Canadian Banking Systems J.D. Han King’s College, UWO

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

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;

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

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

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

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

4. Other Apparent Differences between U. S. and Canada Not Much No Big Surge U.S. Big Increases in Mortgage Backed Securities <- S & L companies’ mismatch of maturity terms of Assets and Liabilities Big Surge of Money Market Mutual Funds <- way to get around `Regulation Q’

5. Changing Characteristics of Canadian Banking Industry Chart 9 of C. Freedman

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

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

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’

Cons: Stock Market Crash leads to Loss of Bank Assets Moral Hazards: “Too Big to go bankrupt” -

IV. European Banks Universal Banking offering a wide spectrum of services and products - as opposed to “Specialized Banking” Fully Merged