1. The Canadian Financial System Jean Roy PhD École des HEC June 1999

2. Content 1. Introduction 2. Legal framework 3. Present state 4. Current developments 5. Conclusion

3. 1. Introduction Context: Many internal and external factors putting pressure for changes Objective: Providing a quick overview of the present situation and current trends Sections: Legal, Economic, Trends

4. 2. Legal framework

5. Legal jurisdiction for various types of financial institutions Government Federal Provincial Chartered banks Yes No Trust companies Yes Yes Credit unions No Yes Insurance co. Yes Yes Securities & exch. No Yes

6. Federal Regulators and Supervisors of F.I. Department of Finance of Canada Bank of Canada Office of the Superintendant of Financial Institutions (OSFI) Canada Deposit Insurance Corporation (CDIC) Bank Ombudsman

7. Majors restrictions for banks Activities –Cannot lease automobiles –Cannot sell insurance in branches Ownership –Cannot be owned by a holding –No shareholder can have more than 10% –Can only own financial affiliates

8. 3. Present state of the canadian financial system

9. McKinsey Report Reference: http://finservtaskforce.fin.gc.ca/research/research.htm Exhibits 2-9 to 2-16, 2-24, 2-27

10. Value of share trading for 1998 (millions of USD) NYSE 7 317 94852,9% Nasdaq 5 518 94639,9% Toronto 331 847 2,4% Chicago 298 912 2,2% Amex 287 928 2,1% Montreal 37 506 0,3% Mexico 31 192 0,2% Vancouver 2 573 0,0% Total13 826 856100,0%

11. 4. Current developments

12. Reform process The task force on the future of the Canadian financial services sector (Mackay report) September 1998 Feedback and comments Fall 1998 Policy paper from the Department of finance to be released this month of June

13. Banks Two major merger proposals turned down (RBC-BMO and CIBC-TD) dec 1998 Expected goverment position –No new activities (leasing or insurance) –Relaxed ownership rules Increase of the 10% ceiling to 20% Upstream financial holding co. to be allowed

14. Life Insurance Co. Four major Life Ins. Co. are currently in a process of demutualization: –Mkt share –Sun Life Ass. Co.(#2)12% –Manufacturers Life Ins. Co(#3)11% –Mutual Life Ass. Co (#5)10% –Canada Life Ass. Co. (#6) 9.5%

15. Other federaly regulated F.I. Insurance co., Trust co and Stock brokers to be allowed to participate directly in the payment system

16. Foreign access to Can. Fin. Sys. Government has recently abolished the requirement that foreign banks have to create a Canadian affiliate to operate in Canada. They may now simply operate as branches of the mother company.

17. Canada Deposit Insurance Corp. CDIC has now (Spring 1999) put in place a system of premium that is risk-adjusted. Premium vary from 1/6 to 1/3 of 1% of deposits

18. Stock exchanges The four Canadian stock exchanges have agreed on a major reorganization plan –Toronto to trade senior equities –Montreal to specialize in derivatives –Vancouver and Alberta to merge and trade junior equities Plan is still to be approved by regulators

19. 5. Conclusion

20. Characteristics of the Canadian Financial System It used to be: protected bank dominated concentrated secure and stable

21. Nature of current evolution Protection is being lifted both by NAFTA and commitments to WTO Non bank institutions will be favored by the coming reform Stock exchanges will go through a major reorganization to survive against US competition

22. Final word Whereas the Canadian Financial System used to evolve quietly, it is now in a process of rapid and substantial changes to cope with technological progress and internationalization.