BU111 Chapter Notes - Chapter 6: Electronic Funds Transfer, Unsecured Debt, Financial Intermediary
Thursday, November 27, 2014
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Economic Context of Business
Financial Institutions
- main function is to facilitate the flow of many from sectors with surpluses to those with deficits
- four financial pillars
- chartered banks
- alternate banks
- specialized lending and saving intermediaries
- investment dealers
Changes Affecting Financial Institutions
- 1980, changes were made to the Bank Act
- banks are now permitted to own securities dealers and establish subsidiaries to sell mutual
funds (deregulation)
Financial Pillar #1
- a chartered bank is a privately owned, profit-seeking financial intermediary that serves
individuals, businesses, and non-business organizations
- they are the most important and largest financial pillar
- offer cheque and saving accounts, make loans, and provide many other services
- in Canada, there are only a few banks, with hundreds of branches
- 5 largest banks account for 90% of total bank assets
Services offered by the Banks
- pension services: establish saving plans for retirement
- they receive funds and invest them as directed by customers
- provide information on investment possibilities
- trust services: perform tasks such as making your monthly bill payments and managing your
investment portfolio
- also manage the estates of a deceased person
- international services: currency exchange, letter of credit (promise by bank to make
payment to international bank), bank can draw up a bankers acceptance (promise that bank
will pay a specified amount at a future date)
- financial advice: help customers manage money
- recommend different investment opportunities
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- electronic funds transfer: payments and collections by transferring financial information
electronically
- helps close important business deals by transferring money from two distant locations
instantly
- automated banking machines let you bank at any time of day or night
- direct deposits and withdrawals enable users to authorize, in advance, specific, regular
deposits and withdrawals (i.e. arrange to have paycheques atomically deposited)
- mobile wallet transitions from plastic cards, allow you to pay for things like groceries and
clothes from your smartphone (i.e. Starbucks)
Banks Loans
- major source of short-term loans
- secured loan is backed by collateral, unsecured loan is only backed by the borrowers promise
to pay
- borrowers must pay interest on their loan
- prime rate of interest: lowest rate charged
Banks as Creators of Money
- reserve requirement: banks keep a portion of their chequeable deposits
- expand money supply through deposit expansion
Other Changes in Banking
-deregulation: banks are diversifying, opening up new revenue streams
-changes in consumer demands: banks are finding new ways to attract and serve their
clientele in order to remain competitive and attract a new generation, and as a result making
profits from fees rather than solely from interest rates
-changes in international banking: increased competition as foreign banks are now allowed to
do business in Canada
The Bank of Canada
- formed in 1935, it is Canada’s central bank, managed by a board of governors
- rate at which chartered banks can borrow from the bank of canada is called the bank rate or
rediscount rate
- these rates serve as a basis for established chartered banks’ prime interest rates
- MONEY SUPPLY AND BANK OF CANADA
- to increase money supply, the bank of Canada buys government securities, people who sell
these bonds deposit the proceeds in their banks, these deposits increase bank reserves, and
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their willingness to make loans… they can also lower the bank rate, which causes increased
demand for loans from businesses and households
- to decrease money supply, the bank of Canada will sell government securities, people spend
money to buy bonds and these withdrawals bring down bank reserves, reducing their
willingness to make loans
Financial Pillar #2
Trust Companies (Alternate Bank)
- safeguards property, funds, and estates entrusted to it
- serves as a trustee (protect bondholder interest), transfer agent (records changer in
ownership of a corporations shares of stock), and registrar (certifies that stock issues are
correctly stated) for corporations
Credit Unions (Alternate Bank)
- cooperative savings and lending associations formed by a group with common interests
- lend money to businesses and consumers that use the money to buy durable goods (i.e.
cars)
- can add to savings account, making short-term, long-term, and mortgage loans
- credit unions invest a lot of money into corporate and government securities
- pay dividends to members when they make profit
Financial Pillar #3
Life Insurance Companies
- shares risk with its policyholders in return for payment of a premium from those holders
- lends money collected from premiums to borrowers
- life insurance companies invest in real estate mortgages and in corporate and government
bonds
Venture Capital Firms
- provides funs for new or expanding firms that seem to have significant potential
- risky, therefore, the firms want to earn a higher than normal return on their investment
- these firms obtain their funds from other financial intermediaries
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BU111 Full Course Notes
Verified Note
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Document Summary
Main function is to facilitate the flow of many from sectors with surpluses to those with deficits. 1980, changes were made to the bank act. Banks are now permitted to own securities dealers and establish subsidiaries to sell mutual funds (deregulation) A chartered bank is a privately owned, profit-seeking financial intermediary that serves individuals, businesses, and non-business organizations. They are the most important and largest financial pillar. Offer cheque and saving accounts, make loans, and provide many other services. In canada, there are only a few banks, with hundreds of branches. 5 largest banks account for 90% of total bank assets. Pension services: establish saving plans for retirement. They receive funds and invest them as directed by customers. Trust services: perform tasks such as making your monthly bill payments and managing your investment portfolio. Also manage the estates of a deceased person.
