THE BIG 6 BANKS, AND ME

I got a report send to myself by a contact at RBC outlining an analyst report on the Big 6 banks in Canada . Interesting title, it was called ' CAPITAL PUNISHMENT ' and revolved around how the banks are wrestling with regulators in U.S. and Canada on their capital base requirements and their investments in their brokerages and personal wealth businesses . For what it's worthy RBC seemed to be positioned best, but all had positive comments .

Every day the main business story seems to be the banks , both U.S. and in Canada, where OBAMA seems to be somewhat courageously taking them on and to task ! Business and banks view all this as intrusion -

I hope the dust settles and banks can get back to anything approaching lending normalcy in Canada re small and medium sized business .

Stan

The Fed's, BDC, And Me

Ooops, they did it again, The National Post reported today that the Federal CSCF - The Canadian Secured Credit Facility did another deal, as I understand it would be deal # 2 . The first was with a Dutch owned construction equipment firm .

The deal had BDC , as administrator, buying 1.2 Billion dollars ( yes thats billion ) in floor plan receivables . From who - GMAC and FORD !

Great deal for all parties concerned I guess, kudos of course . Can I be forgiven for again thinking this facility was supposed to fund Canadian businesses in the current liquidity crunch . The more things change the more they stay the same . Don't get me started.

Stan

BIG BANKS, and Me

Last several days one of the biggest business stories in the U.S. has been OBAMA's efforts to control and regulate banks - somewhat of a punishment for their part in the sub prime and liquidity debacle we just went through .

The recurring theme has been ' too big to fail ' - I have pasted part of a recent article in BNET.COM that provides some backdrop .

As Canadians we know our banking system :

1. Is Different
2. Had little or no role in the worldwide debacle

It is very difficult for us as Canadians as imagining a bank failure in our BIG 6 banks .

I guess that's one of the benefits of conservatism , although all my business customers feel they are paying a bit of a price for conservatism .

Stan

--

President Obama left out a critical element yesterday in announcing his plan to limit the size of banks — how you do it. A number of ideas are kicking around, but following are the most likely methods.

Asset Cap. This would parallel the national deposit cap, which prohibits banks from controlling more than 10 percent of domestic insured deposits. But under this approach the cap would limit a financial company’s total assets, which include loans, reserves, investment securities and real estate, to a set percentage of the banking industry’s total assets.

The U.S. banking sector has roughly $13 trillion in assets. That means a 10 percent cap would limit banks to no more than $1.3 trillion in size. That would affect Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM). A five percent cap would also reel in Goldman Sachs (GS), Morgan Stanley (MS) and Wells Fargo (WFC).

Liability Cap. A bank’s liabilities mostly comprises its checking, savings, CD and other core deposits. Under this method, a financial firm’s maximum total liabilities would be set as a percentage of U.S. GDP, which is roughly $14 trillion. So if the cap were fixed at 10 percent, a banking company’s liabilities couldn’t exceed $1.4 trillion. That would affect Bank of America, Citigroup and JPMorgan.

BRIGHTENING , AND ME

Today's Globe and Mail had an article that I think quite accurately reflects some of the current business environment ; it was titled ' LOAN AVAILABILITY BRIGHTEN - FOR BIG FIRMS ' and highlighted the fact the the liquidity crunch seems to be easing for larger firms, but small firms are still very challenged in getting credit, and additional collateral is being requested by the banks, etc. . The article indicated that many businesses are ' high risk ' borrowers ; I am of the opinion if they are higher risk they should not get the loans, credit, operating lines etc - But businesses with solid track records and good potential , albeit smaller in size, still seemed to be lumped in with the bad . That doesn't seem fair.
Stan

Business is Getting better? and Me

The Bank of Canada today indicated today that the ' recovery is taking hold ' , with some major commentary around business financing, which is the business of 7 Park Avenue Financial .

Interestingly enough they referenced a survey of ' bank loan officers ' who indicated that lending conditions have stabilized after a period of what they referred to as ' tightening '. Again borrowers ' increased access to financing 'was referenced .

It was good to hear the many business referenced hiring potential and new equipment acquisition .

We deal with a number of these ' loan officers ' and I would agree that , as we have said before, it couldnt get any worse and it does feel better out there with respect to business financing and borrowing . Hello 2010!
Stan

SUBPRIME, CANADA, AND ME

There was a great article on BNET.con today about a fellow named Anthony Hsieh- He founded a number of the large online submprime type mortgage portals in the U.S. - He is starting another one called ' LOANDEPOT.COM' .
I don't think these online portals are anywhere near in use in Canada - we seem to prefer the personal touch I guess! Firms such as HOME TRUST and XCEED MORTAGE seems to be doing ok , and Canada was of course ' relatively' unscathed during the U.S. sub-prime bust - God knows we felt the effects though.
Stan

BUSINESS , 2010, AND ME

As we kick into the New Year ( could 2009 have been any worse for business ? ) it was encouraging to note that the Toronto Star has reported that business bankruptcies are down around 10-15% with construction, mfg, and retail accounting for most of the failures .

