Financial Institutions and Banking

Canada’s Financial Institutions Chartered Banks Trust Companies Caisses Populaires Credit Unions

Canadian Banking Banks are businesses Banks sell services and earn profits on these services Most of their revenue is earned by charging interest on money they loan to consumers, businesses, and the government. They invest a portion of the money customers deposit into accounts and earn more interest than they pay their customers. They also charge service fees depending on the type of account you have with them and services they perform for you

The Bank Act Canadian Constitution of 1867 gave the federal government control over banking and money which means the federal government makes all laws and regulations concerning banking and money so all banks in Canada operate under similar rules An individual province or city can not change the rules and allow banks in their area do something that the federal government doesn’t allow them to do.

The Bank Act Outlines procedures for: 1. opening new banks; 2. forming mergers with other banks; 3. other details on what they can and can not do For example, banks must: 1. make regular reports to the federal minister of finance

The Bank Act Every few years, the federal government reviews the Bank Act to ensure it continues to meet the needs of society and the business community

The Bank Act The government introduced new pieces of legislation (bills) which go through the legislative process to become new laws that are added to the Bank Act. Example: 1980 changes to the act allowed foreign banks to operate in Canada for the first time.

The Bank Act Established three classes of chartered banks: 1. Schedule I 2. Schedule II 3. Schedule III The class to which a bank belongs is determined by its ownership

Three Classes of Canadian Banks Schedule II Banks Mostly foreign owned banks but are controlled by a small number of shareholders They don’t generally offer shares to the public Have the same powers as Schedule I banks, but the government limits the total number of branches they can have and the total amount of assets they can hold Examples include the Amex Bank of Canada, the HSBC Bank of Canada, ING Bank of Canada Most focus on investment banking and corporate customers Schedule I Banks Owned by Canadian shareholders Shares are traded on the major Canadian stock exchanges Investors buy shares in these banks in order to receive a share of the profits Canada has 19 Schedule I banks. Examples include CIBC, RBC, TD, BMO, Scotiabank, Canadian Tire Bank

Classes of Banks Schedule III Banks Foreign bank branches with permission to operate in Canada The Bank Act sets restrictions on these banks Most offer investment banking and corporate services Examples include Capital One Bank, Deutsche Bank A.G., and Citibank

Branch Banking Each Schedule I bank has a head office on one of Canada’s cities Head office is connected to thousands of bank branches across Canada. Branches are also in more than 40 foreign countries.

Bank of Canada The Bank of Canada is NOT: A chartered bank A bank where consumers can open up accounts or borrow money

Bank of Canada The Bank of Canada: is the government’s bank; issues Canada’s paper money helps keep the Canadian economy as stable as possible.

Bank of Canada 1. How does it try to keep the Canadian economy as stable as possible? It regulates the money supply which is all the money in circulation in the country. 2. How does it regulate the money supply? It raises or lowers the interest rate also referred to as the bank rate or prime lending rate. What is the bank rate, also referred to as the prime lending rate? It is the interest rate the Bank of Canada charges for loans it makes to the chartered banks (i.e. CIBC). Chartered banks borrow very little and rarely from the Bank of Canada.

Impact of Interest Rates on the Economy Raising or the lowering of the Bank of Canada’s prime lending rate indicates that chartered banks should follow suit Bank of Canada announces its new bank interest rate several times a year and it is always in the news.

Impact of Interest Rates on the Economy Raising Interest Rates Makes it more expensive to borrow money from the bank. Used to help keep inflation from increasing too much to quickly Results in less money circulating in the economy and people cut back on their spending. Fewer dollars being spent leads to a drop in demand for goods and services, thus helping to control inflation as the price of goods does not increase or at least as much as it might if people have more money to spend. Lowering Interest Rates Makes it less expensive and thus more attractive to borrow money from the bank Results in more money circulating in the economy and encourages people to spend more money More dollars being spent leads to an increase in demand for products and services which helps businesses make more money leading to more jobs for society who have money to spend. This cycle may then lead to price increases.

Trust Companies First established in the late 1800’s: Their purpose was to manage and invest funds entrusted to them by customers Today: They provide many of the same services as banks such as providing chequing and savings accounts, and providing loans. They assist customers with the purchase or sale of real estate (property) They maintain trust accounts for charitable organizations an minors Sometimes called “near banks.”

Who Governs Trust Companies The Bank Act does not regulate trust companies. Each province and the federal government specify which types of investments trust companies can make with their customer’s money.

