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MEDIA RELEASE

Thursday, May 7, 1998

COALITION CALLS FOR REVIEW OF BANK BUSINESS LENDING AS PART OF MERGER REVIEW

  OTTAWA - Today, as representatives of Canada's big banks appear before the House of Commons Industry Committee on the issue of bank business lending, the Canadian Community Reinvestment Coalition (CCRC) called on the federal government to legislate much more detailed disclosure of bank lending, and to review the banks' performance in serving businesses in communities across the country as part of the review of the proposed megabank mergers.
 "The government has failed to require the banks to disclose enough information to determine whether the banks meet the demand of job-creating businesses for capital to start-up or expand," said Duff Conacher, Coordinator of Democracy Watch and Chairperson of the 80-Member Group CCRC.
 On Tuesday, the CCRC presented to the Committee its analysis of the statistics the banks currently disclose on business lending (or credit).  Among other things, the CCRC's report shows the following changes in bank business credit between September 30, 1995 and September 30, 1997 (the most recent date statistics are available) (See below for the full 5-page report):

• for credit authorizations of under $250,000 (small business loans), the share of credit decreased (from 7.17% to 6.47%) over the two-year period;
• the percentage of small business customers with credit under $250,000 remained stagnant at 85.4% of total bank buisness customers;
• of the $99.8 billion increase in total business credit in the two-year period, $81.2 billion (81.3%) of the credit was in loans of more than $5 million (an increase of 16.74%), while customers with loans of more than $5 million declined by 13.66% (from 11,477 to 9,909 customers);
• as of September 1997 customers with loans of more than $5 million were only 1.29% of total customers, but received 86.42%of total lending;
• bank lending to business decreased over the two-year period in many areas of the country, including Atlantic Canada, Quebec, B.C. and Toronto; and
• for the one year (1996) that banks have disclosed loan losses by size of loan, the banks lost almost twice as much on big business loans of over $1 million ($349 million lost) than on small business loans of under $250,000: ($195 million lost) (Contact the CCRC for detailed CHART).

 "In the past two years, banks loaned and lost more money to fewer big businesses, who need the money least, while loaning less to small and medium-sized businesses that have created 90 percent of the jobs in Canada over the past decade," said Conacher.
 However, key information needed to hold the banks accountable is still missing.  As U.S. banks have had to for 20 years, the CCRC called on the government to require Canadian banks to disclose: how many loan applications the banks receive, how many are approved/rejected, loan defaults and number of called loans all categorized by the size, type and community in which the business is located, and the gender for small business borrowers.  As in the U.S., if a bank has a poor record in lending and service to customers, it should not be allowed to merge or takeover another financial institution.
 "Without this information, Paul Martin has no choice but to blindly swallow bank claims that they are serving all businesses well," said Conacher, "We need the information to ensure that we do not let any bank get bigger if it is not serving all customers fairly and well."
 

I.  Small Business, the Canadian Economy, and Access to Capital
 According to the Government of Canada, 98% of all businesses have less than 50 employees (88% have less than five employees), 53% of all Canadians working in the private sector are self-employed or employed by a business with less than 100 employees), small businesses created over 80% of all growth in employment in the past 15 years, and small businesses created 38% of Canada's gross domestic product in 1991.
 It is widely agreed, based upon both Canadian Bankers Association (CBA) and Canadian Federation of Independent Business (CFIB) surveys, that small businesses need at most $250,000 in business credit.  According to the CBA business credit statistics reports, customers with authorizations of $100,0000 or less comprise 70% of the business customer base while about 85% of business credit users have authorizations of under $250,000.
 CFIB member surveys have shown "access to capital" to be an ongoing problem, especially when compared to the U.S.  It is consistently ranked in respondents' top 10 concerns, and the number of small businesses reporting problems with access to capital doubled from 20% in 1990 to 40% in 1997 (their June 1996 survey ranked "access to capital" as the 6th concern).  In contrast, respondents to the U.S. National Federation of Independent Business (NFIB) surveys over the past 10 years have never ranked access to capital higher than 43rd (in their 1996 survey it ranked 63rd).
 

II.  Bank Lending Surveys: Flawed, Invalid and Inadequate
 The two annual surveys the CBA has commissioned (conducted by Thompson, Lightstone and Company Inc. and published in June 1996 and 1997) resulted in claims that over 80% of loan requests for small business financing are approved.  However, their survey is flawed in several significant ways.  First, the CBA surveyed businesses which have sales of less than $50 million and fewer than 500 employees, a definition that extends far beyond the small business sector.  Second, the survey sample size is very small, weighted to larger businesses, and statistically insignificant in the category of start-up businesses.  Specifically, results were based on responses of mostly larger existing businesses (more than 50 employees) and at most 200 start-up businesses that had approached banks for financing.  This represents a very small portion of the over 760,000 business credit customers of the Big Seven Canadian banks.  Third, the survey was conducted in conjunction with the Canadian Chamber of Commerce, whose membership includes banks.
 These flaws make it clear that a CBA-commissioned survey is an inadequate and invalid means of tracking small business demand for capital, and loan approvals and rejections.  Systematic disclosure by the banks of total number of business loan applicants, approvals and rejections, categorized by size and type of business and other factors would be a much more valid and complete means of documenting the access to capital situation (For details see the CCRC's third position paper Disclosure by Banks of Business Lending Statistics: How to Correct the Flaws in the Current System (November 1997)).
 
