Management of the Enterprise
Chapter 18: The Financial Services Industry in Canada
Participants in the Financial Services Industry
- Credit unions non-profit, member-owned financial co-operatives that offer a full variety of
banking services to their members.
- 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.
Examples: pension funds, insurance companies, brokerage houses.
- 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
- Commercial and consumer finance companies offer short-tern 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.
The Financial Services industry in Canada
- Every day across the country, consumers, businesses, and governments depend on the products
provided by financial institutions.
- The financial services industry is supported by a number of new 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.
- According to this same agency, the financial services sector plays an important role in the
Canadian economy, as it:
Employs more than 600,000 Canadians
Provides a yearly payroll of more than $35 billion
Represents 6% of Canada’s GDP, exceeded only by the manufacturing sector
Yields more than $13billion in tax revenue to all levels of government
Is widely recognised as one of the safest and healthiest in the world.
- Until the middle 1980s, the financial service industry in Canada was termed a “four-pilla system”
which were; banks, trust companies, insurance companies, and securities dealers. How the Financial Services Industry in Regulated
- Regulation is designed to ensure the integrity, safety, and soundness of financial insitutions and
- Legislative, self-regulatory, and other initiatives help minimize crises and company failures.
- Financial institutions may be regulated at either the federal or the provincial level, or jointly.
- For institutions under federal responsibility, the department of Finance is charged with
overseeing their overall powers – in other words, what they can and cannot do.
- The department of Finance relies on 3 federal agencies to supervise the ongoing operations of
these institutions and their compliance with legislation:
o The Office of the Superintendent of Financial Institutions monitors the day-to-day
operations of institutions with respect to their financial soundness.
o Overseeing the deposit insurance system is the Canada Deposit Insurance Corporation
which protects deposits that Canadians have in their federal financial institutions.
o 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.
The Canada Deposit Insurance Corporation
- The Canada Deposit Insurance Corporation (CDIC) is a federal crown corporation that was
created in 1967 to provide deposit insurance and contribute to the Stability of Canada’s financial
- Insures eligible deposits at member institutions against these institutions’ failure or collapse.
- Guarantees deposits up to $100,000 in each member institution.
Why Money is Important
- The Canadian economy depends heavily on money: its availability and its value relative to other
- Money is so important to the economy that many institutions have evolved to manage money
and to make it available to you when you need it.
- The complexity of the banking system has increased as the electronic flow of money from
country to country has become as free as that from province to territory.
What is Money?
- Money anything that people generally accept as payment for goods and services.
- 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:
o Coins are a lot easier to take to market than are pigs or other
o Different-sized coins could be made to represent different
values. Because silver is now too expensive, today’s coins are
made of other metals, but the accepted value remain.
o When everybody agrees on the value of coins, the value of
money is relatively stable.
o Coins last for thousands of years, even when they’ve sunk to the
bottom of the ocea, as you’ve seen when divers find old Roman
coins in sunken ships.
o It’s hard to counterfeit, or copy, elaborately designed and
What is the Money Supply?
- The money supply the amount of money the Bank of Canada makes available for people to
buy goods and services.
- 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?
- Define inflation as “too much money chasing too few goods”.
- If too much money is taken out of the economy, a recession might occur.
- The money needs to be controlled because doing so allows us to manage the prices of goods
and services somewhat.
The Global Exchange of Money
- A falling dollar value means that the amount of goods and services you can buy with a dollar
- A rising dollar value means that the amount of goods and services you can buy with a dollar goes
up. - When the economy is strong, the demand for dollars is high, and the value of the dollar rises.
- When the economy is perceived as weakening, the demand for dollars declines, and the value of
the dollar falls.
Control of the Money Supply
- It’s important to have an organization that controls the money supply to try to keep the
economy from growing too fast or too slow.
- Indicators such as M1 provide useful information about changes that are occurring in the
- The bank’s economic research indicates that the growth of M1 provides useful information on
the future level of production in the economy.
- The objective of the bank of Canada’s monetary policy is to support a level of spending by
Canadians that is consistent with the Bank’s goal of price stability. This is defined as keeping
inflation within the inflation-control target range.
- The bank of Canada manages the rate of money growth indirectly through the influence it
exercises over short-term interest rates.
- When interest rates rise, consumers and businesses are apt to hold less money, to borrow less,
and to pay back existing loans.
- The bank of Canada has an influence on very short-term interest rates through changes in its
target for the overnight rate.
- The target for the overnight rate is the main tool used by the bank of Canada to conduct
- The Prime rate the interest rate that banks charge their most creditworthy customers.
- When the bank changes the target for the overnight rate, this sends a clear signal about the
direction in which it wants short-term interest rates to go.
- These changes can also indirectly affect mortgage rates, and the interest paid to consumers on
bank accounts, term deposits, and other savings.
- When interest rates go down, people and businesses are encouraged to borrow and spend
more, boosting the economy.
The Banking Industry
- Banks service individuals, small- and medium-sized businesses, large corporation, governments,
institutional investors, and non-profit organizations.
- Offer a full range of banking, investment, and financial services.
- Banks believed that they were permitted to merge, they would be able to take advantage of
economies of scale and be more efficient. Commercial Banks
- Commercial bank a profit-seeking organization that receives deposits from individuals and
corporations in the form of chequering and savings accounts and then uses some of these funds
to make loans.
- Commercial banks have 2 types of customers: depositors and borrowers.
- Tries to make a profit by efficiently using the funds that depositors give them.
- Uses customer deposits as inputs (on which it pays interest) and invests that money in interest-
bearing loans to other customers (mostly businesses).
- Make a profit if the revenue generated by loans exceeds the interest paid to depositors plus all
other operating expenses.
Some Services Provided by Banks
- Individuals and corporations that deposit money in a chequing account have the privilege of
writing personal cheques to pay for almost any purchase or transaction.
- Might impose a service charge for cheque-writing privileges or demand a minimum deposit.
- For business depositors, the amount of the service charge depends on the average daily balance
in the chequing account, the number of cheques written, and the firm’s credit rating and credit
- A term deposit(guaranteed investment certificate or certificate deposit) is a savings account
that earns interest to be delivered at the end of the specified period.
- Also offers a variety of other products such as: credit cards, lines of credit, loans, mortgages, and
overdraft protection on chequing accounts.
Services to Borrowers
- Loans are given on the basis of the recipient’s creditworthiness.
Electronic Banking on the Internet
- All of Canada’s banks allow customers to have access to their accounts online, and all have bill-
- This includes banking transactions such as transferring funds from one account to another,
paying your bills, and finding how much is in your various accounts.
- Internet banks (such as ING) have been created that offer branchless banking.
- People fear putting their financial information into cyberspace, where others may see it.
- Some people want to be able to talk to a knowledgeable person when they have banking
problems. The Insurance Industry
- The general insurance industry in Canada provides insurance protection for most homes, motor
vehicles, and commercial enterprises throughout Canada.
- Most general insurance is provided by private insurance companies, which are subject to either
provincial or federal regulations.
- The id