Canadian Banking Systems

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Canadian Banking Systems

• J.D. Han
• Kings College, UWO

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1. Evolution of Canadian Financial System

• Tradition of
• Four Pillar System
• Trust, Mortgage, Fiduciary Business
• Chartered Banks
• Insurance
• Securities Industry
• (Credit Unions)

Towards
Full Service Banking
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2. Initially Free Banking System, and changed to
Government Regulated System with the Central
Bank(B of Canada)

• The process was unnatual.
• Initially, all banks were allowed to issue their
  own paper monies
• First, BMO helped government bonds to be used for
  reserves
• 1840-1870,Government started monopolizing Money
  Issues
• Then, B of Canada was set up in 1934

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3. Reforms in the Canadian Bank Act

• 1954
• Banks were allowed to go for household lending
  and to make mortgage loans insured by NHA
• 1967
• Canadian Deposit Insurance Corporation was
  created
• the 6 ceiling on the mortgage loans was
  removed
• 1980
• banks were allowed to have mortgage loan
  companies and venture capital companies.
• 1981
• Foreign banks were allowed to set up Canadian
  subsidiaries
• banks were allowed to do leasing, factoring
  and data processing.
• Canadian Payment Association was created for
  nationally open clearing system

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• 1987 Financial Institutions and Deposit
  Insurance System Amendment Act
• banks were allowed to own securities
  houses(investment banks)
• abolishing the Canadian equivalent of
  Glass-Steagall Act
• 1992
• banks were allowed to own trust companies
• banks were permitted to offer a number of
  in-house activities, such as portfolio
  management, and investment counseling.
• required reserves are to be phased out.
• 1999
• Bill C-67
• 2001
• New ownership Rules M A Review Process
  fexbile Bank Holding Company allowed More Open
  Payment Association

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• Easier Entry of New Comers
• Equity Capital requirement is lowered from
  10m to 5 m.
• Some Ownership Concentration allowed for a large
  bank(equitygt 5 billions)
• a single ownership limit is raised from 10 to
  20

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Expanded Access to Canadian Payment Association
membership

• There by access to Large Value Transactions
  System, and Automatic Clearing Settlement System
  was given to Insurance, Investment Dealers, Money
  Market Mutual Funds.
• Now these can allow their customers to use
  Checking Account and Debit Cards
• - more competition for Banks

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4. Other Apparent Differences between U. S. and
Canada

• Canada
• Not Much
• No Big Surge

• U.S.
• Big Increases in Mortgage Backed Securities
• lt- S L companies mismatch of maturity terms of
  Assets and Liabilities
• Big Surge of Money Market Mutual Funds
• lt- way to get around Regulation Q

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5. Changing Characteristics of Canadian Banking
Industry

• Chart 9 of C. Freedman

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III. Japanese Banking System

• Post WWII Japanese banks were reorganized by the
  U.S. Occupying Army
• Yet, they have been distinct from the U.S, banks
• Notably, Japanese banks have been allowed to
  hold equities and to participate in management of
  non-financial corporations

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• Japanese Banks are allowed to own Equities
• Banks are lenders as well as owners

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Pros

• Reduces bankruptcy costs for society (legal
  cost disruption cost)
• Sumitomo Bank revived Mazda in the 1970s
• Reduces monitoring cost of Principal-Agent
  Problem (Sun Bae Kim, Banking and Commerce The
  Japanese Case)
• Makes banks share Upside Returns and
  Calculated Entrepreneurial Risk and Venture

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Cons

• Stock Market Crash leads to Loss of Bank Assets
• Moral Hazards Too Big to go bankrupt
• -

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IV. European Banks

• Universal Banking offering a wide spectrum of
  services and products
• - as opposed to Specialized Banking
• Fully Merged