New research on the Big Banks and the businesses left behind

What the system doesn’t finance

Liquidity rules, capital regulation and shareholder expectations shape every lending decision. The result is a system that struggles to provide whole categories of credit Canadian enterprises need: small loans, patient capital for productivity-improving investments, flexible terms for seasonal or project-based revenue, lending against intangibles like software and IP, mission-aligned capital for non-profits and community infrastructure, transition financing for owners exiting to employees or co-ops rather than private equity and relationship-based underwriting for borrowers whose viability doesn’t show up in standardized documentation.

The gap isn’t between viable enterprises and unviable ones. It’s between the kinds of lending that fit the dominant institutional model and the kinds that don’t. There’s a difference between an enterprise that’s inherently risky and one that simply doesn’t fit the operational model of a big, publicly traded, deposit-funded bank.

Looking outside the banks

Other countries have figured out how to overcome the structural limitations of big-bank financing by looking outside the banks.

Germany’s network of public savings banks, called the Sparkassen, serves community enterprises across the country. France’s Bpifrance is a large public bank with a statutory mandate for patient, long-term domestic financing aligned with industrial policy priorities. The U.S. and U.K. sustain robust ecosystems of community development financial institutions that channel capital to underserved communities and enterprises. Credit unions in countries like the U.S. and the U.K. have benefited from regulatory frameworks scaled to their size and risk.

Canada has made some attempts to cater to the specific needs of SMEs through the Business Development Bank of Canada, the Social Finance Fund and Community Futures,  but these programs lack the scale and permanence to fundamentally change the landscape. They’re patches on a system that needs structural change.

Canada ranks second-worst in the G7 as a place to be an entrepreneur, with 55 per cent of small-business owners saying they would not recommend starting a business here right now. We would argue that this is not a reflection of the limits of our entrepreneurs, but the limits of our lenders.

The productivity, resilience, inclusive growth and economic sovereignty objectives Canada is trying to achieve are not independent of its financing system. They are shaped by it. Canada can continue treating its financing monoculture as inevitable, or it can follow the lead of peer jurisdictions and intentionally build the institutional diversity required for a different outcome.

If we want a stronger economy that works for workers, communities and small businesses, we need a financial system diverse enough to serve them.