Business 4039 FA

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Business 4039 FA

• Introduction and Chapter 1
• Problem Solutions
• THE FINANCIAL SERVICES INDUSTRY IN CANADA

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Question 1 - 1

• largest SOURCE - deposits
• demand, notice or fixed term deposits
• other funding sources are debentures and other
  subordinated debt, preferred shares and equity -
  both paid in from issuance of capital and
  retained from earnings.
• ...

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Question 1 - 1...

• the major use of these funds is investment in
  loans and securities
• some funds are kept in cash, for liquidity, and
  fixed assets - land, buildings and equipment.
• Uses appear on the left hand side as assets in
  decreasing order of liquidity.

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Question 1 - 2

• Schedule I and II banks have the legal power to
  do the same things, but schedule I banks are
  domestic-owned whereas, most schedule II banks
  are foreign owned.
• Schedule I banks are widely held (with no single
  shareholder owning more than 20 percent of any
  class of equity.)
• Schedule II banks can be closely held.
• Schedule III banks are foreign banks authorized
  to branch directly into Canada. They can do all
  activities the Schedule I and II banks can do
  except take retail deposits.
• ...

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Question 1 - 2 .

• The large Schedule I banks (ie. the Big Six
  Royal, Bank of Montreal, CIBC, National Bank,
  Scotia Bank and TD-CT) - universal banks with
  subsidiaries producing the full range of
  financial services.
• Schedule II banks - niche banks focusing on the
  companies, citizens or dependents of nationals in
  their home country and/or selling services to
  Canadian corporations where they have a high and
  unique degree of expertise.
• Small Schedule I banks (such as the Canadian
  Western Bank) have small localized asset base of
  only a few million dollars -- about the size of a
  small to medium sized credit union.

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Question 1 - 2...

• Trust and loan companies tend to be smaller than
  the large Schedule I banks, and they alone can
  perform trustee services.
• credit unions are restricted to a bonding group
  (industry, region or ethnic group) and engage in
  the credit granting activities deemed acceptable
  by their members - - largely consumer and
  mortgage lending.
• Although both tend to be more involved in retail
  consumer FI activities, some larger credit unions
  (and credit union leagues - especially
  Desjardins) and trust are also involved in
  corporate lending. Their largest asset
  categories, however, remain retail mortgage loans
  and consumer loans.

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Question 1 - 3

• FIs today compete in a global arena where their
  and their clients activities often span several
  regulatory regimes.
• The special nature of FIs necessitates
  regulation, but if the regulation were not
  co-ordinated between regulators, FI management
  would be made more difficult as FIs strove to
  fulfill different regulatory requirements in
  different jurisdictions.
• In the absence of regulatory coordination, FIs
  would tend to practice regulatory arbitrage, by
  optimizing location based on regulatory
  characteristics. Regulators in different
  jurisdictions can learn from the experience of
  others, and those from less advanced countries
  can borrow the expertise of those in more
  advanced countries.
• .

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Question 1 - 3

• In the event of FI crisis, which often have
  international dimensions, regulators can
  coordinate their response more effectively
  through a common forum. For these reasons, a
  co-ordinating body such as the BIS is needed.

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Question 1 - 4

• disintermediation has reduced the demand for
  loans from the best quality corporate borrowers
  who can go directly to the financial markets for
  much of their debt needs.
• at the same time, savers are placing more funds
  in less intermediated FIs (mutual funds) and
  directly into securities, so that supplies of
  relatively cheap deposits have also been
  adversely affected.
• this has forced banks to move to less
  creditworthy borrowers where more monitoring is
  required and to expand into other FI services
  besides deposit taking and lending.
• .

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Question 1 - 4 ...

• But disintermediation also brings with it
  opportunities.
• FIs are needed to service disintermediated
  markets by providing dealing, broking, market
  making, security-structuring, informational and
  advisory services. Hence disintermediation is
  changing the nature of banking.

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Question 1 - 5

• Describe how authority over financial
  intermediation is split between the provinces and
  the federal government.
• BNA Act (1867) - federal government was given
  authority over FIs through powers over banks,
  savings banks, interest rates and the issuance of
  currency.
• BNA Act gave the provincial governments authority
  over property - trust activies specifically
  denied to banks, were provincially regulated.
• the provinces also regulated local credit unions.
• Today, banks and federally CDIC-insured trust and
  loan companies and credit union centrals are
  federally regulated.

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Question 1 - 5 ...

• By the Canada Act, the federal government was
  given authority over FIs through powers over
  banks, savings banks, interest rates and the
  issuance of currency.
• This gave rise to the federal governments
  authority over money and banking and, today, to
  the three agencies that supervise deposit-taking
  FIs OSFI, CDIC and the Bank of Canada.
• The Canada Act, however, gave the provinces
  authority over property. Trust activities,
  specifically denied to banks, were
  provincially-regulated. The provinces.

