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Ch 4 Notes.docx

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Valerie Irie

Chapter 4 Economic Factors-Canadian Financial System Economic Factors 1. Canadian financial system 2. Investment instruments 3. Time value of money Canadian Financial System • Financial institutions facilitate flow of money -take money from orgs/people with surplus to households, governments, corporations, that do not have a lot of money -i.e. Investing money in bank and bank lending to other groups • Four distinct legal areas /”pillars”: – Chartered banks – Alternate banks – Life insurance companies – Investment dealers • Lines between pillars have been blurred due to deregulation -In 1980 bank act changed, became deregulated, allowed for all companies to start broadening into different products and services (ie. Loan money to businesses, provide life insurance, etc) Pillar #1 – Chartered Banks • Privately owned, publicly traded, profit seeking • Largest and most important institution • Play large role in our financial system • Privately owned, legislated by government • Publicly traded companies, anyone can buy shares and have some ownership of company • All profit seeking • Largest and most important financial institution within our financial system • Concentrated and highly regulated industry – Five largest account for 90% of total bank assets – High barriers to entry due to legislation and sheer size and power of chartered banks – TD, CIBC, etc – Bank Act limits foreign-controlled banks to <8% of total domestic bank assets • Serve individuals, business, and others • Major source of short-term loans for business – Secured vs. unsecured loans – Secured loans: secured because there is collateral in place, that backs up the promise to pay – Valuable asset that people provide in order to get the loan, provides incentive to pay back borrowed money (ie. House, business assets, stocks/bonds) – Unsecured loan: has no collateral, only a promise to pay (through signing a contract) – Unsecured loan has a higher interest rate as there is a higher risk involved • Expand money supply through deposit expansion – (See chart in textbook) Changes in Banking  Deregulation – As bank act deregulated, opened up the borders for banks to move into other territories – Banks now have insurance, investment branches – Allows them to move into different products and services that are more fee based – Insurance, etc, allowed them to create a more flowing and steady revenue stream  Changes in consumer demands – Moved into online territoryfollowing demand changes – Changes in ways that we invest and the options we exercise to do so, banks must adjust in order to meet these and stay competitive  Competition from foreign banks – Good because it creates competition, better for consumers – Chartered banks trying to merge to have better chance against these large global banks, Central Bank will not allow conglomerates beyond the current 5 main banks Bank of Canada • Canada’s central bank • Manages economy and regulates aspects of chartered bank operations • Manages money supply • Keeps the economy growth in balance and under control • (See chart in textbook) Pillars #2 and #3 • Pillar #2 – Alternate Banks – Trust Companies – Many trust companies no longer independent, acquired/merged by banks – Similar to banks – Objective third party that takes part in book-keeping and taking stock of companys stocks, finances, ect – Credit Unions
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