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Big banks able to weather Bank of Canada’s worst-case scenario, but risks higher for households and businesses


Canada’s six biggest banks survived a severe stress test by the Bank of Canada, which is a relief since they might be the only thing standing between a relatively short recession and something much worse.

The analysis was part of the central bank’s latest Financial System Review (FSR), which is devoted to the COVID-19 crisis.

Generally speaking, the central bank appears confident that its historic response to the shutdown of vast swaths of the global economy has averted disaster. Governor Stephen Poloz stuck to his contention that the recession will be brutal, but probably relatively short, in part because there appears to be little reason to worry about a financial meltdown.

The pandemic remains a massive economic and financial challenge, possibly the largest of our lifetimes, and it will leave higher levels of debt in its wake

Bank of Canada Governor Stephen Poloz

“The country’s banking system and financial market infrastructures are strong enough to deal with the situation,” Poloz said before taking questions on a conference call with reporters. “To be clear, the pandemic remains a massive economic and financial challenge, possibly the largest of our lifetimes, and it will leave higher levels of debt in its wake.”

Still, thanks to decent economic growth during the past few years and the hundreds of billions of dollars in emergency funds that Ottawa is pushing into the economy, the governor said he was “confident that a strong financial system will help Canada emerge from this episode in relatively good shape.”

Unlike many of its peers, Canada’s central bank doesn’t have any regulatory authority over financial institutions. But it does have moral authority, and it wields the country’s most impressive array of economic researchers. Thus, the FSR is an important instrument of policy, since central bankers use it to try to guide behaviour, just as they attempt to steer spending habits by raising and lowering interest rates.

Normally, the annual FSR is a warning mechanism. The Bank of Canada flags vulnerabilities it thinks could lead to pain in the event of a shock. Since we’re currently living through such a shock, this year’s review was more of a “state of play,” as Toronto-Dominion Bank economist Brian DePratto observed. “Vulnerabilities abound, but on balance the bank appears to be cautiously optimistic that the system can handle the current and emerging stresses,” he said in a note to his clients.

The Big Six and the hefty cash reserves they must maintain to satisfy federal regulations are a firebreak in this crisis

Policy-makers are confident that they have avoided a credit crunch, albeit only because they took the unprecedented step of creating tens of billions of dollars to buy government bonds and company debt. The policy seems to be working, since interest rates, which spiked in March as investors retreated when the coronavirus spread through Europe and North America, have returned to pre-crisis levels.

Poloz and the central bank’s other leaders are probably less sure about how many companies and households will survive the recession without declaring bankruptcy.

The central bank reckons about twenty per cent of mortgage borrowers entered the downturn with only enough cash and other liquid assets to cover two months (or less) of loan payments. Many companies are equally fragile, as some of the industries hardest hit by the crisis are also the ones in which companies were already operating with relatively little money in the bank.

“COVID‑19 has hit many households and businesses hard, especially those that are highly indebted or have low cash buffers,” the FSR said. “During this period, emergency measures that provide basic incomes to households and help businesses access credit are crucial.”

Government rescue efforts now exceed 10 per cent of gross domestic product, more than double the value of the fiscal stimulus deployed during the Great Recession a decade ago. Much of the assistance is in the form of emergency loans, and most of that funding is being administered by the biggest banks.

Canada’s banking oligopoly constrains competition and innovation in good times. But the Big Six and the hefty cash reserves they must maintain to satisfy federal regulations are a firebreak in this crisis. Things would be much worse if the banks were as fragile as airlines and oil companies. Fortunately, the banks should be able to withstand a deterioration of current conditions.

Policy-makers ran a simulation of what would happen to the six biggest banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank — if the Bank of Canada’s worst-case economic outlook came to pass.

That scenario, which the central bank acknowledges is plausible, involves a 30 per cent plunge in GDP in the second quarter from the end of 2019 and a slow recovery that would leave economic output below pre-crisis levels for more than two years.

