March 31, 2020 – The federal government should have a large-scale funding program in place to bolster asset-based finance during the current crisis, according to a new report from the C.D. Howe Institute.
In “Filling the Gap: Emergency Funding Programs and Asset-Based Finance in Times of Economic Crisis,” author David Powell notes the 2008-2009 financial crisis pulled most private-sector funders away from the asset-based finance (ABF) industry. If the pattern demonstrated by the 2008-2009 experience is repeated, the concern is that the traditional ABF industry funders and the banks will again pull back, creating a significant funding gap, putting an avoidable dent in economic growth. “That is why a temporary government-supported plan, rapidly deployable is so critical,” says Powell.
The ABF industry is critical to the functioning of the economy. In 2018, the value of ABF financing was an estimated $416 billion of vehicles and equipment for consumer and business customers in Canada, and the industry supports a broad network of dealers, manufacturers, distributors, vendors and brokers, and their customers across Canada. For example, over 90 percent of new vehicles—from autos to big rig trucks—are financed and almost half of that financing comes from non-bank ABF entities.
During the 2008-2009 global financial crisis, ABF entities ran into deep trouble in Canada and required an emergency liquidity program from the federal government that took months to devise and implement.
“Experience drawn from that time demonstrates the invaluable role that the federal government plays in assuring liquidity and stability in the broader financial system in times of crisis, while minimizing any potential long-term negative impact on the government and taxpayers,” writes Powell. “Once liquidity is restored and investor confidence returned, the commercial markets would again resume their normal functioning and government could withdraw from this marketplace.”
A viable model to support ABF entities exists in the $12 billion Canadian Secured Credit Facility introduced in the 2009 Federal Budget. Since then, smaller-scale successor wholesale and indirect financing facilities for financial intermediaries funding small and medium-sized enterprises have been devised and continue to be administered by the Business Development Bank of Canada (BDC). Existing BDC programs could be scaled up in a severe downturn, with experienced people in place for effective, prudent and efficient funding.
“Continuing funding to the ABF industry is an effective way to stimulate the economy," notes Powell. “Getting credit to Main Street, enabling credit-worthy Canadians—businesses and consumers—to obtain financing to spend responsibly and keep the economy moving.”
For over 50 years, federal governments have sought to expand and diversify the number of financial service providers in the Canadian marketplace. History has shown that if liquidity is not supported, many non-bank financing entities and service providers will disappear from the Canadian marketplace.
“In a profoundly disrupted market, the policy objective should be to restore liquidity to allow the financial services sector to continue offering financing to credit-worthy consumers and businesses in support of the Canadian economy, and that must include the asset-based finance industry,” says Powell.
To create an emergency funding facility for the ABF industry, federal policymakers should:
- Maintain a detailed contingency plan, developed and updated, in consultation with industry,
- Enable BDC to scale up its funding programs quickly,
- Allow BDC to fund ABF entities to finance consumer customers as well as commercial clients, and
- Allow BDC to fund smaller regulated financial institutions offering asset-based financing.
For more information contact: David Powell, former President & CEO of the Canadian Finance & Leasing Association; or Nancy Schlömer, Communications Officer, C.D. Howe Institute, phone 416-865-1904 ext. 0247, email: nschlomer@cdhowe.org.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.