth in Canada through 1999, instead of being just a little better than 3.5%, was actually in excess of 4%, probably 4.2% to be precise about it.

A big part of that is due to the surging Canadian trade sector. Here we're talking about is that if you have a very strong U.S. economy and a low-valued Canadian dollar—relative to what we have seen, let's say, in early 1990s or even in the mid-1990s—that contributes significantly to export growth in Canada. You can see that what we're talking about here in our chart is the trade balance. We actually have a surplus of exports over imports.

We've also seen domestic spending bounce back. In the numbers released last week for growth in the Canadian economy, what was most notable was that consumer spending was strong but investment spending was extremely powerful, especially in the second half of last year. That's a real positive as you look forward to the kind of momentum we'll see in the Canadian economy this year.

• 0935

The keys, I think, to the near-term and short-term future of the Canadian economy are described in our next chart. First of all, on the positive side, we have the Canadian dollar, which I think—and I'll describe that in a minute—will be increasing in value to some extent through this year and next year, but not dramatically so. The Canadian dollar will continue to be a positive influence on the economy.

The strong U.S. economy will continue at least to the middle of this year. As for the reference to less fiscal drag, here we're just simply talking about the fact that now that we have fiscal surpluses at the federal level and in many of the provinces, what we're seeing is that instead of the public sector being a drag on the economy, and especially with the most recent budget, it will actually be a net stimulus—modest, but still a stimulus. That's a significant difference from what we were seeing even just a couple of years ago.

Finally, there is the improvement in the economies outside North America. It is true that a huge amount of our trade is linked to the U.S., but we still do have trade outside of North America, and commodity prices are set outside North America. They're set globally. As those commodity prices have improved, that has meant a positive influence on the resource sectors in the economy and in sectors related to those primary industries. That continued improvement in Asia and the continued strengthening of the European economy, for example, will be positive for Canada.

On the other side of the ledger, we will see higher interest rates in the near term. I'll talk about that in a second, but quite clearly we're looking not only at higher interest rates in the U.S., we're looking at some increase in interest rates in Canada.

Then finally, as we get to the second half of the year and into 2001, the slowdown that we've projected for the U.S. economy will spill over into Canada through the trade side.

So there will be a strong 2000, with moderation in 2001. You can see that in our next chart, where—again, the chart is catching up with the most recent numbers—growth in 1999 will actually end up having been over 4%. We're looking at something close to 3.5% this year, and around or a bit below 2% next year.

Now, if I were to project that further, let me make two points. We're not talking about a recession in the Canadian economy. As you know, in the last two periods in which we've had very strong economic growth followed by a slowing in the Canadian economy, we had recessions in both instances, first of all in the early 1980s and then again in the early 1990s. The one in the early 1990s was the most severe one we had seen since the 1930s, and it was the weakest recovery from a recession we've ever seen.

So the 1990s, in many instances, especially the first half, were very weak, much weaker relative to our potential to grow and much weaker relative to the U.S. That has had a number of different implications for investment and so on.

What we're looking at here is not a recession but a slowing in the economy. If I were to project beyond 2001, what you would see for 2002, 2003, and 2004 is the economy rebounding and again achieving growth of around 3% a couple of years from now.

The other important thing here.... This is why it's unlikely that we will see a recession: because of what this next chart implies about the Bank of Canada's policy stance. The forecast for rising inflation in the U.S. does not have a counterpart in Canada. In fact, we're a bit of an outlyer in this one, that is, we're not with the pack of forecasters on what will happen to inflation in Canada. We're actually expecting inflation to fall through this year.

Now it is critically important to understand the importance of that. If we have an inflation rate down below 1.5%, that takes a tremendous amount of pressure off the Bank of Canada as we come to the end of the expansion part of the cycle. The extent to which the bank will have to raise interest rates is significantly less than it ever has been, certainly less than it was in the last couple of episodes when the bank was forced to tighten to slow down the economy.

• 0940

A big part of the reason for that is the lower inflation in Canada. If you go back to the previous chart, for the U.S. we have inflation going up to over 3%, but in Canada we have it coming down towards 1%, and we have that gap we had seen in the early 1990s opening up and re-emerging.

One of the consequences of this will be that the Canadian dollar will strengthen. We have it getting to about 71.5¢ by the end of this year, and sustained in 2001. Part of the reason for this is, as I said, that where the U.S. was faced with a growing external deficit, we've had a significantly improving external deficit—current account, total credit, so just the trade balance and other elements. You can see, if you look at the early 1990s, that our current account deficit was about 4% of GDP. It's going to be close to zero this year. You can see what's happening in the U.S.: a very significant increase in the current account deficit.

We've also seen an improvement on the fiscal side. That's reflected in our next chart, where you can see the debt-to-GDP ratio coming down. This would be inclusive of both our forecast on growth, which would influence the denominator, and our expectation, based on what we saw in the budget document, that $3 billion per year on the debt will come down each year—in other words, we'll see a steady decline in the numerator.

The final factor influencing the Canadian dollar is the firming that we've seen in commodity prices, pretty much across the board. We're not looking for a continued dramatic surge in commodity prices, but we're certainly not expecting any dramatic weakening either. The levels of commodity prices will be quite a bit higher than they were over the last several years.

With respect to interest rates, I've said already that the inflation gap between Canada and the U.S. will be opening up and that it will have a positive influence on what kind of policy stance the Bank of Canada will have to take. So what we're looking at, if you look at the next chart, is that the bank will increase rates, but only another half percent, and as the economy slows, it will be able to reduce those short-term rates sooner than will be possible in the U.S. situation. For example, by the end of 2001 we'll be looking at short-term rates in Canada that are more than a full percentage point below those in the U.S.

Contrast that with the first half of the 1990s in Canada, when short-term rates averaged about three percentage points more than the U.S. That differential, going from three points higher to one point lower, has a significant impact on the strength of the economy in going forward. It'll also allow the long-term rates to outperform those in the U.S. You can see that we do have bond yields going up in Canada as they will in the U.S., but not as much, and beginning to fall sooner than those in the U.S., so again, you see a gap of about a full percentage point in long-term rates as well.

Finally, risks: the risk of a boom and bust in the U.S. obviously spills over into Canada. We get the benefit, in the short run, of a very strong U.S. economy and we get the adverse affect of a U.S. economy—were it to do so—going into recession, similar to what we saw in the late 1980s. Again, this is not a forecast. It's a risk that one has to take into account.

The other point I mention here is that for any given growth rate in the economy, for any given point in the business cycle, the more stimulative fiscal policy is, the more tight monetary policy will be, so we have to think of fiscal and monetary policies as sort of jockeying for position if you will, in regard to influence on the economy. But at the end of the day, monetary policy's main role is to contain inflation, and if, in the view of the Bank of Canada, the growth rate is positively influenced by stimulative fiscal policy, they will obviously increase rates to offset that.

• 0945

Let me be clear about that, though. We're talking about maybe another quarter point. We're not talking about something like a percentage point or two higher. So we're not talking about a very stimulative fiscal environment. We're talking about a moderately stimulative one in which the bank might feel compelled to be a bit more restrictive.

I think in general what we're looking at is an economy that, although it will be slowing, is not going into recession and has all of the strong fundamentals that you'd want to have as you look beyond 2001. Because having come through a decade of underperformance—and that's really the only way to describe the Canadian economy in the 1990s, underperformance by whatever benchmark you want to use, our inherent capacity to grow—we were weaker than that. Relative to our major trading partner, we were weaker certainly than the U.S. economy.

What I would see going forward—and I think this is particularly important for the small-business community and the small-business part of our economy—is that we will end up with relatively speaking a much more favourable interest rate environment in real terms than we saw through a good part of the 1990s. That's a positive.

The fundamental underpinnings for growth in the Canadian economy, then, are stronger than they were through a good part of the 1990s. We don't see a recession having the kind of negative impact it did in the early 1990s, because we won't see a recession, in our forecast. And the temporary or transitory slowing in the U.S. economy is just that—it is transitory. We're talking about a period of about a year or two, say fifteen months, so in four or five quarters, the economy starts to come back.

Relative to what we have experienced too often in the past, we're likely to achieve what has been referred to as a soft landing and then a bounce back. That has to be good news for anybody who does business in Canada, whatever the size of their operation, but particularly for the small-business sector, which was so significantly and adversely affected by the recession of the early 1990s.

Thank you.