It’s ugly, but the banks survived the test: arrears peaked at a rate that was about double the peak during the financial crisis, and non-performing loans would exceed recent highs. But monetary and fiscal policy counter much of the pain, and the banks’ reserves do the rest. Capital requirements remain above the level required by regulation, which was made tougher after the Great Recession precisely so the most important lenders would be ready for the next economic calamity.

“The six largest banks entered the COVID‑19 period with strong capital and liquidity buffers, a diversified asset base, the capacity to generate income and the protection of a robust mortgage insurance system,” the FSR said. “With these strengths, as well as the aggressive government policy response to the pandemic, the largest banks are in a good position to manage the consequences.”

Financial Post

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Disparities In Government Contracting Hurt Minority-Owned Businesses : NPR


Calvin Brandford (center) is a certified minority contractor who has run an excavation business north of Boston for almost 30 years. Brandford said getting state-funded work as a subcontractor is very hard and often comes with a serious drawback: not getting paid for 60 to 90 days.

Chris Burrell/WGBH


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Chris Burrell/WGBH

Calvin Brandford (center) is a certified minority contractor who has run an excavation business north of Boston for almost 30 years. Brandford said getting state-funded work as a subcontractor is very hard and often comes with a serious drawback: not getting paid for 60 to 90 days.

Chris Burrell/WGBH

State and local governments spend billions of dollars hiring contractors for goods and services, but most of those contracts go to white-owned businesses, not minority contractors — despite decades of affirmative action and other policies meant to make up for disparities.

A federal study released by the Minority Business Development Agency in early 2017 found the needle has barely moved on boosting minority business participation in public contracts.

Albert Shen, the former deputy chief of minority business development under President Obama, believes one reason is that government procurement officials just hire who they know.

“The people that manage these large projects are — to be blunt — very homogeneous. They don’t have diverse networks, so they don’t know who to reach out to,” Shen said. “[But] because they don’t know doesn’t mean they don’t exist.”

There are more than 11 million minority owned businesses in the U.S. In places such as Massachusetts, minority entrepreneurs are now getting a smaller slice of the pie when it comes to doing business with local government. Over the last two decades, adjusted for inflation, the value of Massachusetts contracts going to minority-owned businesses has fallen 24%. That’s $135 million less per year paid to minority entrepreneurs.

“The smart thing to do”

In Massachusetts and many other states, public projects are required to hire a certain percentage of minority and women-owned businesses.

But Larry Cole, who runs a trucking company in Springfield, Mass., said there’s very little oversight to make sure that happens. In 2007, a construction company promised him hundreds of hours of work as a minority subcontractor but Cole got only a fraction of the work – despite sometimes showing up onsite with trucks and drivers.

“You’ve got to feed a family. At that time, I had three kids in college, plus the trucks, the insurance, payroll taxes,” said Cole, remembering how he challenged the construction company when they turned him and his dump trucks away. “I said, ‘Wait, I’m supposed to be doing all the trucking here.’ Well, next thing you know, you’re not doing it.”

Lionel Henry (right), who works for a minority-owned contracting firm, repairs the roof of an outdoor hockey rink at Philadelphia’s Fishtown Recreation Center in December 2019. The project was part of a Philadelphia effort to expand participation of minority contractors in city-funded construction jobs.

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Lionel Henry (right), who works for a minority-owned contracting firm, repairs the roof of an outdoor hockey rink at Philadelphia’s Fishtown Recreation Center in December 2019. The project was part of a Philadelphia effort to expand participation of minority contractors in city-funded construction jobs.

Christopher Burrell/WGBH

Cole’s trucking company shrank, he said, partly because of his frustration of getting work in the public sector.

Massachusetts’ leaders began decades ago trying to fix economic disparities facing minority businesspeople such as Cole, passing laws and creating agencies to even the playing field. Last fall, Massachusetts Lt. Gov. Karyn Polito praised efforts to boost minority participation in building two casinos approved by the state.

