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

2. 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

3. 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;
,Government started monopolizing Money Issues
Then, B of Canada was set up in 1934;

4. 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

5. 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

6. 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%

7. 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

8. 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’

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

10. 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

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

12. 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’

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

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