The Chair: Thank you very much, Mr. O'Neill.

I have to forewarn the committee that there's a potential for disruptive votes this morning.

An hon. member: [Inaudible—Editor].

The Chair: No. I understand there's another party that may be attempting to.... It's not the Reform Party. It's a party that's not here today.

Mr. Penson, please.

An hon. member: The NDP?

The Chair: No, it's not the NDP.

Mr. Charlie Penson (Peace River, Ref.): Thank you, Madam Chair.

I'd certainly like to welcome the panel members this morning to our committee and thank them for a very informative presentation.

Mr. O'Neill, I noticed on your very last slide you have the risks, one of the big risks being if the U.S. economy does not perform exactly as planned and there continues to be growth. How much control does U.S. monetary policy have on the economy? How much of an effect can they have by raising interest rates? Is it possible that the economy can continue to grow as it has, in spite of an increase in interest rates? Is that a real possibility?

Mr. Tim O'Neill: I don't think so. It may take longer for any given interest rate increase to have the desired influence in slowing the U.S. economy than may have been the case in the past. We're hearing a lot of talk about the fact that the stock market is booming, that it's creating more wealth for average Americans, that they're spending a lot of that at least paper wealth that they have, and that at least big parts of the equity markets are immune to interest rate hikes, notably high-tech stocks.

Frankly, if something sounds too good to be true, it almost invariably is, and that's one of those things. Higher interest rates will certainly slow the U.S. economy. The fact is that if you look at the level of interest rates in the U.S., they are only about at the level that they were in mid-1997, because the Federal Reserve, you may recall, reduced short-term rates in 1998 and then put them back up again in 1999 to where they were in 1998. So in effect, all that tightening through last year did was return interest rates to where they had been. The recent increase is the first net increase in short-term interest rates we've seen in the U.S. since mid-1997.

• 0950

So this is not an aggressive move so far by the Federal Reserve. Another three-quarters of a percent would be more aggressive. I think it will have the desired effect of slowing, but the open question that obviously relates to what you're asking is how big a slowing will occur. Our forecast of slowing to about 2% is predicated on the assumption that there is a stock market correction that does cause consumers to reverse their spending patterns to some extent. If that doesn't happen, then the Federal Reserve will have to do more tightening. So one way or the other, higher interest rates will slow the U.S. economy. The issue is how much is needed and how quickly it will work.

Mr. Charlie Penson: But doesn't that interest rate policy have some potential for problems as well? In Canada in the early 1980s, that was a policy that was used. It essentially shut down parts of the economy in western Canada, in particular. Isn't there a pretty fine line there? Isn't it pretty delicate when you're using monetary policy through interest rates, that you might actually go too far and have a severe slowing of the economy?

Mr. Tim O'Neill: That risk is always there, because any policy tool—and that includes monetary policy tools like raising interest rates—can never be utilized with absolute precision as to what its impact will be.

I think the reason I wouldn't be nearly as concerned about the possibility of overshooting is that in the 1980s and 1990s, when both the Bank of Canada and the Federal Reserve were tightening, the job they had to do was really twofold: one was to keep inflation from rising, but the other was to actually lower inflation. That was especially the case in Canada, because as you may recall, through the 1970s and most of the 1980s our inflation rate was higher than in the U.S.—which had a negative impact on the dollar—and higher than in many other countries.

The bank had two jobs to do: keep inflation from rising, and actually lower the rate. Well, the second job is done: we have low inflation in Canada. We don't have to do that again. That is why, in an environment where the economy is growing very strongly and the Bank of Canada and the Federal Reserve are beginning to take some stimulus out of the system, they don't have to be as aggressive as they would have been and were in earlier episodes. I say that is especially the case in Canada because of what I projected for inflation. In the U.S., I'm more worried that the Federal Reserve hasn't moved soon enough to prevent inflation from rising to an extent that would cause them to be more aggressive. So you're quite right.

Mr. Charlie Penson: So the frown on Alan Greenspan's face hasn't accomplished what he thought it might.

Mr. O'Neill, there are just two other questions. I'm sorry, I don't have a lot of time, but I would ask if you could address them.

First, I know you talked a little bit about growth and trade outside of North America. Japan is what I'm particularly interested in. What do you see happening with that economy? I understand some recovery is starting to happen.

Also, could you explain a little bit about the trade deficit in the United States? They've had a fantastic trade deficit, yet they continue to have growth year after year in spite of that. Can you give us a better understanding of how that works?

Mr. Tim O'Neill: Certainly.

With respect to Japan, where Japan was the darling of 1980s, it's certainly been anything but a darling in terms of economic growth in the 1990s. The economy has really been suffering and the people of Japan obviously have been suffering as a consequence since the early 1990s. There are signs of a recovery in Japan, but it's halting. You get a couple of quarters of strong growth, and then you get a quarter of very weak growth or actual decline. That's the one economy, certainly the one advanced economy, where there's actual deflation occurring.

In that environment, if you're a consumer or you're an investor or businessman, you're not going to be very encouraged to do anything. If you're on the business side, you're facing falling prices, so what would be the encouragement to invest? If you're a consumer, if prices are falling you're going to wait until they fall further. So there's a real problem with domestic demand in Japan.

• 0955

I think the key to stimulating or kick-starting the economy is the stimulus package we've seen—I'd like to have seen Japan do more on the tax-cutting side—along with export growth. So a strong U.S. and European economy and a strengthening economy in the rest of Asia is a positive for Japan. But we're still looking at about 1% growth this year.

Mr. Charlie Penson: So they haven't made the structural changes that are really necessary in Japan to develop this.

Mr. Tim O'Neill: No. They're in process, and those structural changes will take a while to have an influence.

Perhaps I can move to your second question, with regard to the trade deficit. In fact, the growing trade deficit in the U.S. is a consequence of the strong domestic economy. In effect, the U.S. economy has been the pace car for the economic race of the 1990s. They have been the consumer for the rest of the world, in many respects, which is why they have such a growing trade deficit.

Eventually, something will have to adjust. One way of adjusting it downward, or reducing the trade deficit, is to have the economy grow less quickly, because then import demand won't be as strong. We'll expect to see that as growth slows next year.

The other adjustment factor, which I made reference to in the presentation, would be on the exchange rate. So you would see both growth slowing in the U.S. and the U.S. dollar declining in value, but as a consequence of the strong domestic economy rather than.... Obviously, it's not a cause of growth. It tends to dampen growth because you have a trade deficit rather than a trade surplus.

The Chair: Thank you.

Mr. Malhi, please.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): Thank you, Madam Chair.

In your presentation and in this booklet, you mention that banks are very helpful in terms of lending money to small business. But when I talk to the people in my riding, the people who want to start small businesses, they tell me the banks are very tough with regard to lending money. Could you explain this difference in practical terms?

Ms. Edmée Métivier: Mr. Malhi, we do our best to be able to lend to small business. We do have some financial criteria to meet. The rate of approval of our loans, or the average for the industry, is about 90%.

What I would suggest to you is that most of the time there are questions you can ask your constituents in terms of whether or not they have prepared their case to be able to negotiate with the bank, as well. For instance, do they know the plans for their business? Have they thought about how much money would be required and so forth? What has been their personal credit bureau in the past? So there are some critical criteria that the companies have to meet.

I was also making the point earlier in my presentation that there is a difference between debt financing, which is a more traditional way of financing your company, and equity. Those two have to be balanced. If they're not in balance, then granting credit could be to the detriment of the small business as well, because it would put them, and their investment, in jeopardy.

We continue to look at different ways to be able to help them, but the small business owners also have, in my view, the responsibility to be able to answer some of the fundamentals of requiring financing, and those are around the financial viability of their business, if they're in business.

Mr. Gurbax Singh Malhi: What percentage of the money lent to small business comes from banks as compared with private institutions?

Ms. Edmée Métivier: How much of the financing is coming from the banks...?

Mr. Gurbax Singh Malhi: As compared with trusts and other private institutions.

Ms. Edmée Métivier: The major banks in Canada have only about 50% of the total debt financing in Canada. As we speak, then, we do not have the data on about 50%, because we don't collect that information. Availability of financing in Canada is more than just the seven major banks. It also includes a wide variety of debt financing providers, with whom we don't touch base.

In my view, then, it is becoming much more complex than looking only at the banks.

The Chair: Thank you, Mr. Malhi.