“The one thing the Mass Gaming Commission did was to be intentional to diversify their workforce — setting these goals, holding everyone accountable, measuring progress,” she said.

James Jennings, an expert on race and politics and an emeritus professor at Tufts University, said the state’s efforts to increase fairness and equity for minority business owners aren’t cutting it.

“The pushing has been going on for 25 to 30 years now,” Jennings said. “I think leadership has to be more aggressive in saying we’re going to do something about this because it’s the right thing to do (and) it’s also economically the smart thing to do.”

Inclusive and equitable

Critics in Massachusetts have pointed to Philadelphia as a model for local government getting more aggressive about hiring minority contractors.

On a raw December afternoon in North Philadelphia, a dozen kids are chasing a soccer ball on a blacktop basketball court on a city-owned playground slated for renovation. It’s part of a $400 million initiative aimed at fixing up recreation centers, parks and libraries in low-income neighborhoods like this one.

The city of Philadelphia also intends to spend a third of that money hiring businesses owned by minorities to do the work.

“These poor communities that are mostly minority in the city of Philadelphia: It makes a lot of sense that if you have people coming in and working and fixing things and designing things, let them look like [local people],” said Cappy Sabir, an engineer and minority business owner whose company is working a new vision for this playground. “You’re giving a level of motivation and pride to the community. ‘See? I can be an architect. I can be an engineer, I can be a contractor.'”

Sabir is a co-owner of SRW Engineering & Architecture, which won five contracts with the city worth almost half a million dollars. City-wide, minority-owned businesses landed 23% of Philadelphia city contracts last year, totaling $166 million.

Iola Harper, who heads up Philadelphia’s office of economic opportunity, said Philadelphia’s mayor — now in his second term — has prioritized contracting with minority businesses.

“You really have to have buy-in from the top,” Harper said. “The boss of the city, not their boss, but their boss’s boss, expects that there’s going to be some inclusion. They know that part of my evaluation or part of what my boss is looking at is my ability to be inclusive and be equitable.”

Underlying this mandate is simple economics, said Harper, especially in a city with a poverty rate at 26% — one of the country’s highest for a big city.

“Businesses that are owned by people of color hire people who look like them,” she said. “That’s people that are going to be employed and that’s going to impact the poverty rate.”

Harper’s office also sets minority hiring goals and enforces compliance. Since 2017, Philadelphia has disbarred three vendors from working with the city that violated minority contracting regulations.

The city has also lowered barriers that have historically favored big contractors by offering assistance to smaller, minority-owned and women-owned firms before they even bid on projects.

Sabir’s company — with just 20 employees — took advantage of the city’s new rules and is now treated as a prime contractor, not just a subcontractor that has to lobby other private businesses for a share of the work.

“Opportunities come out from the city (were) worded in a way, structured in a way that is impossible for either for any minority, or woman-owned business to even have a chance,” Sabir said. “Offering the opportunity for minority firms to be primes? To us, that’s like Obama becoming president. It’s huge.”

The huge change that Sabir has welcomed in Philadelphia, though, is not happening across the country. The federal report at the end of the Obama administration analyzed 100 disparity surveys done by cities and states across the country. The majority of those places found minority-owned businesses face significant disparities.

President Trump’s budget for next year calls for cutting the Minority Business Development Agency budget by 76%.



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EIB to support digitalisation of Spanish businesses



The European Investment Bank and the Spanish national entity, Instituto de Crédito Oficial, announced on 21 November that they will jointly finance the innovation investments of Spain’s department store chain, El Corte Inglés, to accelerate its digital transformation, thus strengthening its competitiveness on the market.

Under the ten-year agreement, the EIB will provide €110 million for the operation under the Juncker Plan, while ICO will provide €100 million.

As supporting innovation and business digitalisation is one of the EIB’s priorities in Spain, the investments will focus on the implementation of new technologies to expand multichannel sales and improve the logistics chain management.

El Corte Inglés has more than 90.000 employees. Developing new software and improving the cybersecurity of its online business will also mean creating new jobs in its IT department.



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