Regional Differences in Canadian SME Interest Rate determination/Differences Regionales Dans la Determination Des Taux D'interet Pour Les PME Au Canada

Abstract This study set outs to examine whether or not there are substantial differences in the way that chartered banks, and other institutional lenders, determine interest rates for small business loans in Atlantic Canada and Ontario. Using 2003 survey data from the Canadian Federation of Independent Business (CFIB), econometric analysis shows that interest rates are more dependent on relationship variables in Atlantic Canada than in Ontario. The most significant variable in determining interest rates in Atlantic Canada is how well the SME owner felt his/her business was understood by the lending institution. For Ontario, the model shows that interest rates are dependent on local competition such as the existence of a bank branch in the local community. For example, the model estimates that the loss of one bank branch in an Ontario community can be associated with an increase of 8.5 basis points to the interest rate on small business loans. This evidence is critical for policy makers to consider in assessing the regional impacts of bank mergers on Canada's SME sector. Resume Alors que la fusion possible des banques canadienne fait periodiquement la manchette, notre article analyse l'impact potentiel de telles fusions pour les PME canadiennes, en insistant sur les differences regionales a ce niveau, principalement en fonction du niveau de ruralit6. Nous debutons par une description d'elements pertinents touchant ces eventuelles fusions. Deux aspects important que l'on doit considerer sont les politiques en matiere de concurrence et les liens relationnels touchant l'obtention de credit. Dans certaines circonstances, une reduction de la concurrence peut etre socialement acceptable. Toutefois, il s'avere que les plus petites institutions financieres semblent parfois plus efficaces pour servir les firmes rurales. Dans ce contexte, cette etude cherche a savoir s'il existe d'importantes diff6rences dans la determination par les banques a charte et d'autres preteurs institutionnels des taux d'interet pour les prets aux petites entreprises au Canada atlantique et en Ontario. En utilisant les resultats du sondage 2003 de la Federation canadienne de l'entreprise independante (FCEI), une analyse econometrique demontre que les taux d'interet dependent plus des variables relationnelles au Canada atlantique qu'en Ontario. La principale variable dans la determination du taux d'interet au Canada atlantique est le sentiment, par le proprietaire, que l'institution financiere comprenait son entreprise. Ce resultat est important car de l'information intangible decoulant de la presence de l'institution financiere dans la communaute ne semble pouvoir etre facilement substituee par la technologie. Pour l'Ontario, le modele demontre que les taux d'interet dependent de la concurrence locale telle que la presence de succursales bancaires. Par exemple, le modele estime que la perte d'une succursale dans une communaute ontarienne peut etre associee a une augmentation de 8,5 points de base du taux d'interet sur les prets aux petites entreprises. Ce resultat est d'une grande importance pour pousser les decideurs publics de considerer les impacts regionaux de la fusion des banques sur les PME canadiennes. Introduction In June of 2004, the Government of Canada was set to revise the merger guidelines for chartered banks in Canada. A general election was called and the proposed guidelines were put on hold. A few elections later, with a minority government currently in place, it is unlikely that such a politically sensitive issue will be addressed soon. If only for this reason, we should take full advantage of the opportunity to review the issue from a regional perspective. The argument of whether Canada's chartered banks should be allowed to merge rests largely on whether or not one believes the global benefits of the mergers would outweigh the global costs. Proponents argue that it is important to permit mergers in order to allow domestic banks to operate at a more efficient scale, to compete better internationally and to save substantial amounts of money by closing and/or combining overlapping services (Mathewson and Quigley 1998; Clemens et al 1998; Milne and Neave 1998). …

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