 

III.  Big Seven Banks' Statistics
(Royal Bank, CIBC, Bank of Montreal, Bank of Nova Scotia, Toronto Dominion Bank, National Bank, and Hong Kong Bank of Canada)

 An analysis of the Business Credit Statistics reports the Canadian Bankers Association (CBA)
has produced each quarter from September 30, 1995 up to the most recently available report of the statistics as of September 30, 1997 produced the following results:

(a) Small and Medium-Sized Business Lending
 A comparison of authorizations to small business at September 30,1995 with September 30, 1997 reveals that support for small business in the two-year period decreased, as follows:

• for credit authorizations of under $250,000, the share of credit decreased (from 7.17% of the total in September 1995 to 6.47% of the total in September 1997);
• the percentage of customers with credit authorizations of under $250,000 remained stagnant at 85.4% of total bank business customers between September 30, 1995 and September 30, 1997; and
• for credit authorizations of between $250,000 and $1 million, the share of credit also decreased (from 7.57% of the total in September 1995 to 7.17% of the total in September 1997), while the percentage of customers with credit of this size remained stagnant at 9.8% of the total bank business customers.

 This means that the small business sector, while creating over 35% of Canada's gross domestic product, is receiving at most 6.5% of the total business credit extended by the banks, while medium-sized businesses receive at most about 7% of the total credit.
 At a time when federal government is claiming to be encouraging microenterprises, and when demographers are theorizing about self-employment significantly increasing in the future as a job market sector, the banks' lending figures over the two-year period illustrate a persistent unwillingness to support the job-creating small business sector.

(b) Big Business Lending
 Of the $99.8 billion increase in total business credit in the two-year period between September 30, 1995 and September 30, 1997, $81.2 billion (81.3%) of the credit was loaned out in amounts in excess of $5 million (an increase in this loan category of 16.74%).  However, during the same period customers with credit in excess of $5 million declined by 13.66% (from 11,477 to 9,909 customers).
 As a result, as of September 30, 1997 customers with credit authorizations in excess of $5 million represented only 1.29% of total customers, but received 86.42% of extended credit (compared to 1.72% of total customers and 74.57% of total credit as of September 30,1995).  In essence, the banks extended more credit to fewer big business clients over the two-year period while, as detailed above, decreasing the proportion of credit extended to small  and medium-sized businesses.

(c) Authorized vs. Outstanding Amounts
 Of significance is the amount of credit authorized compared to the amount of credit utilized (outstanding) by different sizes of business.  For small businesses with credit of under $250,000 the utilization rate at September 30, 1995 and September 30, 1997 remained constant at about 70%, while for big businesses with authorized limits of over $5 million the utilization rate also remained constant at about 29%.  It is clear that any increase in total credit authorized in this two-year period for both sizes of business could have been covered from the un-utilized portion of existing authorizations. Therefore, in essence, no new money was made available to small- and medium-sized business between September 30, 1995 and September 30, 1997, while the Big Seven banks extended more credit to big business, who needed it least.

Conclusion
 The banks' own statistics indicate that they are failing in their role as financial intermediaries because they are not providing capital where it can create the most employment and have the most positive impact on the Canadian economy.  At a time when three of Canada's Big Seven banks are among the top 25 most profitable banks in the world, in part because their profitable business divisions have been protected from domestic and foreign competition for decades by the federal government, this lending pattern is unjustifiable.
 
 

Big Seven Banks Business Credit Customers by Size of Loan

Big Seven Banks Percentage of Total Business Credit by Size of Loan

Big Seven Banks Median Amounts of Credit By Size of Loan Category

As the above statistics show, small businesses (those with
loans of under $250,000) represent 85% of bank business credit
customers, but receive only 6.47% of the total amount of bank business credit.
In contrast, big businesses (those with loans of more
than $1 million) represent only 4.7% of customers, yet they
receive 86% of the total amount loaned by Canada's Big Seven Banks.

 

Royal Bank of Canada

                          
CIBC

Bank Of Montreal

Scotiabank

TD Bank

National Bank

Hongkong Bank of Canada

Total: Big Seven Banks

As the above statistics show, as of September 30, 1997 none of the Big Seven Banks in Canada loaned more than 10% of their total lending to small businesses (loans under $250,000), and none loaned more than 20% of their total lending to small- and medium-sized businesses (loans under $1 million).
 
 

Percentages in ( ) refer to percentage of authorized credit in the region of under $250,000, as compared to the total authorized credit in that region as of that date.

As the above statistics show, between December 31, 1995 and September 30, 1997 small business lending (loans under $250,000) in Metropolitan Toronto decreased both as an amount and percentage of the total credit in that region, and decreased as a percentage of total regional lending in Quebec, Northern and Eastern Ontario, Manitoba/Saskatchewan and Alberta, with every other region showing an increase in small business lending amount and percentage of total for this period.
 

Big Seven Banks Total Authorized Business Credit by Region

Percentages in ( ) refer to percentage of authorized credit in the region as compared to the total authorized credit across Canada as of that date.

As the above statistics show, Metro Toronto receives over 40% of total lending in Canada, the vast majority of this amount in big business loans (as shown by the previous chart).
Also, between December 31, 1995 and September 30, 1997 Atlantic Canada, Quebec, B.C. / Territories and Metro Toronto all experienced decreases in the percentage of total lending made in their region.