Bank Lending

Fast facts

• Banks represent approximately half of the business lending market and one-quarter of the overall business financing market in Canada.
• Banks continually work to make credit available to credit-worthy businesses in Canada, including through close cooperation with Export Development Canada (EDC) and Business Development Bank of Canada (BDC) through the government’s Business Credit Availability Program (BCAP).
• The Bank of Canada rate represents less than one per cent of bank funding and there are a range of other factors that more directly influence the pricing of consumer lending.

The bottom line

Canada’s banks remain open for business and committed to providing credit.

Banks are a key source of credit for Canadian businesses and consumers

Banks represent approximately half of the business lending marketplace and one-quarter of the overall business financing market.

Because of the turmoil in international financial markets in 2008/2009, some non-bank sources of business financing were severely disrupted. As a result, many businesses turned to banks for financing. Although they were not able to pick up all the slack, banks worked to fill the gaps left by other providers.

Throughout the economic downturn and into the recovery period, banks have continued to lend to businesses and consumers that are credit-worthy. Bank lending to consumers has remained strong year-over-year. Bank credit to businesses is slightly lower due to a decrease in the demand for credit and resurgence in other parts of the financial markets.

• Because of the recession, businesses are postponing investment and expansion plans. As a result, the overall demand for business credit is decreasing.  
• At the same time, other parts of the financial markets (e.g., the bond market) have started to recover. This means that businesses are once again able to raise money in the bond market so there has been a further decrease in demand for bank credit.

Source: Bank of Canada, Weekly Financial Statistics, March 30, 2010

There has been a repricing of risk

There was a general re-pricing of risk in financial markets as the economy entered the recession, and as the probability of loan losses has increased. As prudent lenders, banks need to factor these increased risks into interest rates – if credit is not properly priced to risk, it would be less available.

At the same time, the prime rate has fallen, so customers with variable rate loans tied to prime are now paying less.

There is a common misperception that the cost of credit provided by banks is driven by the Bank of Canada’s overnight rate. While the Bank of Canada rate has an influence on the pricing of very short-term commercial credit, banks raise funds in a variety of ways (deposits, GICs, borrowing in markets) and the costs associated with these are much less influenced by the Bank of Canada’s overnight rate. The Bank of Canada does not set consumer interest rates.

Pricing decisions on loans are primarily driven by the risk that the borrower represents and by prices that banks and other lenders pay to raise funds in the broader marketplace.

Business Credit Availability Program gives businesses more options

In Budget 2009, the federal government introduced the Business Credit Availability Program (BCAP), which provides $5 billion in additional lending to businesses through the Export Development Canada (EDC) and the Business Development Bank of Canada (BDC), and promotes cooperation with private sector lenders. To find out more about BCAP, contact EDC, BDC, or your bank, or visit www.cba.ca.

Banks are lending prudently

Banks in Canada continue to make lending decisions on a case-by-case basis, extending credit to those for whom it would be beneficial and who have the capacity to repay the loans. This prudent approach is a key reason why banks in Canada have largely avoided the financial difficulties that have plagued banks in other countries.

Economic conditions affect lending

Banks take into account changing economic and financial conditions, and the impact these conditions have on clients, when they lend. As these factors affect the credit-worthiness of customers, there will be an impact on terms associated with loans. Changes in terms are not intended to restrict credit. In fact, changes that reflect different economic conditions enable banks to continue lending.

Canada’s banks – sound and secure

Banks in Canada are highly regulated by the Office of the Superintendent of Financial Institutions, the Canada Deposit Insurance Corporation, and the Financial Consumer Agency of Canada.

• For two years in a row the World Economic Forum has ranked Canada’s banks as the most sound in the world.
• In a speech, the Governor of the Bank of Canada noted: “Our banks are better capitalized and substantially less leveraged than their international peers. In contrast to many international banks, which face enormous pressures to scale back their assets and liabilities to bring them into line with their capital, Canadian banks have actually been raising private capital to grow their businesses… Consequently, Canadian banks continue to lend.” (2009)

Canadians recognize the strength of their banks

• 78% of Canadians believe Canada’s banking system is more stable than others around the world.¹
• 85% of Canadians attribute our banks’ strong performance to a prudent approach to lending.²

Canadian taxpayers have not bailed out banks

• While other countries have taken dramatic steps to prevent their banks from failing, including buying ownership stakes in their banks, banks in Canada are strong and do not need this kind of help.
• Throughout the economic turmoil, financial markets globally were not functioning as smoothly as they could, so the Canadian government undertook initiatives to increase liquidity. For example, the government bought just over $69 billion³ of safe, insured mortgages from the banks to improve credit availability for customers through the Insured Mortgage Purchase Program, which has now ended.
• There was no additional risk to the taxpayers from this mortgage-purchase program. In fact, the Canadian government expects to earn a profit.

General inquiries
1-800-263-0231 or inform@cba.ca

Media inquiries
Andrew Addison, Manager, Media Relations
(416) 362-6093 ext.220 aaddison@cba.ca

1  Strategic Counsel, Assessments of Canada’s Banks, May 2010
2  Ibid.
3  Source: CMHC, as of March 24 2010.