Mr. Jones, please.

• 1000

Mr. Jim Jones (Markham, PC): In the long term, is it good to have a low Canadian dollar? I know your counterpart at the Royal Bank indicated that we could be heading towards the 50¢ dollar, but you're saying the dollar is going to rebound and head upwards.

Why do you feel that way? What things do we have going to take the dollar up versus the downward pressure on the dollar?

Mr. Tim O'Neill: Virtually everything is a positive for the dollar at this point except for the fact that the Federal Reserve is likely to be a bit more aggressive than the Bank of Canada in raising interest rates. What tends to happen in that context is that the faster interest rates move up in the U.S. as compared with Canada, the more attractive it is for money to flow into the U.S. to buy interest-bearing assets.

Apart from that, everything else is a positive for the dollar. Lower inflation is one of the key ones. Certainly the growing gap between inflation in Canada and inflation in the U.S. is a positive. The improvement in commodity prices, which is a major factor in the strength of the Canadian dollar, is a positive. The continued improvement in our fiscal position and the fact that we're heading towards—it will take us a while to get there—the levels of debt burden typical of such triple-A-rated economies like the U.S. is clearly a positive for the Canadian dollar. The final positive would be the significant improvement we've seen in our external balances and the fact that we have a trade surplus and a current account deficit that's close to eliminated now. Those are all very positive for the Canadian dollar.

To get to the first part of your question, whether that's a good or bad thing, you have to remember that for an open economy, we not only sell goods and services to other countries but we also buy from other countries. Much of the machinery and equipment used to expand the capacity of businesses in Canada is purchased outside of Canada. A fairly sizeable percentage of total consumer spending is on imports of goods and services in one form or another.

As Canadians, then, I think we have to think about the stronger dollar not only as a measure of the underlying strength of the economy but also as the benefit it brings to Canadians in terms of their purchasing power in the global context. A stronger dollar is like lower inflation; it's positive for virtually everybody. Even the exporters who benefit from a weaker dollar benefit from a stronger one because they import equipment, for example, in terms of import supplies.

The answer, I think, is that, first, a stronger dollar is a reflection of a stronger economy. You'd want to have that, especially if you're an open economy, as Canada is. Second, the factors that would lead one to expect a stronger Canadian dollar I think are largely already in place.

Mr. Jim Jones: You mentioned something about a stock market correction. Lately in the IPO market you're seeing companies launch and go to $6 billion, $8 billion, $10 billion in market value, with $1 million revenue. Is that healthy, that type of launch of companies like that? Sooner or later there's going to be a correction and it's going to hurt the whole market, I would think.

Mr. Tim O'Neill: It's certainly healthy for those who are doing the IPOs—

Voices: Oh, oh.

Mr. Jim Jones: Yes, but somebody's going to get burned.

Mr. Tim O'Neill: —or for the people who are able to buy the shares, for as long as it lasts. But I think the point is, as I said earlier, that if something appears to be too good to be true, or unbelievable, chances are pretty good that it is unbelievable, that it can't be sustained. I would anticipate that if the high-technology stocks, the .com stocks, are overvalued—and many of them are relative to their current earnings or any reasonable forecast of what their expected earnings would be—there will be a correction in the value of those equities, inarguably.

I suppose we may be seen as being unfortunate in Canada, not having a huge number of those. But when the correction happens, the companies that are really solid, the bigger companies whose values have been rising in this market, will continue to be strong. If they're strong companies now, they'll be strong companies into the future.

• 1005

I would be concerned if an average Canadian investor were overloaded with some of the smaller companies that are actually losing money, because many of those will likely not only decline in value, but disappear. The only issue is when that will happen.

I wouldn't be overly concerned about how dramatic the impact will be on the broad economy. Certainly declining equity values will have an impact on the wealth of the average Canadian and American. It will cause them to reverse some direction in their spending. We haven't had the speculative boom to the same extent as we've seen it in the U.S., so we don't have as far to fall.

The other point is that if you look over the last year or so, the broader equity markets, especially in the U.S., have not been doing as well as would appear if you looked just at the NASDAQ, at the tech stocks. They've actually been sort of tracking sideways. In a sense, we've already seen elements of a correction beginning to occur in equity markets, which means that across the broad spectrum, the impact won't be as devastating as it will be in those cases where people are overloaded in ownership of high-technology stocks.

Mr. Jim Jones: The world economy is growing. The U.S. seems to be able to grow their percentage of the world GDP. Why are they able to grow their percentage of the world GDP, as all the other countries' economies are growing, yet Canada's has decreased?

Mr. Tim O'Neill: I think that's certainly true for the 1990s. As I mentioned earlier, in the 1990s Canada's economy, for fairly straightforward reasons, underperformed the U.S. economy significantly—underperformed its own potential. If you look at the first half of the nineties, basically we had both much tighter monetary policies than the U.S. and tighter fiscal policy through the middle of the 1990s. One may debate whether it was too much, too little, or too long, but the fact is that was the situation we were faced with. That period is over, but for as long as it was there, it meant we were losing ground, relative to the U.S. and the rest of the world.

On the other hand, I think the U.S. economy is overheated. It's been overstimulated. There's a payback for that. The payback will be slower growth, probably for a more sustained period of time than we're likely to see in the Canadian context. I think at the end of the day, having gone through what we described in our annual outlook document in the fall as the decade of woe, we'll go through a decade of much stronger relative performance in Canada. The concerns about where we are in the league tables among the world's economies will begin to dissipate.

The Chair: Last question, Mr. Jones.

Mr. Jim Jones: In your paper you're predicting a slowdown in the U.S. economy in 2001. Is Canada immune from that?

Mr. Tim O'Neill: No. In fact we'll see the same kind of slowing in Canada.

Mr. Jim Jones: Will we go into that recession or slowdown quicker than the U.S.?

Mr. Tim O'Neill: It will probably happen at about the same pace. One of the things that was notable about the 1990s was that the Canadian economy, unusually, was significantly out of sync with that of the U.S. It recovered from a very modest recession very quickly and very substantially. We didn't do that for reasons I've alluded to.

I think we're now more synchronized with the U.S. economy than we were through the 1990s, so our profile of economic growth will look very much like that of the U.S., with the same timing. But as I said earlier, in the bounce-back we'll be performing at least as well as and probably better than the U.S. economy.

The Chair: Mr. Pickard, please.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Thank you very much, Madam Chair.

• 1010

I guess because the budget came out recently, it has a major effect on our fiscal policy, as well as our monetary policy. Do you have any comment about the mix and balance of the budget, what you've seen, and what you believe is happening within Canada? Has the monetary and fiscal policy helped us in a competitive way, or has it hindered us? What do you see as the projection, as we're moving at a very slow pace in reducing taxes? How will the steps that have been taken in the budget this year affect the Canadian economy down the line?

Mr. Tim O'Neill: Let me start with a general comment about monetary and fiscal policy. In the early and mid-1990s, their joint impact on the economy was to slow it down and create the kind of problem Mr. Jones referred to of sort of falling behind the growth rates in other countries.

We're now in a position where they are both providing competitive benefits for Canada. In particular, I think we saw in the budget the other day important strong moves on tax reduction, which are beneficial in a wide variety of ways. Of particular importance were the beginnings of the process of reducing taxes on business, which will ultimately encourage investment and growth, productivity growth in particular, in Canada.

Secondly were the beginnings of movement in the reduction of personal income tax rates, pretty much across the board. I think the most important and positive component of that was the re-indexation of the tax system. Almost every economist of whatever stripe, wherever they are on the philosophical spectrum in this is strongly in favour of a re-indexation of the tax system.

Personally, I would have preferred to see a bit more movement on reducing the debt directly. That's a position we've held and I've held publicly now for some time, so there's no surprise there. The reason for that is that the faster we move the debt burden down, the more manoeuvrable we can be if the economy hits an economic air pocket of greater severity than we're anticipating. For example, if my concerns expressed in the risk part of this discussion were to become fact and we actually saw a boom-bust, we'd be in a much better position to deal with that, in terms of both using fiscal policy to offset some of the negative consequences of an external shock coming from the U.S. and—if I can put it this way—to get forgiveness from financial markets, if we had to go off track on our fiscal policy for a year or so, for example.

Lowering the debt more quickly also reduces debt servicing costs more quickly and gives us more room for both tax cuts and, if it's considered desirable by the government of the day, spending increases. That would have been my preference, and a bit less, obviously, on the spending side, which could have been used for debt reduction.

