Banking in Canada

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BANKING IN
CANADA
Canadian Economy 2203
TYPES OF FINANCIAL INSTITUTIONS
 Deposit taking and Lending Institutions
 Insurance companies/Pension Funds
 Investment Dealers/Sales & Finance Companies
DEPOSIT TAKING AND LENDING
INSTITUTIONS
 Charter banks – have a close relationship with government
 Near banks – similar to charter banks, but can’t call themselves “banks”
 Trust companies – accept deposits, administer estates and trusts
 Mortgage companies – invest their depositor's assets into real estate
 Credit unions – cooperatives that offer banking services to members
INSURANCE COMPANIES/PENSION FUNDS
 Cover individuals and businesses against:
 Fire
 Damage
 Automobile accidents
 Other risks
 Pensions are pools of capital invested in financial assets such as shares,
bonds, and real estate in order to provide retirement income for its
investors
INVESTMENT DEALERS/SALE&FINANCE
COMPANIES
 Investment dealers – sell new issues of company shares to the public
and act as brokers for the investors in the stock market
 Sales finance/consumer loan companies – lend money to businesses and
individuals
 6 of the largest banks in Canada dominate our financial system, owning
70% of its total assets.
 Their lending services makes it possible to create the goods and
services of our economy.
CANADIAN BANKING SYSTEM
 Two main types of banks which a modern economy operates on:
 Unit banking system (allows many independent banks to exist but sometimes puts
restrictions on how many branch banks are allowed)
 Branch banking system (restricts the number of banks but not the number of bank
branches)
 Canada has a BRANCH BANKING SYSTEM.
 USA has a UNIT BANKING SYSTEM (over 14,000 individual banks)
BRANCH BANKING
 Advantage:
 Can borrow money from another branch if someone makes a huge withdrawal.
 Criticism:
 Not enough competition between only a few banks
CHARTERED BANKS
 Canada has the “Big Five” banks which are the main 5 banks in Canada
 Can you name them?
 ________________
 ________________
 ________________
 ________________
 ________________
 These banks have overseas and international branches and locations
which contribute to the bank revenue.
BANK OF CANADA GOALS
 Review:
 When the business cycle is expanding (recovering), people make more money, and
businesses take in more profit.
 People start to borrow money for cars, houses, etc.
 The bank raises interest rates to slow down borrowing to prevent consumers from
fueling demand for goods and services so much that the inflation rate will increase
dramatically.
 Banks must careful with their timing, and must not use too much restraint – which
could cause a recession.
DURING A RECESSION
 Banks will lower interest rates to encourage borrowing, therefore
increasing consumer and business spending.
 “Easy Money” – used to describe monetary policies of low interest
rates, availability of credit and growth of the money supply. Attempt to
slow down/reverse recessions.
 “Tight Money” – used to describe monetary policies of high interest
rates, difficulty availability of credit, and decrease of money supply. Used
to rein in economy during an expansion.
WHY SHOULD I CARE ABOUT INTEREST
RATES?
 Interest is the price paid for a loan
 They are a large deciding factor in a consumers choice whether to
SAVE or BORROW.
 Interest rates (depending on high or low) could help you save money or
cost you a lot of money over time!
 As interest rates DECREASE, money that is borrowed
INCREASES.
 Rate of return – the amount of extra revenue an investment by a
business in new machinery, technology or new plant will bring in. (e.g. Is
the investment going to make us more money in the long-run?)
DIFFERENT TYPES OF INTEREST RATES
 Prime rate – the lowest interest rate institutions will offer (it is the
base/lowest interest rate available)
 Normally, people will be offered a rate of x% above prime which is
dependent on a number of factors including
 Amount of the loan
 Credit rating
 Term of the loan
 Bank rate – rate of interest charged by the Bank of Canada to chartered
banks and other financial institutions.
BANKS/BANK OF CANADA
 Goal – to keep price stability and low inflation rate
 Want to keep inflation between 1-3%
 If it falls close to 1, Bank of Canada decreases short-term interest rates
(easy money policy)
 If it rises close to 3, Bank of Canada raises rates to pull inflation down
(tight money policy)
 Bank of Canada can control inflation rates by changing OVERNIGHT
RATE TARGET
OVERNIGHT RATE TARGET
 Lowest available interest rate (Bank of Canada charges this to other
institutions)
 By charging this, the BoC tells other banks and institutions the direction
of monetary policy
 An increase in the target encourages other banks to increase their own
interest rates
BANK OF CANADA BALANCE SHEET
 3 Types of Assets
 3 Types of Liabilities
3 ASSETS OF BANK OF CANADA
 Government of Canada bonds
 Bonds: a financial asset that represents a debt owed by a corporation to the holder,
the corporation pays interest to the holder
 GoC bonds: Govt sells bonds to BoC, bank gives government money, government
promises to pay back the Bank by selling bonds to individuals, businesses, institutions
 Foreign exchange
 Stock of foreign currencies used to defend the Canadian dollar on international
money markets and these currencies are used to purchase Canadian dollars which
props up the dollars price
 Advances to the Chartered Bank
 The BoC lends money to chartered banks for investment purposes, the chartered
banks charge the interest to borrowers
3 LIABILITIES OF BANK OF CANADA
 Currency outstanding
 Consists of bank notes issued by the Bank of Canada or paper money in circulation
 Deposits of the chartered banks
 Balances held by chartered banks at the BoC for the purpose of settling debts
 Deposits of the federal government
 Government deposits revenue and makes payments from the account (e.g. to pay
employees)
ASSIGNMENT
1. Explain the concept of monetary policy.
2. Explain how monetary policy affects the level of inflation in the
economy.
3. Analyze how the Bank of Canada uses monetary tools to promote price
stability, full employment, and economic growth.
4. Explain how interest rates influence decisions of savers and borrowers.
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