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The Bank Job

By Craig Skauge

It’s common knowledge that it’s challenging to start a small business in Canada.

First and foremost on the long list of what makes it so hard is finding the money to get the business underway. In stark contrast to those with little to no down payment wanting to borrow hundreds of thousands of dollars to buy a home and add to our overheated housing market, entrepreneurs looking to borrow money from a bank to start a business are often shown the door. Sure, banks love to lend; just not in cases where it’s not backstopped by the government. Rather than providing capital to entrepreneurs, which may actually spur job growth, banks prefer to secure both their money by lending against existing assets like homes and stock portfolios.

So, what’s an entrepreneur to do? Why raise the capital of course! Surely, as a fundamental driver of economic growth, the rules crafted by our government make it easy for those wishing to start a business to go raise the funds they need right?

Wrong.

But entrepreneurs need not fear any longer.

Canada’s largest financial institutions, realizing the difficulty in accessing capital for entrepreneurs, have come to the rescue to help the small business community they care so dearly about. How? By launching, in conjunction with the Federal Government, the Canadian Business Growth Fund. Announced on March 8th, BMO Financial Group, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Manulife, Sun Life Financial, Great-West Life, National Bank of Canada, ATB Financial, Laurentian Bank, Canadian Western Bank and HSBC Bank Canada have launched a private-sector fund of up to $1 billion dollars to provide long-term financing to burgeoning high-growth businesses. $500 million of this is expected in the first year, with the possibility of the amount doubling to the $1 billion over the next 9 years.

Let me get this straight…

The largest financial institutions in Canada, who have indisputably benefited from the ever increasing complexity of securities regulation, one of the very reasons small businesses can’t properly access capital in the first place are going to collectively  (with government assistance) put in 500 million dollars this year to solve the very problem they’re complicit in creating.

Given the contributions from participants are for some reason confidential at present, let’s assume that the Feds put up half the money ($250 Million), Canada’s Big 5 Banks collectively put up 25% of the funds ($125 Million) with the remaining 8 covering the balance (another $125 Million). That would equate to each of the Big 5 putting a whopping 25 million dollars into the fund at inception. Sounds like a lot until you remember that each of these institutions makes billions of dollars a quarter. Heck, each of them probably made more than what they chipped in during the press conference announcing this laughable contribution.

Let’s put this in persepective:

As of their most recent annual report, RBC alone has more than $500 billion of outstanding loans on their books.

In December of 2016, a number of registrant offshoots of BMO agreed to a collective settlement of a cool $52 million dollars with the OSC for overcharging their clients.

So, if my contribution estimates are correct, one of Canada’s largest financial institutions contribution to help small business will equate to 0.005% of their loan portfolio and the other’s is less than half of a recent regulatory fine they paid.

I can’t make this stuff up people.

So with the relative insignificance of the dollars involved, why then would the CEO’s of Canada’s largest financial institutions, who collectively control trillions of dollars, get together for one press conference where they announce they are jointly, alongside the feds, contributing $500 million dollars? It’s simple; so they could smile and wave to the cameras and act as though they actually care about the small business community they turned their backs on long ago.

As has been the case for far too long, rather than grabbing the regulatory reigns back from unelected bureaucrats and starting a long needed overhaul of our securities rulebook, our political leaders have once again taken the easy road, this time bringing the Big 5 Banks, whom many feel actually run this Country along for the photo opps and headlines.

Don’t get me wrong; I’m not saying this fund won’t help, but in the grand scheme of things it’s not nearly enough and will only placate a select number of small businesses; not the community as a whole.

A much larger fix is needed.

The reality is that Canada’s regulatory regime governing capital markets has been added to over and over again for decades with little taken out. Think of it like a wall in need of a fresh coat of paint every now and then to change with the times, except in this case, old cracking paint doesn’t get scraped off when it’s time to modernize…no it just gets another coat or two added to the existing mess until the point that it’s almost seen as impossible to properly fix.

These layers upon layers of regulation have been to the detriment of independent financial firms and to the direct benefit of some of the world’s largest financial institutions, who have the scale and size to not only absorb the increasing regulatory burden, but actually benefit from it by swallowing up those in need of jobs after their independent IIROC, MFDA, or Exempt Market Dealer closes.

Truth be told, regulation has gotten so cumbersome that even the Exempt Market, the last stop for entrepreneurs, isn’t really meeting the mark as well as it should. Sure, we help entrepreneurs and small business but in order to make it cost effective have had to resort to larger funds that effectively act as Corporate Dragon’s Dens instead of helping the businesses themselves with direct equity injections. As well intended as it was when conceived, regulators most recent Hail Mary to help small business, Crowdfunding, has fallen flat too.

So what are we to do then? As much as it goes against my general feelings about the man, we should listen to US President Donald Trump; “I will formulate a rule which says that for every one new regulation, two old regulations must be eliminated.” As controversial as most of his policies have been since taking office, Trump’s stance on regulation is hard for anyone but a bureaucrat to dispute. Unlike regulations themselves, his fix is simple. And like he has with just about everything else promised during his campaign, he’s issued such an order.

It may not be the most cerebral, complex, or sexy idea ever but sometimes the simplest rules can make the biggest impact. It’s high time for our governments, both federally and provincially to take a look at doing something similar on our own soil as that will make a difference that we’ll feel in the long run.