President and CEO
Business Development Bank of Canada (BDC)
A report released by the C.D. Howe institute (“Reining in the Risks: Rethinking the Role of Crown Financial Corporations in Canada” (PDF)) reopened an old debate that questions the relevance of Financial Crowns in today’s business environment. The authors’ overriding claim is that “mission creep” has seized hold of these Crowns and they are now operating beyond their originally intended mandates and utility. As it concerns BDC, this claim is inaccurate. BDC’s mandate, mission and priorities are set by government and reviewed regularly to ensure they conform to contemporary marketplace gaps.
It is healthy to challenge the role of BDC and to ask if it continues to serve a vital and demonstrable need. Unfortunately, an objective and clear-eyed analysis is not to be found in this particular report. Instead, it reads like a rehashing of tired and misleading arguments that are detached from the reality of today’s BDC and the small and medium-sized enterprise (SME) marketplace. Therefore, the record must be set straight and to do so we must look at the facts.
BDC’s long tradition of supporting entrepreneurship in Canada dates back to 1944. Since then, BDC has carved out its role, one entrepreneur at a time, not by displacing private financial institutions, but by working along-side them in a “complementary” manner.
It is because of this specialized focus that BDC has always struck a very modest profile. Standing alongside Canada’s major banks, BDC appears much like David in the shadow of Goliath, securing barely more than 1% of total business credit. This fact renders senseless the authors’ claim that BDC somehow represents a “systemic risk” to taxpayers. Neither by virtue of its size nor its risk management practices is such a claim even remotely defensible. In fact, BDC has always operated in a small niche of the market, with clients numbering between 27,000-28,000 for the last 5 years. Moreover, it has made steady profits, averaging $216 million per year, and has paid $116 million over the last five years in total dividends to taxpayers. Our financial results are by far the greatest testament to our sound risk management practices and the strongest argument against the report’s claims.
The report also claims that BDC received new powers during the financial crisis—which is untrue— and that its portfolio increased after 2008. The latter is correct and contradicts the view that BDC is somehow detached from market realities. In fact, the enlarged book of business was a direct response to the dramatic financial turmoil caused by the greatest economic crisis since the Great Depression. As the other banks experienced limited lending capacity and tightened their exposure to SMEs, they nevertheless made every effort to refer otherwise healthy SMEs to BDC. According to the Conference Board of Canada, BDC’s role proved vital in helping Canada recover quickly from the financial crisis as it provided “exceptional credit support” at a time of need.1
It bears mentioning that the C.D. Howe Institute made no effort to inquire as to our lending and risk management practices, which they nevertheless imply must be lacking. Had they simply questioned us, what they would have found is one of the most sophisticated databases of SME credit history in Canada, with a perfectly integrated risk-pricing tool that ensures that our transactions are priced for the risk we take. They might also have benefited from consulting the Auditor General’s latest Special Exam Report on BDC, which confirms the adequacy of our control systems. While BDC is not overseen by OSFI, this is hardly evidence of a lack of transparency, accountability or operational rigour. As a Crown, BDC is subject to external oversight including Treasury Board guidelines, the Financial Administration Act (FAA), and audits by both the Auditor General of Canada and a private sector auditor – a practice that does not exist in private financial institutions.
By far the gravest flaw of the C.D. Howe report is the failure to examine contemporary demand for SME financing, even as the analysis makes sweeping judgments about the state of the sector. The surest indication that BDC should exist is that it serves a market need that remains partially unfilled by others. Had the C.D. Howe Institute spoken with actual entrepreneurs, conducted a secondary analysis of the many sector studies including our own recent report on the decline of medium –sized firms in Canada, or even consulted the lending practices of other financial institutions, they would have found certain evidence of persistent and worrying gaps in financing for young, knowledge-based and export-oriented firms. Indeed, the most significant risk to Canada’s future prosperity would be to underestimate the importance of the policy rationale to support these entrepreneurs and the role that a development bank like BDC plays in their success.
Bluntly stated, there is no merit to the claim that private financial institutions in Canada are crowded out by BDC. It serves no purpose to have BDC return to its role as “a lender of last resort” unless it is to incur the losses historically associated with such a role. The C.D. Howe study is weak and distracts everyone from the more meaningful and pressing debate about how we can all help make Canadian companies more competitive. BDC will continue to do what it has done well for over six decades-keep putting entrepreneurs first.
1 Conference Board of Canada. Lessons from the Recession and Financial Crisis. January 2010. Page 165.