If we can get the Canadian business lenders to improve capital flow to Canadian business we can all reasonably expect 2010 to be a better year . We at 7 Park Avenue Financial hope so !

Government loan guarantees and Me

There was a disturbing ( probably only to myself !) article in todays Globe and Mail - I have pasted it in below here around the Canadian governments Small business loan guarantee program, commonly called the CSBFL program . The article , by Dean Beeby - Canadian Press - discusses a study by KPMG around the porgram . The highlights of the article are the larger amounts of defaults , reluctance of some bankers to not introduct the program to their customers (' its a lot of paperwork and admin' ) and the fact the the program might be over utilized in some sectors , ie food, beverage, hospitality, etc .

I personally have always thought this was one of the only shining bastions of real government effort in Canadian business . I have written previously on what I considered a joke in this area, the Canadian Secured Credit Facility which was instituted by the feds at the time of the current financial meltdown, had 12 B allocated to it, did one deal, yes one deal!, and , guess what, the recession is over and thousands of small and medium business got no help whatsoever . Anyway, dont get me started .

I hope the gov't and the banks get their act together and utilized the program to the benfit of all parties, the risk takers and the Canadian business person .

ARTICLE IN TODAYS GLOBE AND MAIL ->

OTTAWA -- An Industry Canada loan program for small business continues to lose money and annoy bankers a decade after it was redesigned to avoid those very problems.

A new report on the Canada Small Business Financing Program has found a loan-guarantee portfolio in sharp decline even as losses to the federal treasury mount.

The program, which reimburses financial institutions for losses on defaulted loans, is a tangle of red tape and inflexible terms that has lenders fleeing, says the KPMG study, commissioned by Industry Canada.

"Lenders have identified a heavy administrative burden, which includes a paper-based system, and difficulties with the claim process, as major obstacles," the consultants' report concludes. "It is not profitable to them."

The result has been a sharp drop in the number of loans, hitting a new low of 9,000 -- about half the number the program supported in 1999 when it was overhauled to put it on a more business-like footing.

The program has so far guaranteed about $10 billion in small-business loans issued by banks, credit unions and others since 1999, and collects fees based on the size of the loan.

The revenue paid to Industry Canada was supposed to cover the default claims paid out, but the math has never worked in Ottawa's favour.

Claims paid out have risen steadily over the decade, and now top $100 million annually, while revenues have consistently lagged, costing taxpayers a net $335 million so far.

Put another way, cost recovery is currently at only about 60 per cent rather than the 100 per cent that was planned, and is in steady decline.

"The gap between claims and fee revenues will continue to exist and most likely expand," predicts the KPMG report, dated Oct. 30 and obtained by The Canadian Press under the Access to Information Act.

The program's portfolio of loans has become ever more risky over the decade, now catering especially to newly established small firms with weak credit scores and little collateral, many in the food-and-beverage sector.

Few small-business borrowers have even heard of the program, so lending institutions have effectively become gatekeepers, able to recommend the option if a standard loan application fails.

But loans officers have generally soured on the program.

"They mention the high amount of forms that need to be filled out ... as a major nuisance," say the KPMG investigators, who interviewed bankers and others.

"It is the lender's perception that the claim staff at the ... program is very strict and focus mostly on reasons not to pay the claims." Some of the loans officials interviewed were "very passionate about not offering the program."

Virtually all the problems cited by KPMG repeat the findings of earlier studies. An Industry Canada report in early 2002 cited the paperwork burden, lack of profit and trouble collecting claims as driving financial institutions away.

The same year, the auditor general of Canada expressed doubts that the program as designed could ever recover its costs.

And a 2004 report the department commissioned from another consultant repeated the findings about the administrative load, disappearing profits and cost-recovery problems.

The 2009 federal budget changed two rules in the program, raising the maximum loan amount by $100,000 to $350,000 and adjusting a claims calculation limit. There was also a vague promise to ease the administrative burden, with no details.

The Finance Department predicted the changes, which came into effect March 31, will increase annual borrowing under the program by $300 million from the current $1 billion.

The KPMG report quizzed bankers and others about the 2009 budget changes. The new loan limit won praise, though with a warning that default levels might also rise. The claims adjustment got a lukewarm response.

A spokeswoman for Industry Canada did not respond immediately to a request for comment.

The Canada Small Business Financing Program covers 85 per cent of loan defaults, and sets the maximum interest rate that can be charged as the prime lending rate, plus three percentage points. Industry Canada collects registration and administration fees set as a percentage of the loan.

An earlier incarnation of the program, the Small Business Loans program, lost at least $275 million between 1995 and 1999 and was scrapped that year.