Peter Routledge, the country’s top banking regulator, has some advice for Canada

TORONTO—Is our financial system—and especially the banks—meeting Canada’s future growth needs by providing credit and capital to our small and mid-size companies as they seek to grow, generating the jobs and wealth the country needs? The answer would seem to be "no."

“If you look at what’s ahead of us for the next 20 years, we will need pretty significant investments in technology, new businesses, new forms of energy, old forms of energy and infrastructure,” said the country’s top banking regulator, Peter Routledge, who heads the Office of the Superintendent of  Financial Institutions. That’s the growth part of the economy, he said, on June 4 before the Senate Committee on Banking, Commerce, and the Economy. The committee has been holding hearings on the access to credit and capital for small and mid-size business. 

So a key question is whether any one of our banks will emerge as a leader for the new economy and its entrepreneurs? “The smart banks and the banks that get out in front and are aggressive and more risk-seeking, they may take their lumps early,” Routledge said, “but they may find themselves 10 or 15 years from today in a much better position than their competitors because they took these risks and bet on developing the Canadian economy.”

But Routledge’s view, in his testimony, was that our financial system is not geared up to meet the needs of the future economy. He told the Senators that this system must “support growth, innovation, and competitiveness.” This means, he went on to say, that we must “avoid the stability of a graveyard in which a docile, risk-averse financial system impedes prosperous growth—we must not fall into this trap."

So a successful financial system is not only one that is sound, but is also one that “can continue supporting the economy through periods, like the present, in which innovative opportunity and uncertainty mix and thereby create volatility.” This is the world our financial system must respond to. Canada’s financial institutions, including our banks, Routledge said, “occupy a privileged position in our economy, and with great privilege, comes great responsibility.” And in the present environment, “banks have a tremendous opportunity to support hard-working entrepreneurs who, if successful, create long-term prosperity that benefits Canada and Canada’s financial institutions.”

What’s needed, Routledge contended, is a new mindset in our financial institutions—in  a world of increased risk and volatility, and where assets are often more likely to be intangibles, such as intellectual property rather than physical property link buildings and machines. Yet, the way the financial system is structured, it tends to advantage loans backed by property rather than intangibles, and this, Routledge said, “disadvantages loans to small and medium-size enterprises.” The banking world has to adapt to a new economic model, one that serves the needs of innovators and entrepreneurs. That means “accepting more risk in a responsible way, but accepting more risk to get better outcomes, knowing that better outcomes aren’t guaranteed. That is the mindset shift.”

Routledge praised the initiative in the United States by JPMorgan Chase to invest US$1.5-trillion to enhance the ability of companies in the industries of the future to grow, spur innovation, and accelerate strategic manufacturing. The targeted industries include critical minerals, aerospace (including drones), battery storage, electric grid technologies, AI, cybersecurity and quantum computing.

“I would welcome if Canadian financial institutions made a concerted effort to help the economy adapt to a new environment, within the bounds of sound financial management,” as JPMorganChase has done, he said.

The current mindset in the financial system has been to overbank real estate and underbank innovative SMEs. “If you’re a homeowner and you have a lot of equity in your home, you can get a $500,000 or $1-million loan from your kitchen table while you have your morning coffee,” Routledge said. “But if you need a $500,000 to $1-million loan for an equipment investment on your farm, it’s not going to be a morning. It’s going to be weeks and lots of processes and procedures.” That, he said, was the consequence of choices made by senior management of banks on how they allocate capital.

“They can do better,” Routledge said. 

One thing the Office of the Superintendent of Financial Institutions can do to give entrepreneurs more choice and lower costs, according to Routledge, is to find ways to increase competition. He said is office is trying to reduce the time and process for new players—such as fintech and credit unions, as well as foreign banks—to enter the system. There may also be an opportunity for banks that specialize in small business credit and equity needs.

“The time to enter our system is shorter than it was a year ago, and we want to shorten it even further." But Routledge said his office can also make regulation changes that free-up banking capital for greater lending capacity, as he did earlier this month, reducing the level and top end of the range of the Domestic Stability Buffer. This, OSFI said, would enable the banking system to deploy its excess capital in support of “Canada’s adaptation to new opportunities." What the banks will do with that new money remains to be seen.

But despite the very real concerns of the entrepreneurial community, the banks nonetheless seem quite complacent. As Anthony Ostler, who heads the Canadian Bankers Association, told the same Senate committee, small and midsize businesses “generally have ample access to credit financing from banks.” This suggests our banks are not thinking of a new business model for a new kind of economy. That’s a big problem and one that could cost Canada dearly unless resolved. As we seek to build this new economy, then we need a new kind of financial system as well. This has to be a national priority if we are to be a prosperous and sovereign nation in the years to come. 

Correction: Routledge's first name is Peter, not Paul. The headline, cutline, and the column have all been updated to correct this. The Hill Times apologizes for this error.

David Crane can be reached at crane@interlog.com.

The Hill Times