Ottawa should make banks reveal more

(This editorial, authored by Duff Conacher, Coordinator of Democracy Watch, appeared in The Gazette (Montreal), Monday, September 25, 1995 on page B2)

At a time when Canada's chartered banks are reporting soaring profits once again, Canadians should question what the banks are doing with their money. This round of record profits is attributed by analysts to "smarter lending" by the banks, but the fact of the matter is that no one in Canada, except the banks, know the details of where banks lend money or how much the banks profit or lose on specific loans.

Canadians have the right to know what banks are doing with their money for three reasons. First, Canada's banks would not be able to exist without the money from Canada's 20 million depositors, which makes up 95 percent of the capital base of the banks. Second, Canadian taxpayers have bailed out many failed financial institutions over the past decade at a cost of billions of dollars; failures caused mainly by overexposure to risky real estate loans. Third, the banking industry plays a very crucial role in maintaining the health of the Canadian economy.

What should concern all Canadians is that the government seems to have accepted voluntary disclosure of lending statistics as the answer to the question of where and how banks are making loans, especially in the area of small business. A look at the Canadian Bankers Association (CBA) first annual report on small business reveals that the dangers of voluntary compliance are numerous. The report only provides statistics for loans under $500,000, but survey results from the Canadian Federation of Independent Business (CFIB) show that the median small business loan is $50,000. This means that the CBA's figures are too vague to provide an accurate picture of small business lending.

The report also fails to mention the CBA's recent pledge to disclose statistics on lending to women entrepreneurs, skirts the issue of statistics on loan rejections and loan losses, and ignores calls for data on lending to visible minorities and in specific communities. This information is needed to judge whether Canada's banks discriminate against borrowers on the basis of gender, race, neighbourhood or size of business, and to determine whether small business is truly "riskier" to lend to, as the banks claim. In addition, the CBA report touts the banks' voluntary codes of conduct and dispute resolution processes as the solutions to any complaints from borrowers.

Clearly, leaving lending disclosure to the banks will leave us in the dark concerning what banks are doing with our money. The real solution to this ongoing debate is to require banks by law to report the following statistics to the government and the public:

• the number of loan applicants the banks approve and reject;
• each approval and rejection categorized by size and type of business, and for small business loans also by the gender and race of the business-owner, and the postal code of the business; and
• the loan loss rates in each category.

In addition, in order to correct the damage caused by discrimination in lending, the federal government should require banks to reinvest in the sectors of society statistics show have been discriminated against. A similar system of disclosure and reinvestment requirements has worked very well in the United States to reveal discrimination in mortgage lending and to encourage banks to lend to people on low-incomes and to visible minorities.

Some may say that these requirements, if enacted, would mean that Canada's banks would not be able to earn as much as their shareholders want because they would be forced to loan to people who don't provide the highest rate of return. This is a misplaced concern for three reasons. First, the information currently available is not detailed enough to judge which business loans provide the highest return because loan loss statistics are not regularly disclosed. Interestingly, when one of Canada's big banks released data on loan losses during hearings in March, the statistics showed that between 1990 and 1994 loss rates were lower for business loans under $500,000 than for larger loans.

Second, the highest rate of return may not be the only, or even the most important, standard that should be used when judging where banks lend money. We should also be concerned about whether banks invest our money in job-creating ventures -- which create income and stability for communities, tax revenues for deficit reduction, and opportunities for people to break a cycle of dependence on social assistance -- as opposed to big business mergers and speculative real estate ventures that benefit mainly merger specialists and real estate speculators.

Third, banks that provide mortgage loans to low-income neighbourhoods under the U.S. reinvestment system report that these loans are still profitable. Indeed, Canada's Bank of Montreal has stated that it expects to earn half its profits by the year 2000 through Harris Bankcorp of Chicago. If the Bank of Montreal feels that Harris can be that profitable under U.S. reinvestment requirements, why should it resist the enactment of similar requirements in Canada?

This is not to say that Canada's banks are government agencies or charities, but they do play the major role in providing the essential service of access to capital, mainly because they enjoy quite charitable government protection from foreign competition. Therefore, there should be requirements to ensure that they provide this service fairly to all Canadians.

Duff Conacher is the Coordinator of Democracy Watch. In May 1994, Democracy Watch released its report A Capital Idea: The Case for Reinvestment Requirements and Accountability Mechanisms for Financial Institutions in Canada.