An Overview Of The Canadian Financial-Services Sector: Banking Industry

An Overview of the Canadian Financial-Services Sector: Banking Industry

What is a financial intermediary? A financial intermediary is an organization that raises money from investors and provides financing for individuals, companies and other organizations. Intermediaries are a stop on the road between savings and real investment. Mutual funds and pension funds are two important classes of intermediaries. A financial institution usually suggests a more complicated intermediary doing more than just pooling and investing savings. Banks and insurance companies are good examples.

A bank is where you can borrow money only if you can prove you donЎЇt need it. To some extent, this joke is more truth than fiction. While banking has a profound effect on our lives, influencing the availability of jobs, the cost of living, and our savings for the future, there is still much confusion about exactly a bank is because banking today is a quite different industry than in the past. A bank can be defined in terms of (1) the economic functions it serves, (2) the services it offers its customers, or (3) the legal basis for its existence.

Many Different Roles Banks Play in the Economy

The financial system of markets and institutions does more than simply transform savings into investment. It also provides a variety of supporting services essential to modern living. The modern bank has to adopt new roles to remain competitive and responsive to public needs. They include

(1) Intermediation role: transforming savings received primarily from households into credit (loans) for business firms and others in order to make investments in new buildings, equipment and other goods.

(2) Payments role: carrying out payments for goods and services on behalf of customers (such as issuing and clearing checks, wiring funds, providing a conduit for electronic payments, and dispensing currency and coin).

(3) Risk management role: assisting customers in preparing financially for the risk of loss to property and persons.

(4) Savings/investment advisor role: aiding customers in fulfilling their long-range goals for a better life by building, managing and protecting savings.

(5) Safekeeping/certification of value role: safeguarding a customerЎЇs valuables and appraising and certifying their true market value.

(6) Agency role: acting on behalf of customers to manage and protect their property or issue and redeem their securities (usually provided through a trust department).

(7) Policy role: serving as a conduit for government policy in attempting to regulate the growth of the economy and pursue social goals.

The Trends in the Canadian Banking Sector

At present, Canadian residents are served by 63 banks that operate in different parts of the country and manage over $1.8 trillion in assets. Of these, 19 are domestic banks, while 23 are foreign bank subsidiaries and 21 are foreign bank branches. All banks operating in Canada fall under the purview of federal regulations contained in the Bank Act and are categorized under Schedules I, II and III. For more information and statistics about CanadaЎЇs banking industry, you can visit the website of the Canadian Bankers Association at .

Schedule I banks dominate CanadaЎЇs capital market, with the ÐŽoBig FiveÐŽ± accounting for about 90% of the countryЎЇs bank industry assets and over 50% of the total domestic assets held by the financial sector. In 2004, the ÐŽoBig FiveÐŽ±, in order of assets, are Royal Bank of Canada, Scotiabank, TD Canada Trust, Canadian Imperial Bank of Commerce and Bank of Montreal. National Bank takes the sixth position. They maintain a network of more than 8,200 retail branches and 15,500 automated banking machines, and are becoming major international participants. The Big Five domestic chartered banks are perhaps the countryЎЇs most familiar financial intermediaries.

The Big Five, together with the National Bank of Canada, are CanadaЎЇs six largest domestic chartered Schedule I banks. Just name a few from the remaining 13 small ones: Laurentian Bank of Canada, PresidentЎЇs Choice Bank, Pacific & Western Bank of Canada, Canadian Tire Bank and Dundee Wealth Bank. In past, Schedule I Banks ought to be widely held by a large number of shareholders, originally with no investor holding more than 10% and foreign ownership was previously limited to 25%. However, these rules have been changed according to a new legislative policy framework introduced in June of 2000. Under the new rules, there are three sub-classes of banks, based on the size of their equity capital: 1) large (greater than $5 billion); 2) medium ($1 to $5 billion); and 3) small (less than $1 billion). Based on present figures, the $5 billion cut-off point would establish the top six Schedule I Banks as large banks, except the National Bank (although it would be classified as such until deemed otherwise by the Minister of Finance). The large banks have to remain widely held under new criteria that eliminate the 25% foreign ownership rule, and permit a single investor to own up to 20% of the voting shares of the bank, and up to 30% of non-voting shares, subject to a ÐŽofit-and properÐŽ± test designed to evaluate their character and suitability. Medium banks would be allowed to have a single owner hold up to 65% of shareholdings and would be required to maintain a public float of at least 35% of voting shares. Small banks would face no ownership restrictions other than the ÐŽofit and properÐŽ± test. Following the reform, the nationality is no longer a concern. Through mergers, majority ownership of the ÐŽoBig FiveÐŽ± will probably pass to non-Canadians soon.

Although its name may suggest a regional bent, Scotiabank founded in Halifax in 1832 has operated internationally better than any other Canadian bank. Recently, it takes its lumps in Argentina and Chile now and then. The bank has grown significantly presence in Latin America and in the Caribbean, where it has 30% to 40% market share. It earns more than a quarter-billion dollars in the region. Branches in Kingston, Jamaica, tend to be more profitable than those in Toronto. Scotiabank has even found solid earnings in its majority stakes in Grupo Financiero Inverlat, MexicoЎЇs sixth-largest bank.

If a bank can be flashy, TD sparkles. The product of a 1955 merger between the Bank of Toronto and Dominion Bank, TD was a distant fifth