BANKING IN CANADACanadian Economy 2203

TYPES OF FINANCIAL INSTITUTIONS Deposit taking and Lending Institutions Insurance companies/Pension Funds Investment Dealers/Sales & Finance Companies

DEPOSIT TAKING AND LENDING INSTITUTIONS

Charter banks – have a close relationship with government

Near banks – similar to charter banks, but can’t call themselves “banks”

Trust companies – accept deposits, administer estates and trusts

Mortgage companies – invest their depositor's assets into real estate

Credit unions – cooperatives that offer banking services to members

INSURANCE COMPANIES/PENSION FUNDS Cover individuals and businesses against:

Fire Damage Automobile accidents Other risks

Pensions are pools of capital invested in financial assets such as shares, bonds, and real estate in order to provide retirement income for its investors

INVESTMENT DEALERS/SALE&FINANCE COMPANIES Investment dealers – sell new issues of company shares

to the public and act as brokers for the investors in the stock market

Sales finance/consumer loan companies – lend money to businesses and individuals

6 of the largest banks in Canada dominate our financial system, owning 70% of its total assets.

Their lending services makes it possible to create the goods and services of our economy.

CANADIAN BANKING SYSTEM

Two main types of banks which a modern economy operates on: Unit banking system (allows many independent banks to exist but

sometimes puts restrictions on how many branch banks are allowed) Branch banking system (restricts the number of banks but not the

number of bank branches)

Canada has a BRANCH BANKING SYSTEM.

USA has a UNIT BANKING SYSTEM (over 14,000 individual banks)

BRANCH BANKING

Advantage: Can borrow money from another branch if someone makes a huge

withdrawal.

Criticism: Not enough competition between only a few banks

CHARTERED BANKS

Canada has the “Big Five” banks which are the main 5 banks in Canada Can you name them?

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These banks have overseas and international branches and locations which contribute to the bank revenue.

BANK OF CANADA GOALS

Review: When the business cycle is expanding (recovering), people make

more money, and businesses take in more profit. People start to borrow money for cars, houses, etc. The bank raises interest rates to slow down borrowing to prevent

consumers from fueling demand for goods and services so much that the inflation rate will increase dramatically.

Banks must careful with their timing, and must not use too much restraint – which could cause a recession.

DURING A RECESSION

Banks will lower interest rates to encourage borrowing, therefore increasing consumer and business spending.

“Easy Money” – used to describe monetary policies of low interest rates, availability of credit and growth of the money supply. Attempt to slow down/reverse recessions.

“Tight Money” – used to describe monetary policies of high interest rates, difficulty availability of credit, and decrease of money supply. Used to rein in economy during an expansion.

WHY SHOULD I CARE ABOUT INTEREST RATES?

Interest is the price paid for a loan They are a large deciding factor in a consumers choice

whether to SAVE or BORROW. Interest rates (depending on high or low) could help you

save money or cost you a lot of money over time! As interest rates DECREASE, money that is

borrowed INCREASES. Rate of return – the amount of extra revenue an

investment by a business in new machinery, technology or new plant will bring in. (e.g. Is the investment going to make us more money in the long-run?)

DIFFERENT TYPES OF INTEREST RATES Prime rate – the lowest interest rate institutions will offer

(it is the base/lowest interest rate available) Normally, people will be offered a rate of x% above prime

which is dependent on a number of factors including Amount of the loan Credit rating Term of the loan

Bank rate – rate of interest charged by the Bank of Canada to chartered banks and other financial institutions.

BANKS/BANK OF CANADA

Goal – to keep price stability and low inflation rate Want to keep inflation between 1-3% If it falls close to 1, Bank of Canada decreases short-term

interest rates (easy money policy) If it rises close to 3, Bank of Canada raises rates to pull

inflation down (tight money policy) Bank of Canada can control inflation rates by changing

OVERNIGHT RATE TARGET

OVERNIGHT RATE TARGET

Lowest available interest rate (Bank of Canada charges this to other institutions)

By charging this, the BoC tells other banks and institutions the direction of monetary policy

An increase in the target encourages other banks to increase their own interest rates

BANK OF CANADA BALANCE SHEET

3 Types of Assets 3 Types of Liabilities

3 ASSETS OF BANK OF CANADA

Government of Canada bonds Bonds: a financial asset that represents a debt owed by a

corporation to the holder, the corporation pays interest to the holder GoC bonds: Govt sells bonds to BoC, bank gives government money,

government promises to pay back the Bank by selling bonds to individuals, businesses, institutions

Foreign exchange Stock of foreign currencies used to defend the Canadian dollar on

international money markets and these currencies are used to purchase Canadian dollars which props up the dollars price

Advances to the Chartered Bank The BoC lends money to chartered banks for investment purposes,

the chartered banks charge the interest to borrowers

3 LIABILITIES OF BANK OF CANADA

Currency outstanding Consists of bank notes issued by the Bank of Canada or paper

money in circulation

Deposits of the chartered banks Balances held by chartered banks at the BoC for the purpose of

settling debts

Deposits of the federal government Government deposits revenue and makes payments from the

account (e.g. to pay employees)

ASSIGNMENT

1. Explain the concept of monetary policy. 

2. Explain how monetary policy affects the level of inflation in the economy. 

3. Analyze how the Bank of Canada uses monetary tools to promote price stability, full employment, and economic growth. 

4. Explain how interest rates influence decisions of savers and borrowers.