A survey of Canadian financial institutions

FI in Canada Deposit-taking FI Insurance companies Asset management companies Investment Banks and Finance Companies

Deposit-taking FI Take deposits and make loans Profit is realized from the difference between interest charged on loans and interest paid on deposit Engaging in other financial activities lately

Deposit-taking FI Banks Schedule I Banks: The big six + two Schedule II Near Banks Trust and Mortgage Loan corporations Local Credit Unions and Caisses Populaires

Chartered Banks Schedule I: Most Canadian owned banks Schedule II: Foreign owned banks Schedule III: Foreign banks taking only wholesale deposits

Schedule I Chartered Banks Royal Bank (Toronto)‏ Canadian Imperial Bank of Commerce (Toronto)‏ Bank of Montreal (Toronto)‏ Bank of Nova Scotia (Toronto)‏ Toronto Dominion Bank (Toronto)‏ National Bank of Canada (Montreal)‏ Laurentian Bank of Canada (Montreal)‏ Canadian Western Bank (Edmonton)‏

Schedule II Banks Usually, subsidiaries of foreign banks in Canada Became chartered as Schedule II banks in the 1980 Bank Act revision Commercial loans to companies Very limited retail banking services to individuals

Schedule II Banks HSBC Bank Canada Credit Lyonnais Canada ABN AMRO Bank Canada Banca Commercialle Italiana of Canada Amex Bank of Canada Citibank Canada USB Bank etc.

The Near Banks Trust and Mortgage Loan corporations Local Credit Unions and Caisses Populaires

Insurance companies Are in the business of reallocating risk Actuarial liabilities Actuarial liabilities: the PV of obligations to policy holders

The Insurance Industry Life Insurance Companies Property and Casualty Insurance Companies

Asset Management Companies Managing the investments of people who do not wish to do it on their own Involves partial disintermediation: the FI acts only as an agent

Asset management vs. Asset administration Asset administration: involves maintaining custody of the asset; no discretion over its sale or purchase is allowed Asset management: discretion over the disposal of assets

The Asset Managers Pension Funds Mutual Funds

Pension Plans Government pension plans Old age security Canada Pension Plan Quebec Pension Plan Personal pension plans RRSP Private pension plans

Mutual Funds Special-purpose investment vehicles professionally managed that allow unit holders to hold shares in diversified pool of assets

Mutual Funds Open-end funds: units (shares) are marked to market to reflect NAV - NAV = (mkt. value of assets - payables)/no. of units Closed-end funds: units (shares) sell at a price determined by the market, like any other security

Mutual funds: distributors Investment dealers: 50% Banks: 30% Other: 20%

Mutual funds: assets by fund type

Investment Banks and Finance Companies Use their expertise to meet specialized financial needs Unlike banks, they do not book most of the assets they handle

Investment Banks and Finance Companies Investment Banks service financial markets Finance Companies extend specialized credit

Investment Banks Also known as: Investment Dealers (Canada)‏ Broker-Dealers (US)‏ Securities Firm (US)‏ Merchant Bank (UK)‏

Investment Banks: Main activities Retail brokerage Wholesale brokerage

Retail brokerage Discount (bare-bone) brokerage Simple execution of trade requested by client Competition based solely on size of commission Full service brokerage Provides investment advice and charges higher commissions

Wholesale brokerage Investing Managing assets for own account or for others Underwriting and distribution of primary and secondary securities Private placements: less stringent disclosure Public offerings: IPO, SEO, bonds, etc, must be registered Depending on the risk assumed by the bank, underwriting can be full or best-effort. Mergers & Acquisitions advisory work Deal-making Market making & principal trading Maintaining a continuos bid-ask spread backed by inventory - a secondary market - for an asset. The biggest investment dealers are also primary dealers for securities issued by the government. Other Custody, escrow, clearance and settlement services

Finance companies Nondeposit-taking institutions that provide financing for business and consumers Acceptance financing buying extendet payment plans at a discount owned by GM, Ford, Chrysler Leasing Financial Operating Factoring purchasing accounts receivable at a discount