Canada Deposit Insurance Company (CDIC) The Canada Deposit Insurance Corporation (CDIC) is a federal Crown corporation created by Parliament in 1967 to protect your deposits made with member financial institutions in case of their failure. CDIC is NOT a bank. CDIC is NOT a private insurance company. CDIC automatically insures many types of savings against the failure of a bank or financial institution that is a CDIC member. However, not all savings are insured and CDIC deposit insurance does not protect against fraud, theft or scam.

CDIC Products insured and not Insured by CDIC See link: http://www.cdic.ca/e/coveredornot/coveredornot.html

Caisses Populaires and Credit Unions Organized and owned by a group of people who agree to pool and share their resources Members share a common bond such as profession, place of employment, geographic area, cultural or ethnic backgound. (i.e. Teachers Credit Union, Niagara Credit Union)

Credit Union and Caisses Populaires Services Receive Deposits Lend money Offer chequing services Provide investment products like RRSP’s and GIC’s. Offer competitive interest rates on deposits and loans Focus on residential mortgages, consumer credit and deposits. If you want to borrow money from a credit union or caisses populaire, you must have a savings account with them

Credit Union and Caisses Populaires Characteristics Provide services only to members and their families To become a member, you must purchase at least one share of the company Each member has one vote regardless of how many shares you own, when making collective decisions for the institution Not-for-profit organization, thus all profits earned must be returned to their members in the form of dividends or rebates at the end of the year. Depositor’s accounts are protected/insured through provincial legislation.

Insurance Companies What are Insurance Companies? Financial institutions that insure risks Provide money to cover the financial costs should some kind of accident, theft, or other loss happen associated with what is being insured What types of insurance are there? Life and accident Car and home Drug and health Factors influencing an individual’s insurance needs: Age, marital status, children, home, car and other personal items, risk comfort level

Why Do Business’s Need Insurance? Fire insurance To protect a business from losing everything in a fire Property or liability insurance Protects against an accident with an employee or customer Auto Insurance Allows companies to transport goods without concern for being sued for an auto accident

Why Do Business’s Need Insurance? Professional Insurance Protects physicians, dentists, and lawyers from being sued for professional misconduct or malpractice Product Liability Insurance Protects against a lawsuit from a product being faulty and/or injuring a customer

How Insurance Works Customers are call policyholders. The type of insurance one receives and the extent of the coverage is called the policy. Customers pay a determined amount of money called a premium. ($120) Premiums are usually paid to the insurance company on monthly basis.

How Insurance Works Premiums are determined based on a number of factors including, but not excluded to: 1. type of insurance 2. age 3. financial and scope of coverage wanted 4. previous insurance record and claims 5. risk level to the insurance company

How Insurance Works An insurance company has many policyholders each contributing premiums The insurance company using the premiums of the many to pay out the claims of a few. A major disaster can quickly cause an insurance company to run out of funds to cover claims 911 caused a number of insurance companies to go bankrupt as they were unable to meet all the claims from business and individual loses. Insurance companies make most of their money from taking premiums and investing.

Bank Accounts Bank accounts where you deposit money until you need it are often referred to as deposit accounts. Financial institutions offer different types of deposit accounts depending on one’s needs. i.e. Savings account, chequing account, joint account Interest rates vary from account to account and from one bank to another

Opening and Accessing an Account Step 1 Provide personal information required Step 2 Provide 2 pieces of identification Step 3 Fill out a signature card Step 4 Receive a bank card

Opening and Accessing an Account Step 2 Identification: Student card Drivers license Passport Credit card Health card Step 1 Personal information required: Full name; Home address Date of birth Telephone number Occupation, if applicable

Opening and Accessing an Account Step 3 Signature Card: Provides a sample of the signature you will use when you deposit and withdraw money, write cheques, and engage in other financial transactions. You will need to fill out a signature card

Opening and Accessing an Account Step 4 Receive bank card that can be used to conduct financial transactions such as at an Automated Banking Machine (ABM) Can be used as a debit card to make purchases at a store and your bank account will automatically be deducted by the amount of the purchase.

Account Statements and Passbooks When you open an account, your account will be assigned an account number for easy reference of your keeping tack of your account activity Depending on the financial institution you may receive a monthly, quarterly, or annual bank statement reviewing all of your account activity. Activity would include deposits, withdraws, service charges, interest received, cheques cashed, etc.

