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Parliament Hill in Ottawa.Dave Chan/The Globe and Mail

When credit markets froze up after the 2008 Lehman Brothers Inc. collapse, Finance Minister Jim Flaherty took the extraordinary step of moving Export Development Canada into the domestic lending business.

Four years later, the EDC is still making domestic loans, even though it was created to provide export financing to Canadian companies.

It's an example of what C.D. Howe Institute analysts Philippe Bergevin and Finn Poschmann call a worrying trend of "mission creep" by federal Crown financial corporations.

Created to fill gaps in the credit system, these lenders have steadily expanded their activities beyond strictly doing what private-sector lenders won't, the authors concluded in a new report "Reining in the Risks: Rethinking the Role of Crown Financial Corporations in Canada."

"The country has grown up, and these Crown corporations often represent an economic contradiction," the report said.

Many Crown lenders no longer have a "clear policy rationale," the report said. And their expanded activities may be putting taxpayers at risk, displacing private lenders and encouraging excessive risk-taking by borrowers, the authors said.

"The Crowns' mandates should be clearly circumscribed, and even rolled back," argued Mr. Bergevin, a senior policy analyst at C.D. Howe. "The Crowns' conduct needs consistent monitoring to ensure they stick to their mandates, and to ensure they do not pose undue risks for taxpayers and the economy."

Farm Credit Canada, another government lender, now has a 29-per-cent share of all farm loans, up from less than 15 per cent in the 1990s – partly the result of expanded powers granted by Ottawa.

The EDC and the Business Development Bank of Canada, which makes loans to small and mid-sized businesses, have also expanded their activities over the past decade.

The FCC and other federal lenders have an advantage over banks and private sector lenders. They can tap the government's low credit risk and they don't pay income tax.

These lenders face an "existential challenge," the report said. On one end, the lenders were created to fill gaps. But taxpayers generally don't tolerate when they lose money, causing them to look for new revenue-generating activities.

Among the report's key recommendations:

  • The temporary expansion of the mandates of the EDC and BDC should be wound down.
  • Clearer mandates should be written into the governing legislation of Crown financial corporations to ensure they are true “lenders of last resort.”
  • All Crown financial lenders should be regulated by the Office of the Superintendent of Financial Institutions, the federal financial watchdog.

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