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Question 1 - 5 ...

• The provinces also regulated local credit unions.
  
• As trusts grew to take deposits and the local
  credit unions expanded in the early 20th century,
  a second tier of deposit-taking FI regulation
  grew up in each province to regulate these other
  FIs.
• Today banks and federally CDIC-insured trust and
  loan companies and credit union centrals (ie.,
  those involved in the clearing system) are
  federally-regulated while some trust and loan
  companies and all credit unions are
  provincially-regulated.

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Question 1 - 6

• The Bank of Canadas supervisory role over banks
  is incidental to its other, more important
  functions. Discuss.
• The Bank of Canadas main function is to
  regulate credit and currency in the best interest
  of the economic life of the nation by taking
  deposits from and making loans to the clearing
  banks.
• The Bank of Canada controls the money supply
  through the clearing banks. To perform that
  function, it collects much data on day to day
  bank activities. It is at the center of the
  payments system, providing automatic
  collateralized liquidity. In a crisis, it can be
  the lender of last resort to banks, but it does
  so only insofar as bank solvency is certified by
  OSFI, the main regulator of banks in Canada.

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Question 1 - 7

• When OSFI was formed, it was heralded as a super
  regulator. How appropriate is the epithet?
• The epithet is appropriate.
• OSFI was formed by combining the Inspector
  General of Banks and the Department of Insurance
  in order to create a single institution that had
  authority over all federally-regulated FIs.
• Since its creation in 1987 OSFI has coordinated
  with the CDIC to share responsibility for FI
  oversight. OSFI oversees healthy FIs but shares
  oversight of distressed FIs with CDIC.

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Question 1 - 8

• Explain the sunset clause of the Bank Act and how
  it has helped the development of FI regulation in
  Canada.
• The sunset clause of the Bank Act has been
  written into each successive Bank Act since 1871.
  
• It provides for the Act to expire in ten years (5
  years for the 1992 and 1997 Acts.)
• The clause has effectively required parliament to
  pay periodic attention to banking reform,
  resulting in a more up to date bank regulatory
  framework than would be in place without such
  requirement.

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Question 1 - 9

• Explain how early Canadian development of trusts
  differed from the US development of trusts.
• Trusts, both in the US and Canada, began by
  operating as financial fiduciaries for clients.
• In the US during the last years of the 19th
  century they rapidly developed into financial
  supermarkets, providing the full range of
  financial services. Some also invested, through
  underwriting activities, into major industrial
  enterprises, becoming large power brokers in the
  economy. They were attacked by populist
  political forces and were forced to give up their
  power.
• In Canada, trust companies tended to be smaller
  and more local in scope. They also expanded
  their activities, but tended to be dominant only
  in retail deposit taking and consumer lending.

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Question 1 - 10

• What were the circumstances that led to trust and
  loan companies developing a closer client-FI
  retail banking relationship than banks?
• The trust function was the starting point for
  trusts. This function involves such personal
  activities as being executor for estates and
  being fiduciary for charitable funds and funds
  set aside for support of minors and incompetents.
  When trust companies started taking deposits,
  they naturally did so for individuals at the
  community level.
• Banks were prohibited from doing mortgage lending
  for much of the 20th century, so that the largest
  single credit need for consumers became the
  preserve of trusts (and credit unions) ...

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Question 1 - 10 ...

• What were the circumstances that led to trust and
  loan companies developing a closer client-FI
  retail banking relationship than banks?
• Banks typically had a commercial bias in their
  dealings. As they operated national networks,
  they naturally provided trade finance and short
  term working capital financing. As the sole
  issuers of demand deposits, and the providers of
  clearing services, they were focused on providing
  essential business services, not consumer
  services.
• Although the legal and regulatory barriers
  between these activities no longer exist, the
  past still affects the present orientation of
  these FIs.

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Question 1 - 11

• To what extent is Mouvement Desjardins a
  financial supermarket.
• Mouvement Desjardins is an association of caisses
  populaires in Quebec where each caisse is owned
  and operated by its local members. The
  Confederation is owned by the caisse populaires
  and in turn owns various FIs including insurance
  companies, a US savings and loan company, a
  trust, a discount broker, a credit card company,
  a venture capital company, etc.
• The Mouvement proved so successful in Quebec
  because it was a community, Francophone-based,
  self-help organization. It was able to
  circumvent proscriptions against universal
  banking because it was not a bank (under federal
  legislation), but was an association of credit
  unions (under provincial legislation.)