Account Statements and Passbooks Passbooks which you update at the bank or at an ABM, provide you with a record of all your financial activity Passbooks are seldom used now, as customers can use online and phone banking to keep up with their account activity.

Making a Deposit or Withdrawl Using the ABM: Use your bank card Input your personal identification number (PIN) – like an electronic signature Follow the onscreen instructions Take a copy of the receipt printed out Enter PIN

Making a Deposit or Withdrawl At the bank: Fill out a deposit slip Teller inputs information electronically You will either give or receive money from the teller The teller will give you a receipt

Types of Common Bank Accounts Transaction accounts Savings account Transaction/Savings account Current Accounts 5. Joint Account

Transaction Accounts Formerly called chequing accounts Transaction account is used to pay bills and for purchasing goods and services with cash, cheques, or debit cards May use an ABM, online banking or telephone banking You should receive a receipt of some sort which has recorded the details of the transaction. Transactions records ensure you know how much money is in your account. Most financial institutions do not pay interest on this type of account Some institutions charge service fees depending on the number of transactions per month and the balance in your account

Savings Account Used by people who want to save some money Banks will pay interest on the balance of your account The interest paid is the lowest interest rate available compared to all other types of investments. The amount of interest and how it is calculated varies from bank to bank. Some banks require the customer to have a minimum balance at the end of each month – i.e. $4000.00.

Transaction/Savings Account Allows you to pay bills but also to save money. A small amount of interest may be paid, but less than what a savings account would pay Service charges may apply to processed cheques, debit and withdrawls You may be exempt from some or all the service fees if you maintain a minimum balance in your account at the end of each month. (i.e. $3000)

Joint Account An account (transaction, savings, or the combination) can be opened in the name of two or more people Withdrawls from joint accounts may require one or more signatures, depending on the wishes of the people who opened the account.

Current Accounts Current Accounts Used by businesses Business must be registered with the provincial or federal government Account must be in the business name No interest is paid on these accounts Bank charges a service fee for each deposit, withdrawl and cheque that is procesed Cancelled cheques (cashed cheques) are returned to the business for their accounting records at the end of each month along with a bank statement outlining the account activity for the month. Business usually have a deposit book with duplicate deposit slips for the clients accounting records.

Cancelled Cheques A cheque a business or your wrote out for someone, who then cashed the cheque at the bank. The business or individual’s financial institution will stamp the cheque with the date the money was taken from the account. The institution will either return the cancelled cheques to the issuer with a monthly statement or provide photocopies of the cancelled cheques, or store them for future reference. Cancelled cheque is legal proof of payment and can be used to prove a payment was made.

Writing Cheques Date Amount in Numbers Payee Drawee – The name of the financial institution would also be present on the cheque Date Amount in Numbers Payee Amount in words Drawer

Cheque Essentials Date: The date, month and year the cheque can be cashed must be present. Staledated Cheques: Most financial institutions will not cash a cheque when the date is six months after the date on the cheque. Postdated Cheques: When someone writes a date on the cheque which is later than the actual date. A financial institution will not cash a cheque until the date that is actually on the cheque or after up to six months.

Cheque Essentials Payee The name of the person or business to whom the cheque is written – Pay to the order of Bart Simpson. Be sure to spell the name of the payee correctly, or s/he may experience difficulty cashing it.

Cheque Essentials Drawee This is the name of your financial institution (i.e. CIBC) Drawer The person from whose account the money will be taken Must sign the cheque on the line on the bottom right corner of the cheque. The signature should be the same as the one on the drawer’s bank signature card.

Cheque Essentials Stopping Payment If a cheque you have written gets lost or stolen, you can notify your financial institution and tell them you would like a stop payment on a cheque. A form will then need to filled out with the details of the cheque you would like the stop payment on. The financial institution will charge you a fee for this service.

Cheque Essentials Holds on Cheques The bank may delay when you can collect the money from a cheque you are cashing. Holds are done until the bank can ensure that the person who issued you the cheque actually has enough money in the bank to cash it. Any interest you may have earned while the money was withheld from you will be added to your bank account. Holds are often placed on cheques above a certain value.

Cheque Essentials NSF Cheque (Non-sufficient funds) When a cheque is cashed and the financial institution learns that theperson who wrote the cheque does not have adequate funds in his/her bank account to cover the amount. The person who cashed and wrote the cheque will be charged a service fee for NSF cheques.