Generally speaking, I think the budget was what I would regard as a strong performance, if I could put it in terms of a review of a performance by an orchestra. Maybe a couple of beats were missed in it, but it was largely a fairly positive budget, in terms of its impact on the Canadian economy.

The Chair: Last question.

Mr. Jerry Pickard: Thank you, Madam Chair.

I would like to suggest, or maybe get your comment, that the direction and the cushioning of actions by the finance minister and the government have been done in order to make certain that if we come to a boom-bust there will be a cushion there, and he will be able to deal with the fiscal policy in the country without upsetting the direction.

If we were to spend all of the deficit potential at the beginning of the year, without accumulating a cushion, we might have a major problem. But I think he has, in the approach, taken into account the fact that we are in a cyclic, up-and-down type of situation. That is what he's doing. Is this just another philosophical difference, or would you suggest that possibly he's being too cautious, as some people have?

• 1015

Mr. Tim O'Neill: No, I think caution, especially in a finance minister, is a character trait that is a very positive one. I have on many occasions argued that this caution was appropriate. It was clearly appropriate in the context of the deficit reduction campaign. That was critical, I think.

Even in this context, recall that in 1997 we would have been looking at a bright future in 1998 and 1999, and then the Asian crisis hit. So you have to be prepared for those kinds of external shocks. If it's an internal one, you have some control. If it's external, you don't. So I think a boom-bust potential certainly requires caution. That's why we've been very strongly supportive of the contingency reserve and committing that, if it's not used, to debt reduction, and of the prudence factors that are built in to the budget. I think those are important.

I would prefer—and I'm expressing a personal preference here—that if we end up not using or not requiring the prudence factor, if we end up with a surplus at the end of the year that is unexpected, it ought to be used specifically and only for debt reduction. That would be my preference.

The Chair: Thank you, Mr. Pickard.

Mr. Jerry Pickard: Could I just ask one further question, a short one?

The Chair: Well, it's taking a lot of time.

Mr. Jerry Pickard: If you had a choice of being finance minister and you had to make decisions over the past, what would you have done differently?

Mr. Tim O'Neill: I think the only thing of substance I would have done differently—and certainly in the last couple of years that we've actually had surpluses—is that I would have used whatever additional unexpected surpluses were available for debt reduction, rather than the spending increases we've seen. That's the only material change I would have made.

Mr. Jerry Pickard: Okay, thank you.

The Chair: Thank you, Mr. Pickard.

I'd just like to remind members that we are here to talk about SME financing. I know there's a temptation to drag Mr. O'Neill into other conversations, but we are here to talk about SME financing. So let's try to remember that.

Mr. Jim Jones: What did you say? I couldn't hear you.

The Chair: I said we are here to talk about SME financing today, so let's try to focus on that just a little bit better. This is not the finance committee.

Madam Jennings.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you, Madam Chair. I'm glad you reminded my colleagues what the topic on today's agenda is.

My colleagues have focused on asking Mr. O'Neill about economic projections, and have put no questions to Ms. Métivier, who has been very quiet indeed. Ms. Métivier talked about the initiatives banks are taking to help small business. On page 3 of the English version of her brief, she states:

Banks are also forming strategic alliances and are working cooperatively with other stakeholders to enhance financing options. Many of these specialty programs have a particular focus on supporting the activities of knowledge-based industries.

Could you please elaborate on this? These initiatives seem very interesting, but I am not sure that I understand them very well.

Ms. Edmée Métivier: I will use an example to answer your question, Ms. Jennings. We can talk about the KBI sector—knowledge-based industries—in a little while, but first, I will talk about financing for small businesses. Banks are trying to find ways to finance very small businesses, by which I mean those who need less than $10,00 or $15,000. In most cases where we're talking about micro-credit, an area where banks have traditionally not had much success. These very small loans require a great deal of attention.

• 1020

We form alliances, such as Calmeadow in Ontario, within which banks support an organization that grants smaller loans. We give the borrower much more support than we give major companies taking larger loans.

Most banks also provide services to young entrepreneurs, through the Canadian Youth Foundation. Here, I have given you two examples where banks have worked together and formed a partnership with an association so that very small businesses, which often consist of a single person, can also have access to credit.

Ms. Marlene Jennings: I was just going to talk about people who are self-employed.

In today's economy, where many sectors are becoming restructured, the number of self-employed people is increasing. Have banks developed new products and services geared to the needs of self-employed people?

Ms. Edmée Métivier: Absolutely, Ms. Jennings. There's a whole range of new products, some of which were developed only in the past two years. We offer self-employed people products that were not accessible before, such as the credit cards most banks offer to small businesses.

I'll take your question from a different perspective, from the standpoint of the client himself, the person who wants to start up a business. Today, we can offer that client many more choices, and many more financing options, than he would have had several years ago. Some self-employed people prefer to finance their business in their own name, rather than in the company's name. That is a personal choice which banks respect. However, the data we have provided here today do not include such personal financing.

The self-employed person also has the option of dealing with a chartered bank or with a less traditional institution, for example a credit card issuer based in Canada or elsewhere. The Internet has also given this category of entrepreneurs new funding possibilities, such as financing auctions supported by several financing institutions. Many diverse funding options are available to consumers, regardless of whether they are individuals or businesses. Today, banks represent only one of those options.

Ms. Marlene Jennings: You say that banks represent only one of many options. Do you have any data on the number of services and products available, the institutions which make them available, those institutions' market share and a profile of their clients? Can we distinguish small businesses financed under the owners' own name, and can they be identified as self-employed people? Do you have such data? It would be interesting to determine whether our government policies meet their needs. To date, we have focused on banks and traditional financing institutions. We do have to ensure there is a level playing field, however.

Ms. Edmée Métivier: This is a point that I put forward in my presentation, Ms. Jennings. We only have half the overall picture. At present, we have no information on other sectors that offer financing in a less traditional form than the banking industry. I think we did say something about this when we were talking about the banking industry.

• 1025

[English]

Alan, maybe you can add to this one. There is work being done to capture that side as well.

Mr. Alan Young: Sure. In the June 25 policy paper the Minister of Finance released last year setting out the policy framework for financial services as a whole, one of the elements had to do with small-business financing, and the policy paper recognized there is an information gap. It acknowledged that the CBA, with the government, has produced a significant body of statistics for several years, and government has recognized that it is just a small part, about half, of the debt-financing market. So the government policy is to have Industry Canada and Statistics Canada take responsibility for serving small business, and for serving not just the banking industry, but other providers of financing to the small-business community.

We think this is a very positive step the government is taking, and we hope to learn more details about that in the months ahead. But it is a very important step.

If I could just go back to your first question about knowledge-based industries and the banking industry, for your information, on the CBA website that Edmée referred to in her remarks about serving the needs of small business, there is a segment that lists a very impressive number of special programs and investments the banking industry has made specifically in KBIs. So I draw that to your attention.

Ms. Marlene Jennings: I have one further question. In terms of the surveying that will be done by Industry Canada and Statistics Canada, do you know if there will be any attempt to garner information about les travailleurs autonomes? I forget what the term is in English.

Mr. Alan Young: I don't know. I don't have the details on that. I think Industry and Statistics Canada officials are in the early stages in considering this. I don't have that information.

Ms. Marlene Jennings: Thank you very much.

The Chair: Thank you very much, Madam Jennings.

Mr. Penson, please.

Mr. Charlie Penson: Yes, thank you.

I have two questions. Maybe I'll just ask them both, and then you can reply afterwards.

First of all, just getting back to the budget for a moment, I recognize, Mr. O'Neill, that you have suggested the direction is very important. Some of the corporate-side stuff in terms of tax reduction is occurring over five years—only 1% reduction in corporate tax this next year.

My question, though, has more to do with trying to catch up to a moving target. Even though Canada has moved in a positive way in terms of some tax relief, other countries and other trade blocs are continuing to move further. My question would be whether it's important to respond, given we've had such a tremendous divergence in productivity between us and our major trading partner, the United States, in the last ten years. Even though we have some modest tax relief in the budget, my understanding is that the U.S. is planning to move even further. So that's my question to you.

The second question—to the whole panel—would be in terms of why it's necessary—

The Chair: Let's do one question at a time, because we have to make sure we allow everyone equal time, and if you're going to ask long questions—

Mr. Charlie Penson: Well, if we can't get to it, I would prefer to have a written answer rather than no answer at all.

