Chapter 18 Notes (on Finance)

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Published on 5 Oct 2011
School
UTM
Department
Management
Course
MGM101H5
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of 5
MGM Chapter 18 Notes
The Financial Services Industry in Canada
Financial Services sector plays important role in Canadian economy, employing 600,000
and representing 6% of GDP
Before, Canada had four distinct groups of financial institutions: banks, trust companies,
insurance companies, and securities dealers. But now it is increasingly difficult to
distinguish firms by type of function.
Participants in the Financial Services Industry
A credit union is a non-profit, member-owned financial co-operative that offer a full
variety of banking services to their members.
A trust company is a financial institution that conducts activities like a bank. But it can
administer estates, pension plans, and agency contracts, which banks cannot do. As a
result, many banks are acquiring trust companies.
Non-banks are financial organizations that accept no deposits but offer many services
provided by regular banks. Examples of non-banks include pension funds, insurance
companies, commercial finance companies, consumer finance companies, and
brokerage houses.
Pension funds are amounts of money put aside by corporations, non profit organizations,
or unions to cover part of the financial needs of their members when they retire.
Life insurance companies provide financial protection for policyholders, who periodically
pay premiums.
Commercial and consumer finance companies offer short-term loans to businesses and
individuals who cannot meet the credit requirements of regular banks or have exceeded
their credit limit. Interest rates are very high.
Dividing line between banks and non-banks are becoming less apparent. Many former
non-banks now take deposits.
How the Financial Services Industry is Regulated
Regulation techniques include legislative and self-regulatory initiatives
No single body that regulates. Banks are regulated by federal government, everything
else is provincially regulated.
Why Money is Important
What happens to any major country’s economy has an effect on the Canadian economy
and vice versa. To understand Canadian economy, one must understand global money
exchanges and the creation and management of money
What is Money?
Money is anything that people accept as payment for goods and services. Money
started with the barter system.
Today’s form of money has to the meet the requirements: Portability, Divisibility,
Stability, Durability, and Uniqueness. Coins and bills fulfill these requirements.
Not all money is equally stable. Russian currency is so unstable that no other country
would accept it.
E-cash is the latest form of money.
What is the Money Supply?
Money supply is the amount of money that the Bank of Canada makes available to
people to buy goods and services.
Can be measured with monetary aggregates (M1, M2, M2+ and M2++)
M1 represents very liquid money such as bank notes and coins, while M2, M2+ and M2+
+ represents broader measures of the money supply such as personal savings accounts
and mutual funds.
Too much money in circulation leads to inflation (too much money chasing too few
goods) Conversely, taking money out of the system will slow inflation or lead to
deflation.
When Canadian economy is strong relative to other economies, its dollar value will rise,
as demand for the Canadian dollar will be strong. The opposite is also true.
A rising dollar value means that you can buy more with a dollar.
Control of Money Supply
Money supply has to be controlled to prevent economy from growing too fast or two
slow. At the perfect control, the economy can grow without causing inflation.
Bank of Canada monitors money supply (notably the M1 value) and ensures that the
rate in which it injects money into the system is consistent with stable long-term growth
Bank of Canada attempts to keep inflation between 1 and 3 percent
Bank of Canada’s main weapon is the overnight interest rate. Bank of Canada tells the
biggest banks what rate it wants to see as the overnight interest rate. Overnight rate
immediately influences the prime rate, which is the interest rate that banks charge their
most creditworthy customers. This prime rate is used as a benchmark for many of the
bank’s loans. When this change is implemented, it drags all the other interest rates in
the economy, such as bonds and savings account interest rates with it.
Increasing interest rate causes consumers and businesses to borrow less and pay back
existing loans. People Businesses would rather put the money in the bank. As a result,
economy slows down.
When interest rates go down, people are encouraged to borrow and spend more,
boosting economy.
Bank of Canada chooses a rate that would set an inflation rate that would provide a
good climate for sustainable economic growth, investment, and job creation.
The Banking Industry
Close to half of banks earnings are generated outside of Canada, and these activities
are growing.
Up till the 2008 Financial Crisis, many banks have been attempting to merge to take
advantage of economies of scale
A commercial bank is a profit-seeking financial organization that receives deposits from
individuals and corporations in the form of checking and savings accounts and uses their
funds to make loans to others.
Commercial banks borrow money from depositors and lends money to borrowers. If
revenue generated from giving loans exceed the interest paid to depositors, then the
bank generates a profit.
Some Services provided by banks
Chequing accounts are accounts that can be accessed by a third party when you write a
cheque. Most banks charge a service fee for cheque-writing privileges or demand a
minimum deposit. Chequing accounts usually does not offer an interest rate.
Savings accounts offer an interest rate, but cannot be accessed directly by third parties.
A term deposit is a savings account that earns an amount of interest to be delivered to
you if you promise not to touch the money till then. The longer the term, the higher the
interest rate offered.
Other services include: credit cards, lines of credit, loans, mortgages, overdraft
protection, ATMs, life insurance coverage, brokerage services, financial counselling,
safe-deposit boxes, and traveller's cheques.
Online banking provides convenience. They also offer higher interest rates and lower
fees because they do not have the costs of physical overhead and physical service fees.
However, due to the fear of the lack of security and the crave to talk one-on-one with a
financial counselor, brick-and-mortar banks are here to stay.
The Canadian Securities Industry
A securities dealer, aka investment dealer, aka brokerage house, is a firm that trades
securities for its clients and offers investment services. Allows investors to trade on
open markets. More and more Canadians are turning to securities to ensure their
financial security. This injects equity into businesses, making for a booming economy.
When corporations seek public financing, they must issue a prospectus, which is a
condensed version of economic and financial information that must be made available to
investors.
The securities commission is a government agency that administers provincials
securities legislation. It seeks to protect investors from unfair and fraudulent practices.
Each province and territory is responsible for their own security regulation. Each
province/territory meet at the Canadian Securities Administrators (CSA) to coordinate
and standardize regulations.
The Function of Securities Markets
A stock exchange is an organization whose members can buy and sell securities for
companies and investors.
Stock exchanges assist businesses in finding long-term funding, and assist investors
with buying investments that would help them in long-term financing.
Security markets come in two types: Primary markets and Secondary markets
Primary markets handle sale of new securities. Businesses only make money on the
primary market, through the sale of their IPO.
After IPO, shares are sold in the secondary market.
Businesses would rather meet long-term financial needs by using retaining earnings or
borrowing from lending institutions, but will resort to issuing bonds (debt) and selling
additional shares sometimes.

Document Summary

The financial services industry in canada and representing 6% of gdp. Financial services sector plays important role in canadian economy, employing 600,000. Before, canada had four distinct groups of financial institutions: banks, trust companies, insurance companies, and securities dealers. But now it is increasingly difficult to distinguish firms by type of function. A credit union is a non-profit, member-owned financial co-operative that offer a full variety of banking services to their members. A trust company is a financial institution that conducts activities like a bank. But it can administer estates, pension plans, and agency contracts, which banks cannot do. As a result, many banks are acquiring trust companies. Non-banks are financial organizations that accept no deposits but offer many services provided by regular banks. Examples of non-banks include pension funds, insurance companies, commercial finance companies, consumer finance companies, and brokerage houses.