Reining in the Risks: Rethinking the Role of Crown Financial Corporations in Canada

Crown corporations are business enterprises owned by governments – having been established to achieve a range of public policy goals, they tend also to have revenue-generating objectives. In the financial sector, the Crowns typically had their origins in a perceived lack of credit – a credit market gap – for some consumers and businesses. In this Commentary , we test the rationale for financial Crown corporations’ continued existence, in the context of the mandate and activities of three federal Crown financial corporations: the Business Development Bank of Canada (BDC), Export Development Canada (EDC) and Farm Credit Canada (FCC). We argue that the rationale for their continued existence is difficult to sustain, because the market failures they are intended to address are not well defined. The financial Crowns’ intertwinement with domestic political and business institutions, however, makes their rapid unwinding unrealistic. The issues we address, therefore, are the extent to which they complement or displace private activity, and whether their access to low-cost capital leads these Crowns or their counterparties to take on excessive risks. We find that all Crowns compete to some extent directly with private financial institutions, and hence operate beyond any potential market gap. FCC, whose share of total farm loans has grown from less than 15 percent in the 1990s to 29 percent in 2011, appears to operate the farthest removed from a complementary role. We also find that Crowns’ operations pose risks to taxpayers and the overall economy – and that these risks seem to have grown in recent years. In particular, the FCC has grown alongside a rise in the level of farm indebtedness and a bidding-up in farm asset values, including supply-managed farm quotas. We recommend policies limiting these Crowns’ activities to better align them with their core mandates and economic rationales. The Crowns’ mandates should be clearly circumscribed, and even rolled back. The Crowns’ practices should be monitored consistently to ensure adherence to their mandates and to ensure they do not pose undue risks for taxpayers and the economy.