The Chair: Well, let's just wait, then. Let's hear the first answer.

Mr. O'Neill, please.

Mr. Tim O'Neill: I think, first of all, with respect to productivity differentials, we had done some work on that ourselves, and it would appear that the gap in productivity growth that was felt to be there about a year and a half ago is largely not an issue. There is a difference in the productivity levels between Canada and the U.S., inarguably. There are certain sectors of U.S. manufacturing that have experienced faster productivity growth than the equivalents in Canada. I suspect that's primarily a consequence of what I was describing earlier, the differences in macro-economic performance for the 1990s.

Having said that, obviously lower taxes are more stimulative of economic activity than higher ones. One can't deny that. And with respect to corporate taxes or business taxes in general, that is one of a number of influences on decisions made by companies, by individual entrepreneurs, about where they want to make their investments, but it's by no means the only one.

• 1030

The position I've taken very publicly and very often is that I wouldn't want to suggest that there's a magical elixir here, that if we can only get the tax rate down to a certain level, we somehow will magically transform the Canadian economy. Certainly it will be helpful to have a lower tax burden than we've had in the past.

With respect to where the U.S. is going to go, as you probably know, there's a very significant debate now about how surpluses will be used in the U.S. beyond those which are going to be dedicated to social security. I was recently reading some debate about whether the surpluses will be nearly as large as people are hinting or suggesting or projecting they will be. The extent to which the U.S. will actually go through significant tax cuts is up for debate at the moment, I think.

The Chair: Go ahead, Mr. Penson, with your second question.

Mr. Charlie Penson: Well, a new administration is going to be elected fairly shortly, and I would expect that would be part of the equation as well. My understanding is that coming out of those presidential campaigns, there are several people campaigning for lower taxes.

I'd like to debate this further with you, but I want to move to the other part of my question and that is the reason for the government to be in the banking business. Take the Business Development Bank, for example. Is there something that the Canadian banking industry, your companies, is doing that's not responding to Canadian small business that necessitates the Canadian government to be in the banking industry? Can't you supply that need?

Ms. Edmée Métivier: Part of the development bank's mandate is to offer higher-risk loans, which means loans to companies that have either stretched themselves financially or are growing extremely fast and don't necessarily have the working capital to be able to support that. For instance, BDC will grant loans that banks would not do simply because they're based on the working capital requirement of the company.

What they do in addition to that is provide financial business advice. I would say they monitor the company more closely than the traditional bank would be able to do. They also do some financing that is on a longer-term basis, which the Canadian banks are not doing right now.

Mr. Charlie Penson: Well, why not?

Ms. Edmée Métivier: The terms are longer than what we could do. Ten-year terms on mortgages for businesses have different criteria, I would say. The risk of the portfolio of BDC is usually higher and they get a higher return for it as well, I might say.

Mr. Charlie Penson: If for some reason the Canadian government decided not to be in the banking business, are you suggesting that this need would not be filled?

Ms. Edmée Métivier: I think there are emerging alternatives for that. There are, for instance, organizations that specialize in what I call higher-risk loans or lending. For instance, you have companies that are coming from the United States and establishing themselves in Canada that are doing discounts on accounts receivable, factoring, and so forth. We do have some Canadian companies, but it seems the market is relatively small in Canada. To be able to succeed in that, you have to have some scale and scope as well.

Mr. Charlie Penson: Are there any impediments to those companies that are coming in and doing business in Canada? Are we allowing them to provide that service to Canadian companies that are looking for higher—

Ms. Edmée Métivier: Not that I know of. Nothing. If they are not a bank, there is no impediment.

If we go back to your question around BDC, BDC works with traditional banks. They don't capture deposits, they don't capture operating facilities. The difference is that usually a company will have a traditional bank and possibly a loan from BDC as well. So it's an add-on to the existing financing and it is somewhere between traditional financing and equities.

• 1035

If you had to rate the lending, you'd have traditional financing, which is your normal operating loans—

Mr. Charlie Penson: I understand that.

Ms. Edmée Métivier: —loans for equipment, and BDC is somewhere there. Then you have—

Mr. Charlie Penson: But you've also told us—

The Chair: Mr. Penson, we have to move on.

Mr. Charlie Penson: —that there's a higher risk factor.

The Chair: Mr. Penson.

Ms. Edmée Métivier: There is usually a higher risk.

Mr. Charlie Penson: Therefore the Canadian taxpayer is picking up that risk, I would guess.

The Chair: Thank you, Mr. Penson.

Mr. Ianno, please.

Mr. Tony Ianno (Trinity—Spadina, Lib.): Thank you very much.

Aside from the stats, I was saying the economy is good, small business must be having good cashflow, so there are very few questions. But Mr. Penson got me going.

First of all, in terms of higher risk, this is the old ghost we dealt with for many years when all the banks came and I guess it's reappeared. Could you tell me the loan loss ratio for small business versus large business, since you said it authoritatively?

Ms. Edmée Métivier: I'm not sure I have that information available right now.

Mr. Tony Ianno: Then how would you know that the BDC's—

Ms. Edmée Métivier: Are you talking about loan loss ratio for smaller businesses as opposed to larger ones?

Mr. Tony Ianno: Yes.

Ms. Edmée Métivier: I'm not sure we have that.

Mr. Tony Ianno: If you don't have that, how about the loan loss ratio for small business regarding your bank versus the BDC's bank?

Ms. Edmée Métivier: I don't have the information on BDC, Mr. Ianno.

Mr. Tony Ianno: So how could you state that the higher risk...? What does that mean?

Ms. Edmée Métivier: The mandate of BDC is very different from the mandate of the traditional banking industry. I'm assuming the members of the committee would know this too.

Mr. Tony Ianno: I see. What is its mandate?

Ms. Edmée Métivier: The mandate was originally to help entrepreneurs to start up their business. For instance, if you had no history or you wanted to start a business and purchase a building for a longer term, the BDC was there to help those start up.

Mr. Tony Ianno: Are we talking historically or currently?

Ms. Edmée Métivier: Historically.

Mr. Tony Ianno: How about currently?

Ms. Edmée Métivier: Currently, I have no idea. In my dealings with BDC, where I see them financing companies is mostly in the areas where we are not.

Mr. Tony Ianno: I see. Going along with Mr. Penson's perspective, you don't know whether it's higher risk because you don't have the stats.

Ms. Edmée Métivier: No, we don't have the statistics.

Mr. Tony Ianno: Yet you're stating it as a gut instinct, I would assume, because you don't have the facts.

As you may know, in the last six to seven years, we've looked at the loan loss ratio here, with all the banks, for small business versus large. We're surprised that all of a sudden the banks realized that there wasn't a difference, that the loan loss ratio for small business was relatively the same. So we wonder where the word “risk” is coming in from.

From another perspective, since the BDC is filling a role that you feel is important and something the banks don't want to touch because of the higher risk, should they become deposit-taking institutions so that at least they can continue servicing that high-risk market?

Ms. Edmée Métivier: You're talking about the BDC changing the mandate they have currently?

Mr. Tony Ianno: Well, the government changing the mandate of the BDC.

Ms. Edmée Métivier: I don't think I can answer that on behalf of the industry today because that's not necessarily the purpose.

Mr. Tony Ianno: Of what?

Ms. Edmée Métivier: Of why we're here.

Mr. Tony Ianno: Oh, isn't it? Small business?

Ms. Edmée Métivier: Well, small business is. I agree with you.

Mr. Tony Ianno: I see.

Ms. Edmée Métivier: Quite honestly, I can't express an opinion to you today on the role of BDC and where the government wants to take it.

Mr. Tony Ianno: But you were stating an opinion to Mr. Penson about the high risk and the need that the BDC was fulfilling.

Ms. Edmée Métivier: Yes.

Mr. Tony Ianno: I thought you might be aware of the BDC's role and how it affects the economy, especially the small-business sector.

Ms. Edmée Métivier: I agree.

I guess I wasn't very clear in my statement; my apologies for that. In traditional banking, we have criteria around financing, most of which require that, whether it's an operating facility or a term facility, we gather deposits as well for companies. The BDC, at one point in their life, had a reason to be there. Whether or not their reason is still valid today, I can't answer that.

Mr. Tony Ianno: But you just finished saying.... I don't know if I'm missing something.

