Feb. 6, 2013 - After years of "mission creep" at Canada's Crown financial corporations, their activities have expanded far beyond their original mandates and need reassessment, according to a new report from the C.D. Howe Institute. In "Reining in the Risks: Rethinking the Role of Crown Financial Corporations in Canada," authors Philippe Bergevin and Finn Poschmann assess the risks posed by three major Crown financials for taxpayers and the economy and make recommendations for limiting their activities.
The authors test the rationales for the existence of three federal Crown financial corporations: Farm Credit Canada (FCC), the Business Development Bank of Canada (BDC), and Export Development Canada (EDC). In the financial sector, they note, the Crowns typically had their origins in a perceived lack of credit - a credit market gap - for some consumers and businesses.
All Crowns compete to some extent with private financial institutions, say the authors, and hence they operate beyond any potential market gap. An example is the FCC, whose share of total farm loans has grown from less than 15 percent in the 1990s to 29 percent in 2011, and appears to operate at the farthest remove from a gap-filling role.
They also find that Crowns' operations pose risks to taxpayers and the overall economy - and that these risks seem to have grown in recent years. In particular, the FCC has grown alongside a rise in the level of farm indebtedness and a bidding-up in farm asset values, including supply-managed farm quotas.
Bergevin and Poschmann recommend policies limiting these Crowns' activities to better align them with their core mandates and economic rationales. "The Crowns' mandates should be clearly circumscribed, and even rolled back," said Bergevin. "The Crowns' conduct needs consistent monitoring to ensure they stick to their mandates, and to ensure they do not pose undue risks for taxpayers and the economy."
In particular,
- Recent mandate expansions and capital enhancements at the BDC and EDC, some of which were extended for another year in Budget 2012, should be wound down. Management at each of these Crowns has indicated an aim of limiting their activities to roles complementary to the market;
- All Crown financial corporations should be regulated by the Superintendent of Financial Institutions, so that they are subject to the same capital standards and related prudential regulations as those of the federally regulated private financial institutions. Budget 2012 introduced model legislation for doing so with respect to Canada Mortgage and Housing Corporation;
- Parliament should introduce sunset clauses to the Crowns' enabling legislation, as with the current Bank Act.
Click here for the full report.
For more information contact: Philippe Bergevin, Senior Policy Analyst; or Finn Poschmann, Vice-President of Research at the C.D. Howe Institute, 416-865-1904; email: cdhowe@cdhowe.org