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MEDIA RELEASE

Wednesday, September 30, 1998

DECREASE IN LENDING TO JOB-CREATING SECTOR SHOULD BE PART OF BANK MERGER REVIEW

OTTAWA - Today, one day before 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) released its analysis of the banks' own statistics, which show a decrease in bank business lending to job-creating small and medium-sized businesses (SMEs) between the end of 1995 and the end of 1997 (the most recent statistics available). The CCRC called on the federal government to take into account the banks' poor performance in serving businesses as part of the review of the proposed megabank mergers, and to legislate much more detailed disclosure of bank lending

Among other things, the CCRC's report shows the following decreases in bank lending to SMEs between December 31, 1995 and December 31, 1997 (the most recent date Canadian Bankers Association (CBA) statistics are available) (For the full 5-page report see below):

• for credit authorizations of under $250,000 (small business loans), the share of credit decreased (from 6.47% to 6.19%) over the two-year period;
• the percentage of small business customers with credit of under $250,000 decreased from 85.4% to 85% of total bank business customers;
• of the $90.5 billion increase in total business credit in the two-year period, $80.77 billion (89.2%) of the credit was in loans of more than $5 million (an increase of 24.85%), while customers with loans of more than $5 million declined by 2% (from 10,338 to 10,127 customers).
• as of September 1997 customers with loans of more than $5 million were only 1.3% of total customers, but received 76.8% of total lending;
• bank lending to business decreased over the two-year period in Atlantic Canada, Quebec, and B.C./Territories; and
• for the two years (1996 and 1997) that banks have disclosed loan losses by size of loan, the banks lost $200 million more on big business loans of over $1 million ($543 million lost) than on small business loans of under $250,000: ($371 million lost) (For detailed charts please contact the CCRC).

"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 Duff Conacher, Coordinator of Democracy Watch and Chair of the over 100 group CCRC.

However, key information needed to hold the banks accountable is still missing. As U.S. banks have had to for 20 years, and as generally recommended in the recent Report of the Task Force on the Future of the Canadian Financial Services Sector, 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 to ensure that we do not let any bank get bigger if it is not, among other things, meeting demand for capital from job-creating businesses."

I. Small & Medium-Sized 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 and medium-sized businesses created over 90% 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 three annual surveys the CBA has commissioned (conducted by Thompson Lightstone and Company Inc. and published in June 1996 and 1997, and in July 1998) resulted in claims that over 80% of loan requests for small and medium-sized (SME) business financing are approved. However, their survey is flawed in several significant ways. First, the CBA surveys businesses which have sales of less than $50 million and fewer than 500 employees, a definition that extends far beyond the SME sector. Second, the surveys' sample sizes were very small, and statistically insignificant in the categories of people who had tried to start a busines, women-owned businesses and visible-minority-owned businesses. Specifically, results were based on surveys of, at most, only 200-400 people in these categories. These sample sizes represent a very small portion of the over 740,000 SMEs with credit from one of the Big Seven Canadian banks, and an even smaller portion of the almost 2 million SMEs in Canada. Third, the first two surveys were conducted in conjunction with the Canadian Chamber of Commerce, whose membership includes banks.

These flaws make it clear that, as the Task Force on the Future of the Financial Services Sector concluded, a CBA-commissioned survey is an inadequate and invalid means of tracking SME demand for capital, and loan approvals and rejections. Systematic disclosure by the banks, based upon the effective 20-year old system in the U.S., of total number of business loan applicants, approvals and rejections, categorized by size, type and location of the 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) produced the quarter ended December 31, 1995 with the most recently available report of the statistics as at December 31, 1997 produced the following results:

(a) Small and Medium-Sized Business Lending
A comparison of authorizations to small business at December 31,1995 with December 31, 1997 reveals that support for small and medium-sized businesses in the two-year period decreased, as follows:

¥ for credit authorizations of under $250,000, the share of credit decreased (from 6.74% of the total in December 1995  to 6.19% of the total in December 1997);
¥ the percentage of customers with credit authorizations of under $250,000 decreased from 85.4% to 85% of total bank  business customers between December 31, 1995 and December 31, 1997; and
¥ for credit authorizations of between $250,000 and $1 million, the share of credit also decreased (from 7.52% of the  total in September 1995 to 6.87% of the total in December 1997), while the percentage of customers with credit of this  size decreased from 10.1% to 9.9% of the total bank business customers.

This means the small and medium-sized business sector, while creating over 90% of jobs in Canada, is receiving at most 6.2% 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 banksÕ lending figures over the two-year period illustrate a persistent unwillingness to support the job-creating small and medium-sized business sector.

(b) Big Business Lending
Of the $90.5 billion increase in total business credit in the two-year period between December 31, 1995 and December 31, 1997, $80.77 billion (89.2%) of the credit was loaned out in amounts in excess of $5 million (an increase in this loan category of 24.85%). However, during the same period customers with credit in excess of $5 million declined by 2% (from 10,338 to 10,127 customers).

As a result, as of December 31, 1997 customers with credit authorizations in excess of $5 million represented only 1.3% of total customers, but received 76.8% of extended credit (compared to 1.5% of total customers and 74.2% of total credit as of December 31,1995). 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 and Loan Losses
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 December 31, 1995 and December 31, 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 28%. 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. Also, in terms of loan losses by size of loan:

for the two years (1996 and 1997) that banks have disclosed loan losses by size of loan, the banks lost $200 million  more on big business loans of over $1 million ($543 million lost) than on small business loans of under $250,000  ($371 million lost) (For detailed charts please contact the CCRC).

Therefore, in essence, no new money was made  available to small- and medium-sized business between December 31, 1995 and December 31, 1997, while the Big  Seven banks extended more credit to big business, who needed it least, and lost more in loans to big business.

V. 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 15 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, and four banks are seeking to merge, 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 and medium-sized businesses (those with loans of under $1 million) represent 95.4% of bank business credit customers, but receive only 13.06% of the total amount of bank business credit. In contrast, big businesses (those with loans of more than $1 million) represent only 4.6% of customers, yet they receive 86.93% 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 December 31, 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).
 
 

Big Seven Banks Authorized Business Credit Under $250,000 by Region
(Given that 85% of bank business customers have loans of under $250,000, loans of this size
are considered to be small business loans)

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 December 31, 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 every region except B.C.
 

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 December 31, 1997 Atlantic Canada, Quebec and B.C. / Territories all experienced decreases in the percentage of total lending made in their region.