Mr. Penson, you might jump in. I don't have a problem with that, even with my time.

You had stated to him that there was a role for the BDC. It fulfils the need of the high-risk, small-business sector that you, the banks, will not touch. With your last statement, I don't understand how that works. Maybe you can get back to us on that, if that's possible.

Ms. Edmée Métivier: I can do that. Absolutely. Thank you.

I guess what I'm saying to you is that there is a role for them. What is the role in the future? Should they be gathering deposits? I don't know at this stage.

• 1040

Mr. Alan Young: The CBA does produce, on an annual basis, loan loss provisions. One of the commitments we made to the industry committee back in 1995 was to provide these. Our latest loan loss statement was in June of 1999. I can read out the numbers for you.

Mr. Tony Ianno: No, if you can supply them for us, that would be great.

Mr. Alan Young: Sure, I'd be happy to. It was done in June of 1999, so the summer of this year we'll have the more recent stats.

Mr. Tony Ianno: On another matter, it's often noted that the banks only do 50% of most financing for business, especially small business. Why is that the case? Why was there a need? Why were they able to grow? And should the group that supplies the 50% be allowed, with the white paper that's coming forward, more access so that they become deposit-taking institutions and are able to get the money at a cheaper rate also?

Ms. Edmée Métivier: You're talking about non-traditional banking.

Mr. Tony Ianno: Of course—what you were referring to.

Ms. Edmée Métivier: I think one of the roles of the banking system in Canada is to protect the deposits of the consumer as well. So if you were to open the market and allow other people to take deposits, whether it's BDC or any other organization, they would have to fall under the same criteria as the banking system.

Mr. Tony Ianno: Of course. Yes.

Ms. Edmée Métivier: So anyone who would like to take deposits can apply for the ability to become a bank in Canada. Mr. O'Neill can add to that; he's probably more expert than I am. But in taking deposits the primary role of the banks is to ensure that the depositor will have safety at the end of the day.

Mr. Tony Ianno: Of course. And that's where OSFI comes in.

Ms. Edmée Métivier: Which also brings me to the issue of lending. When we are lending, it's also a part of our role to make sure that the money we've gathered from our depositors—

Mr. Tony Ianno: Of course that's the reason for loan loss ratios: it's so that we understand the difference in terms of risk from large business versus small.

Ms. Edmée Métivier: Right.

Mr. Alan Young: There are many deposit-taking institutions in Canada that are non-bank deposit-taking institutions. The caisses populaires in Quebec have a significant part of the market in Quebec. Credit unions in British Columbia and Saskatchewan have a significant part of the market as well.

Mr. Tony Ianno: Right. What is their percentage?

Mr. Alan Young: In Quebec, I don't know; it's at least half, about 50%. In British Columbia, between 30% and 35%—

Mr. Tony Ianno: So overall in the nation, how much is it?

Mr. Alan Young: I don't have that. I could do a calculation on the back on the envelope.... But with deposit-taking ability come all sorts of obligations and regulations.

Mr. Tony Ianno: No doubt.

Mr. Alan Young: The June policy paper the Minister of Finance released last year, which will be translated into legislation this year, is designed to encourage more entrants into the marketplace through changes in ownership policy so that for the first time an individual or a company could own a small bank in Canada. They're establishing the framework for more institutions, individuals, to be able to accept deposits if that's the way they choose to do business in Canada.

Mr. Tony Ianno: Thank you. I have one more question.

The Chair: Very quickly, Mr. Ianno.

Mr. Tony Ianno: In terms of the small-business stats, I notice that from 1998 fourth quarter to the one we have the latest quarter on, the third quarter 1999, in terms of small-business lending, even though there have been more customers—and of course in the last year and a half many more people have set up small businesses, so the percentage is a lot higher than it was before—you've increased not a great deal in terms of the number of customers. Although it's more in the end, the overall number hasn't changed; in fact it's gone down with the number of loans to small businesses. Could you explain why?

Ms. Edmée Métivier: Are you talking about the authorized or outstanding?

Mr. Tony Ianno: Outstanding. I want to deal with outstanding.

Ms. Edmée Métivier: There are a couple of things. We've been going through a number of years when the economy has been doing extremely well, so when the economy's doing well cashflow usually is pretty good. Some of our customers are actually in the deposit situation and they don't necessarily require financing.

Mr. Tony Ianno: With the large businesses, I suppose they went up quite a bit, but it's the same concept?

Ms. Edmée Métivier: I would say.

Mr. Tony Ianno: I see.

As an aside, a last question, the rate of return for the banks in the last announcement is what, approximately 19% for most of them?

Ms. Edmée Métivier: Yes.

Mr. Tony Ianno: Could you tell me the best rate of return for the banks that exists on the average internationally?

Ms. Edmée Métivier: That would be in the U.S....

• 1045

Mr. Tim O'Neill: The British banks.... Lloyds has about 30% or 35% return on equity and Barclays is now around 25%. Some of the top-tier U.S. banks are in that sort of 25% or 30% territory.

Mr. Tony Ianno: So in the last year and a half, the British banks have grown from roughly the 22% at the Hongkong Bank up to 35%?

Mr. Tim O'Neill: No. Lloyds actually has been in that 30% range now for probably about three years. I can't speak for Barclays, because I don't carry those numbers around in my head, but that's a more recent phenomenon. And some of the top U.S. banks have done it for several years, some recently, so—

Mr. Tony Ianno: Could you send us the information on the international so we can do the comparison to see how it works?

Mr. Tim O'Neill: Sure. Do you want ROE or ROI?

Mr. Tony Ianno: ROE. That way, taking into account that the banks are doing better than they've ever done in terms of 19 versus 15, I wonder how much better they would have done with a merger. I'm curious from that perspective.

Mr. Tim O'Neill: I'll also, if you want, send you the same timeframe, maybe the last three or four years, for Canadian banks as well so that you have it.

Mr. Tony Ianno: Yes, perfect. Thanks very much.

The Chair: Send that through the chair. That would be appreciated. Send it through the clerk. The clerk wants it too.

Mr. Tim O'Neill: Certainly.

[Translation]

The Chair: Mr. Brien.

Mr. Pierre Brien (Témiscamingue, BQ): I have a question for Ms. Métivier.

When people in my region—Abitibi—Témiscamingue—express in my view legitimate fears that regional bank branches will disappear, what do you suggest I tell them? The last bank which got rid of some of its regional branches was the National Bank, and credit unions are going the same way. We see fewer and fewer regional branches. As these financial institutions restructure their organizations, the decision-making gets further and further away from us. I should point out that I'm not blaming the National Bank, because it is one of the rare financial institutions that did keep a regional branch in our area.

Moreover, the amendments to the Bank Act will give rise to another phenomenon. We all expect that the banks will finally find a way to merge. If things go the same way they did the last time when one bank tried to buy out another, there will very likely be downsizing in branches, and some branches will even close. I cannot imagine that a merged bank would continue operating two branches side by side.

And moreover, I cannot believe that the first market a foreign bank will try to penetrate when it establishes a foothold in Canada will be Abitibi-Témiscamingue.

Therefore, I believe that in my area competition will actually drop. And we will have far fewer places to go for credit. The trend we are seeing in the regions is fewer branch offices, fewer players, and therefore increasingly difficult access to credit. So what do I tell the people who share their fears with me?

Ms. Edmée Métivier: Mr. Brien, I believe this is a very legitimate fear for people in the regions. We are well aware that there have been changes in how loans are made and access to financing provided.

The banking industry is rationalizing what I would call its physical presence. However, that rationalization is balanced by a growth in access through different channels, be it through electronic access, Internet access, or other means. People can obtain financing by communicating with an institution by telephone, which is very useful in serving clients in remote areas. Today, they can apply for credit without leaving home, just by calling a call centre which then helps them obtain the needed financing. I would suggest that you recommend such means to people in your region.

I'll say a few words about a project the Royal Bank is implementing. At present, we are establishing a financing auction to which small businesses will have access through the Internet. A client can set up an Internet link and consider financing options. If he knows that he needs a $50,000 loan, he will be able to determine what the best rate is, and how he can best obtain it.

• 1050

Entrepreneurs in your region can use these means to access financing. This may not be the traditional means we have known before, but in my opinion they are much more efficient. Clients in the regions will now have far more choices: instead of two or three choices, they will have many.

