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Chapter 15

Chapter 15 – The Financial Services Industry in Canada.docx

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Rita Cossa

Chapter 15 – The Financial Services Industry in Canada The financial services industry in Canada Every day across the country, consumers, businesses and governments depend on the products provided by financial institutions. The environment in the financial services industry is supported by features provided by the Financial Consumer Agency of Canada, including:  Model credit card application form  Cost of banking guide  Ten tips you need to know before signing any contract The financial services sector plays an important role in the Canadian economy:  It employs more than 600,000 Canadians  It provides a yearly payroll of more than $35 billion  It represents 6 percent of Canada’s GDP, exceeded only by the manufacturing sector  It yields more than $13 billion in tax revenue to all levels of government  It’s widely recognized as one of the safest and healthiest in the world Until the 1980s, the financial services industry in Canada was termed a “four-pillar system.” These were: banks, trust companies, insurance companies and securities dealers. Regulation was designed to foster competition within each pillar, but not among them. Changes in regulations have eliminated many of the old barriers that prohibited financial institutions from competing against each other, and today is difficult to distinguish firms by type of function. Participants in the financial services industry Canada’s financial services industry consists of traditional banks (also called commercial banks), credit unions, caisses populaires, and trust companies. Credit unions: non-profit, member-owned financial co-operatives that offer a full variety of banking services to their members. Caisses populaires are a form of credit unions, located predominantly in Quebec. Trust company: a financial institution that can administer estates, pension plans, and agency contracts, in addition to other activities conducted by banks. Non-banks: financial organizations that accept no deposits but offer many services provided by regular banks. Pension funds: 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 or individuals who either cannot meet the credit requirements of regular banks or have exceeded their credit limit and need more funds. Interest rates are normally higher. How the financial services industry is regulated The financial industry is one of the most regulated sectors in the country. Regulation is a responsibility shared among different organizations and levels of government. For institutions under federal responsibility, the Department of Finance is charged with overseeing what they can and cannot do. The DOF relies on three federal agencies to supervise the ongoing operations of these institutions and their compliance with legislation:  The Office of the Superintendent of Financial Institutions monitors the day-to-day operations of institutions with respect to their financial soundness.  Overseeing the deposit insurance system is the Canada Deposit Insurance Corporation, which protects deposits that Canadians have in their federal financial institutions.  The Financial Consumer Agency of Canada monitors financial institutions to ensure that they comply with federal consumer protection measures, which range from disclosure requirements to complaint-handling procedures. Institutions under provincial jurisdiction, the province(s) in which a company is incorporated or registered is (are) responsible for regulating the company’s overall powers. As at the federal level, provinces are supported by agencies and organizations that supervise the ongoing operations of these institutions. The Canada deposit insurance corporation CDIC if a federal Crown corporation that was created in 1967 to provide deposit insurance and contriute to the stability of Canada’s financial system. It guarantees deposits up to $100,000 in each member institution and is funded primarily by premiums paid by banks and trust companies that belong to this program. CDIC does not cover foreign currency accounts, term deposits with a maturity date of greater than 5 years, and investment in mortgages, stock and mutual funds. Why money is important Economic growth and the creation of jobs depend on money. Each day more than $1.5 trillion is exchanged in the world’s currency markets. What is money? Money: anything that people generally accept as payment for goods and services. Cowrie shells were one of the world’s most abundant currencies. Barter: the trading of goods and services for other goods and services directly.Coins met all of the standards of a useful form of money:  Portability – coins are a lot easier to take to market than pigs or other heavy products.  Divisibility – different-sized coins could be made to represent different values.  Stability – when everybody agrees on the value of coins, the value of money is relatively stable.  Durability – Coins last for thousands of years, even when they’ve sunk to the bottom of the ocean.  Uniqueness – It’s hard to counterfeit, or copy, elaborately designed and minted coins. Russian money is so unstable (rubles), that other countries won’t accept it. Electronic cash (e-cash) is the latest form of money. What is the money supply? Money supply: the amount of money the Bank of Canada makes available for people to buy goods and services. The money supply can be measured in a number of different ways. Some are called monetary aggregates. M1 represents money that can be accessed quickly and easily. M2, M2+ and M2++ are even broader measures of the money supply. Why does the money supply need to be controlled? When too much money is printed, prices go up, called inflation. When too much money is taken out of the economy, prices go down, called deflation. If too much money is taken out of the economy, a recession may occur. The money supply needs to be controlled because doing so allows us to manage the prices of goods and services somewhat. Controlling the money supply affects employment and economic growth and decline. The global exchange of money A falling dollar value means that the amount of goods and services you can buy with a dollar decreases. A rising dollar value means that the amount of goods and services you can buy with a dollar goes up. What makes the dollar weak or strong is the position of the Canadian economy, relative to other economies. Control of the money supply Inflation control target range is 1-3 percent. Prime rate: the interest rate that banks charge their most creditworthy customers.The banking industry Following legislative changes in 1992, banks were allowed to own insurance, trust and securities subsidiaries. Commercial bank
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