Banks bumping up the price of loans, despite strong Yukon economy

Mines and tourist lodges get all the attention. In a global commercial slowdown, these industries are the most visibly damaged by a loss in foreign investment. If American tourists can't pay their mortgages, they're not hiking...

In a global commercial slowdown, these industries are the most visibly damaged by a loss in foreign investment. If American tourists can’t pay their mortgages, they’re not hiking in Kluane Park. If China isn’t building industrial mega projects, they aren’t sending investors to look at metals in the ground up here.

But now the Yukon’s retail sector is feeling the credit crunch too.

Retail companies have all the appearances of business as usual. Help-wanted signs hang in the windows of franchises and local stores, the big retailers’ parking lots are busy every night, and public servants aren’t buying less in fear of massive layoffs around the corner.

There’s more than one road from Wall Street to Whitehorse. For local retailers, it’s a hike in borrowing fees from Canadian banks.

One Yukon company didn’t even believe it existed before last month.

“I didn’t think much of the credit crunch issue until it happened to me,” said the representative of a retail firm who wished to remain anonymous.

A letter from a bank recently indicated that his borrowing costs were going to climb.

“Now I’m a believer,” he said.

The Whitehorse Chamber of Commerce echoed his worries when Treasury President Vic Toews visited the Mount McIntyre Centre last month.

“Small and medium entrepreneurs are starting to feel the pressures of the economic downturn and if we don’t do something now to support these businesses they will indeed be faced with increasingly difficult times,” chamber chair Muriel Chalifoux told the minister on January 16.

“The federal government could make it easier for small and medium entrepreneurs to get access to financing by having the Business Development Bank of Canada ensure that credit is available,” she said.

The development bank did get a 0-million injection in the federal budget to help increase borrowing. The Bank of Canada has also lowered its prime rate—the rate at which it lends to its best borrowers—to one percentage point.

But the bank’s prime rate, which usually gets Canada’s big five banks to follow suit, isn’t making a difference.

“They are definitely not passing on that saving to a commercial borrower like a business, and I know that for a fact,” said the retailer.

Even if the interest rate in the money market amongst banks drops, the banks are hiking their interest rates to businesses.

“The prime rate used to be five per cent months ago before the credit crunch hit. My cost of borrowing has gone down quite a bit with the prime when it was lowering. But now the banks no longer lend at prime and they’re increasing the borrowing costs based on prime.”

Businesses that use to borrow above prime are now seeing that percentage get even higher instead of lower.

“(Businesses) are probably getting an increase to four or five per cent above prime. So even though the Bank of Canada is trying to ease the borrowing costs to the businesses, the banks are increasing the costs of borrowing to the businesses.”

The Bank of Canada prime rate isn’t the only factor affecting banks, though. The hike in business loans is due to factors beyond the prime rate, which only directly affects lending between banks in overnight loans.

The cost of a loan has four parts: the cost of funding, the cost of capital, operating costs and loan losses.

The money the bank loans to a business is the cost of funding. That money is purchased on the money markets and it is affected by changes in the Bank of Canada rate.

The cost of capital is different. This is the amount of money that the bank needs to secure the loan in case of a rainy day.

“The cost of capital is related to the stock market, not the Bank of Canada,” said Keith Halliday, a Yukon-based economist.

This cost has gone up because banks need to be better capitalized in volatile times.

“Basically, the banks are being told by the stock markets and being told by the regulators to hold more capital for their loans because of all these disasters in other countries,” said Halliday.

“So that’s increased the cost of loans that the banks give to businesses, which you don’t really see when you look at the Bank of Canada rate.”

Operating costs are the costs of running a branch and they aren’t a factor in higher borrowing costs. But the loan losses cost—the risk the bank takes on by giving a loan—has climbed since the economy took its downturn.

“It might not concern this individual’s business you spoke to, but statistically the whole economy is getting worse and, therefore, more businesses are going bankrupt. Therefore the banks have a higher loan loss rate and they will raise their prices.”

Fluctuations in capital costs and loan losses costs don’t happen uniformly across the country. Different banks will charge different prices depending on how volatile a regional market or industry is.

“At the mass banking level, when you have hundreds of thousands of small business clients, the banks tend to keep it simple and have a fairly uniform set of prices across the country,” said Halliday.

But there are regional differences because the banks estimate the credit worthiness of its borrowers, he said.

“So with the loan loss rate, there is some internal difference. But with these others things like the cost of capital, it’s a national or international phenomenon where we are getting buffeted by these international credit crisis’.”

Credit card and personal lines of credit don’t fluctuate like business loans because their forms of borrowing are closely tracked by the borrowing firms, said Halliday. On a smaller scale, it shows that personalized attention can assure a credit fee that suits your history.

But the data needed to do this with small businesses is too hard to get, he said.

So even if Yukoners are still buying goods and working 40 hours a week, business loans here are being affected by credit conditions Outside.

While there’s been talk of a credit union in the Yukon, centralizing our financial needs would also have its risks.

“The con is that you have a smaller organization that doesn’t have all these scale efficiencies,” said Halliday. “(Credit unions) are more vulnerable to one single shot (of instability).”

Even if international financial shocks have hit the Yukon, the problem isn’t that there’s less money to borrow in Canada.

“The amount of money that the Canadian banks have lent to consumers and small businesses has gone up,” he said. “It was higher in 2008 than it was in 2007 and there is no evidence that the banks are reducing the amounts of credit.”

It’s only getting more expensive for banks to finance their loans with higher capital costs. These loan cost hikes might be especially severe because more customers are turning to Canadian banks now that international banking subsidiaries have retreated from the market, said Halliday.

“The big debate is: ‘Has it gone up to a reasonable amount that you’d expect because of the credit crunch and the rising cost of capital, or has it gone to a higher amount?’”

Contact James Munson at