Mr. Pierre Brien: They are a little sceptical about this, and it is a scepticism I share. It seems that banks want to abandon those markets, which are not very profitable, and leave it to credit unions and government institutions, like the Business Development Bank of Canada and the Community Futures Development Corporation. These are government institutions that are getting some of the loans which were previously handled by financial institutions.

On-line services are great, but our credit application still has to be approved. I'm not denying that on-line services are very important and are the way of the future, but it does become more difficult to judge a business and its credit worthiness. Confidence, as well as the relationship an entrepreneur builds with his financial institution and his own credibility are all important factors. People in regions like ours have the feeling that these factors matter less and less.

If I had any advice to give you—although I am not of course here to do that—I would tell you that your link with business people is rather distant, and that too few banks are coming to the regions to introduce new services and explain how we could use them, or to tell us where we are going. You should come and listen to their message. They feel somewhat forgotten and abandoned, and as a result tend to respond automatically. The Canadian Federation of Independent Business opposed bank mergers because it did not see how such a merger would benefit its members. We as parliamentarians are in a difficult situation: our constituents do not want us to support bank mergers, but we ourselves do know they will become necessary. I think it would be in your best interest to reach out more to people in the regions, and talk to them. That is the message I have for you today.

Ms. Edmée Métivier: Thank you, Mr. Brien. I shall take note of your concerns. This is something the Industry Committee will be studying.

I concede that I have already heard others say the same thing, and we will have to do everything we can to let at least our clients know that they can have access to financing in a way that is somewhat more advantageous for people in the regions. Thank you.

[English]

The Chair: Thank you, Mr. Brien.

Mr. Jones.

Mr. Jim Jones: A couple of my questions were asked by Mr. Penson—

Mr. Charlie Penson: That's why we have to unite. You can come over and join us.

Mr. Jim Jones: In the U.S. the percentage of GDP in the high-tech sector is 40% to 45%, and in Canada it's roughly around 20%. Do you think the recent budget addresses this issue? If not, what do we have to do to increase our participation in that sector?

Mr. Tim O'Neill: First of all, doing percentages of an economy that is high tech is at best potentially misleading. In a sense, every sector of the economy has high-tech elements. That includes agriculture, mining, forestry, and so on. I was recently at a conference in which somebody in the chemicals industry, certainly an old industry by anybody's standards.... They now have “dot-com” companies that are into the distribution side of that business. So in a sense all parts of the economy have high-tech elements.

The other point I'd make is that if you're in an economy, as we are, blessed with a lot of natural resources you're invariably going to have a higher proportion of your activity associated with those industries, with those sectors, with harvesting and processing and selling those. I don't think there's any problem with that. It's profitable, valuable, and people will be involved in it.

With specific reference to a couple of sectors like electronic and electrical equipment, communications, those are two areas that have been growing very strongly in the U.S. We recently released a study in which we looked at projections for various sectors, and those have been the highest-growing sectors in Canada as well as in the U.S. So we're starting at a lower base, and hence the percentages may be relevant in that case, but certainly we're growing very quickly. Our projections are that those will also be the fastest growing. Irrespective of what might have come out in the budget, those will be the fastest growing sectors in the Canadian economy for the next five years.

• 1055

So to be quite candid with you, I'm not sure there's a lot we need to do or should be trying to do aggressively or actively with government policy to encourage high-tech sectors.

I thought one of the best things that came out of the budget was the effective levelling of the playing field that will occur over the next five years as the corporate income tax levels come down, especially for those sectors that had been disadvantaged by not having any special tax breaks. That's probably the best thing we could have and we can do to ensure that high-tech sectors, highly knowledge-intensive sectors, whoever they are, wherever they are, are able to compete on an equal footing for investment dollars and for markets.

Mr. Jim Jones: When a lot of the large corporations, the multinationals, are growing and expanding, we're not getting our percentage of the growth of their expansion. They're electing either to grow within the U.S. borders or to go to other countries. Why is that?

Mr. Tim O'Neill: I think, generally speaking, that has not been the case. It's interesting, because one of the concerns we've heard recently raised is about the extent to which foreign investors are now buying up Canadian companies. So obviously they're interested in Canada if they're buying assets here and investing in Canada.

If you look at the period after the Canada-U.S. Free Trade Agreement, in fact what you saw happening was that in almost all the major sectors where we had multinationals involved, especially in manufacturing, what they ended up doing was restructuring themselves, but not shifting activity out of Canada. They had more focused activities in some of the plants in the U.S. and more focused activities in Canada. Basically, there was no loss of investment, no loss of activity from those multinationals in Canada.

I think the one negative factor over the last ten years has been that in a slow-growth environment, in a weak economy, investors find it less attractive to invest. As I said earlier, that's in the process of changing. So to whatever extent we may have lost out on investment in recent years because of that, that situation is very likely to change and is already in the process of changing.

The Chair: Thank you very much, Mr. Jones.

I want to ask a couple of quick questions on areas that I don't think were covered earlier by other members, in particular about SMEs. I don't know if you can, but how do you explain the increase in the loan authorizations under $250,000 in the last set of statistics?

Ms. Edmée Métivier: How do I explain the increase in loan authorizations below $250,000? I think it's a combination of several factors. First of all, in my view, the availability of products below $50,000 has been a big breakthrough for banks in the last two or three years.

I think the favourable context in the Canadian economy has also spurred a larger number of new small businesses. Generally speaking, some of these companies have been growing just in the last four or five years. So we've seen more new companies being formed, more small business growing, and I would say as well that the number of products has increased, the availability of products.

The Chair: Would most of those loans be guaranteed under the Canada Small Business Financing Act?

Ms. Edmée Métivier: No, I wouldn't say so. It would be about 20% of that.

The Chair: About 20%, okay.

Mr. Alan Young: It's 18%, to be exact.

Ms. Edmée Métivier: Thank you.

The Chair: Thank you.

As well, according to the statistics, between December 31, 1995, and September 30, 1999, the number of clients in some regions seems to have declined—in particular, in Quebec and the Atlantic region. Is there an explanation for that, or is there something we can put our finger on as to what the problem or the issue is?

Ms. Edmée Métivier: I can talk about Quebec, because that's the market I've been following probably a bit more closely. In Quebec, the market share of the caisses populaires has grown increasingly; they have nowhere else to grow but in the province. So the number of customers that has decreased from the banks has gone to the caisses populaires. It's not because their economy is not doing as well; it's simply because there has been a shift in the customer here, and it's the choice of the customer most of the time.

• 1100

The Chair: With regard to the statistics, if you look at the charts on pages 4 to 11, as a committee, we note that there's an increase in the authorized credit in Ontario and in the prairie provinces. In industrial terms, there's also an increase in the amount authorized in agriculture and related services, fishing, trapping, manufacturing, and business services.

The agriculture one is of particular concern to me when I see the increases and what's happening in agriculture and we hear Mr. O'Neill talk about commodity pricing and the fact that he's not anticipating it to go any higher. Yet we know commodity prices in agriculture are at record lows for grains and oilseeds. What is that going to mean for the loans that are out there for small and medium-sized businesses?

Ms. Edmée Métivier: Do we capture anything else in agriculture but agriculture and farming?

Mr. Alan Young: There's fishing and trapping.

Ms. Edmée Métivier: Mrs. Chairman, I can speak for my own bank here, simply because I know we are following that portfolio quite closely to make sure its progression and success continue to be there. There has been a higher demand. I could get back to you with more details, if you wish.

The Chair: I would appreciate that, and I'm sure the committee would, because it has come up several times during our discussions on productivity and where agriculture is at in Canada and what the results are. Based on Mr. O'Neill's comments on commodity pricing, it leads us to believe we're going to be looking to the banks for some flexibility before this year is out. We're asking where you're at on it. So I would appreciate that.

Mr. O'Neill, very briefly, you mentioned about inflation in the United States and U.S. productivity. Are we too worried about U.S. productivity? When we look at the fact that U.S. productivity is increasing, doesn't that also mean that the safe inflation line may actually be decreasing? It seems to be holding its own, yet U.S. productivity is increasing so much that the gap between Canada and the U.S. was 20%, and now it's 25%. Yet we seem to be holding that line right across.

Mr. Tim O'Neill: There's no question that the single biggest and most interesting issue for economists, including those at the Federal Reserve is, first of all, to what extent will the increase in productivity growth that we've seen in the U.S. be sustained, and secondly, at what level will it be sustained?

My own guess—and it has to be a guess at this point—is that we're probably looking at a permanent increase in productivity growth on a sustained basis of about a percentage point to one and a half percentage points going forward. That means exactly what you've described: that the inflation-safe rate of growth in the economy or the inflation-safe level of unemployment, or the employment rate, is different from what it used to be, but there are still speed limits. They've still been exceeded in the U.S. economy. So if you could sustain 3% growth instead of 2% and you're growing at 4%, you're still growing too quickly. If that growth is accelerated to 6.5%, which is close to what it did in the second half of last year, that's still way too fast.

The Chair: But isn't there also the other side of the coin, that years ago the whole risk and the attitude of boom-bust was slightly different too? It's just a theory, but now we're on a just-in-time delivery system in a lot of places where we weren't, and that's not where we were 15 years ago. So aren't we maybe overstating the risk as well?

Mr. Tim O'Neill: Of course there's always the possibility that one is overstating it, but there's also a possibility we're understating it. I know some of the more enthusiastic, let me call them, new-age economists and observers are very enthusiastic about the possibility that we'll never see inflation rise again. I just don't happen to be a new-age person in that regard.

The Chair: I come from an area that's very cyclical, and I obviously think things have their turns up and down as well.

Mr. Penson has another brief question.

Mr. Charlie Penson: Out of the portfolio you have for SMEs, what percentage of that would be covered under the Small Business Loans Act, or, if you like, essentially guaranteed?

Ms. Edmée Métivier: It's 18%.

Mr. Charlie Penson: That's what you referred to earlier—18%. Is that changing? Is there a trend line there that we can discern?

Ms. Edmée Métivier: I think it has remained relatively flat.

Mr. Alan Young: That's the most recent data we have. That's as of the end of March 1998. The 1999 numbers will be coming out pretty soon.

Mr. Charlie Penson: When a customer comes in, what would determine whether they get a loan directly from your bank or are put into the small business loans criteria?

Ms. Edmée Métivier: That's a very good question.

• 1105

I would say in my experience—and I'm going to talk by experience here—the kinds of loans we would probably do under this program are loans for improvements, for instance, that you make to a building. That is not necessarily material in the sense that if you're investing $50,000 to decorate the inside of a restaurant, it's not necessarily an asset that is bankable in the long term. So the SBLA loan is a good example of doing that kind of financing that allows a small business to improve the premises they're in. That would be the type of lending that I would see that would be different from the traditional lending. If you're purchasing a piece of equipment, most of the banks can certainly take the equipment as a guarantee.

Mr. Charlie Penson: So security would be....

Ms. Edmée Métivier: Security would be one main point where the partnership of the government would be helping.

The Chair: Thank you, Mr. Penson.

Just as one final comment and question, the difference between Canada and the United States came up earlier in terms of the length of loans, not only in business but also for consumers. We seem to compare ourselves on a regular basis in terms of the banks' expectations, Mr. O'Neill. The rate of return on profit as well is compared with that of the United States. When are consumers going to see the same benefits? As an example, in the United States you could get a 30-year mortgage at just over 7.3% U.S. back at the beginning of February. When are Canadian consumers going to have that same ability to buy a home or build a home and have a 25-year mortgage at the interest rate levels we're experiencing right now? Do we anticipate that, or do we just like to compare ourselves to the Americans when it's convenient, but then not bother on the other side of the coin, when there are benefits to consumers?

Mr. Tim O'Neill: There are some longer-term loan products available, but if you look at the U.S., my understanding—and I can get back to you on the details—is that the longer-term mortgages, the 30-year mortgages, are in fact becoming relatively less common. In fact, what you're finding is that a lot more Americans are moving to shorter-term lengths on their mortgages. So I'm not sure the comparison is a particularly valuable one. I can certainly follow up, though, and find out and give you more information on that.

The Chair: I don't want to disagree with you, but having just been in Arizona in January with my cousin who's buying a home, and having seen the fixed quotes she has received on mortgages, only one was less than a 25-year term. It was a ten-year term that was renewable for another ten, on a floating interest rate after ten years. So I have to disagree. Arizona is a pretty aggressive state, and that's what was shopped around. Those were the rates that came back.

However, I still think consumers in Canada may want to see that option, have never seen that option, and still don't have that option. We heard earlier about the profits and the range and rate of return of the banks, yet consumers don't have the same options as they do in the United States—nor do businesses. The banks seems to pick and choose what it is they want, and they want to have the same rate of return. I'm just wondering, because consumers would like to see that, but we don't see it.

Mr. Tim O'Neill: I'm probably not the right person to answer the question about what kinds of loan products we'll be offering.

Ms. Edmée Métivier: May I suggest that we get some information for you on that? This is more on the consumer side, and unfortunately I would not probably be in a position in terms of answering whether there will be new products on the mortgage side. I think the answer is that there will be, because those products are coming into Canada one way or another. Either they're going to come through the Internet or through media that we haven't seen before. Therefore, the banks are certainly aware that they have to be competitive with these kinds of products on a long-term basis.

The question Mr. O'Neill brought is the viability of those products on a long-term basis as well. The market is slightly different in Canada, because it's about one-tenth of the market in the U.S.A. For instance, when you want to try to gather mortgages for ten years or twenty years and sell them on the open market or securitize them on the open market, we don't have the same buying power behind us to be able to do that kind of thing.

The Chair: For small and medium-sized businesses and for all consumers, the rate of return the Canadian banks are making, considering that we're only one-tenth the size of the United States, seems pretty impressive when you start to compare those numbers.

• 1110

Mr. Tim O'Neill: You might know that if you compare the margins available in the U.S.—the spread between rates at which loans are made and rates at which banks and other financial institutions borrow—that gap has been and continues to be significantly larger than in Canada. When you're talking about the competitiveness of the U.S. economy in comparative terms, the fact of the matter is that whatever the suite or range of products available to Canadians is, those products are effectively cheaper than they are in the U.S.

An hon. member: Because of competition.

Mr. Tim O'Neill: Exactly, because of competition. That's precisely right.

The Chair: I have just one final question, and then we'll wrap up. It's a simple question...or maybe not a simple question.

On your predictions and economic forecasts, what do they mean for small and medium-sized businesses in the future with banking?

Mr. Tim O'Neill: In one sentence, I think they mean lower interest rates than what we have seen on a sustained basis over the last decade, really; better growth on a sustained basis than what we've seen over the last decade, despite the fact that we'll have a bit of a dip; and no recession, unlike the patterns we've seen over the last 30 or 35 years. In general, I think there are much more favourable economic conditions for the small-business sector, certainly more so than what it would have been used to up to 1996 or 1997.

The Chair: That sounds like it's good news.

Mr. Tim O'Neill: I think it is very good news.

Going back to your point about commodity prices, I would add as well that in the short term there is no question that a couple of key sectors, like the grain sector in agriculture, have suffered recently. I'd love to be able to forecast that it's going to change next week, but I don't think it will.

The Chair: Did you forecast that it was going to drop?

Mr. Tim O'Neill: We were expecting some weakness on the grain side. Other parts of agriculture are not doing too badly on the price side. In fact, I think what we're probably going to continue to see, as we typically do when the different parts of the agricultural sector are out of sync with each other, are shifts into those more profitable sectors where possible.

In the medium term, we obviously have some trade issues to deal with internationally in this area. On the presumption that one way or another those will get resolved, that at least is a positive. In the short term, though, I think there still will be some difficulties in the grain sector on the price side for another year or so.

The Chair: And I would anticipate that if that continues to be the case, there may also be some—as my earlier question said—flexibility required from the banks. I don't think anyone could have predicted 25 or 30-year low prices, or that anyone did. Anyone who was lending money wasn't lending it based on that as well, so obviously there are going to be some adjustments required.

Mr. Tim O'Neill: I don't know that side of the business extremely well, but because we've been doing some work with the people in my bank on it, what I do know is that it's precisely that kind of flexibility that has already been occurring because of the special nature of the problems we're seeing in the prairie agriculture.

The Chair: Thank you.

On behalf of the committee, I want to thank the Canadian Bankers Association and all your members for your presentations this morning, for being here, and for the very good discussion we've had. We look forward to meeting with you again some time in the near future.

Ms. Edvée Métivier: Thank you.

Mr. Tim O'Neill: Thank you.

The Chair: The meeting is now adjourned.