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HAPTER 1: The Capital Markets and Financial Services (continued)

CHARTERED BANKS

*All banks operate under the Bank Act, regulation of Canadian bank ownership protect against foreign domination

1. Schedule 1 Chartered Banks

* Sixteen banks with six largest (Royal, CIBC, BMO, Scotia, TD, and National)

* Provide services through investment dealers, insurance, mortgage, trust, mutual fun, and international subsidiaries

* "Chinese walls" controls that inhibit information sharing between various businesses

* Major activity is to loan funds to businesses and consumers at interest rates higher then the rates they must pay in interests on deposits or other borrowing (covers operating costs)

* Specialized types of lending; residential mortgages, term lending, project financing, foreign lending, venture capital lending, credit card lending, equipment leasing

2. Schedule 2 and 3 Banks

* Schedule 2 may be wholly owned by non-residents, engage in same business as Schedule 1

* Size of individual loan must be related to the capital base of the subsidiary rather then their parent bank which limits ability to extend larger loans

* Seek deposits from corporations

* Schedule 3 include foreign banks that have opened banks in Canada without setting up Canadian incorporated subsidiaries

3. Recent Bank Developments and Future Trends

* Bank owned Investment Dealers have begun to acquire U.S. Investment Dealers (discount brokers)

* Banks now allowed to offer non-banking financial services such as insurance and trust activities through subsidiaries

* Bank Act now offers non-deposit taking institutions (life insurance companies, securities dealers, and money market mutual funds) access to the Payment System

LIFE INSURANCE COMPANIES

1. Products and Services

* Chief source of funds are premiums on whole life, term and group insurance policies, premiums being paid for annuities, pensions, group medical and dental care programs interest on policy loans and mortgages

* Two main businesses: life insurance (act as trustees) and property and casualty insurance

* Most important aspect is Underwriting - the business of evaluating risk the risk an insurance company is willing to take from a client in exchange for insurance premiums

* Another important aspect is acting as agent or broker for other underwriters

2. Insurance Regulation

* Governing insurance companies is the Insurance Companies Act (June 1, 1992)

* Permits insurance companies to own trust and loan companies therefore can enter new financial businesses through subsidiaries

3. Segregated Funds

4. Recent Developments and Future Trends

* Insurance companies are organized as mutual companies or owned by policyholders, or a joint stock companies

* Demutualization: process by which insurance companies, owned by policyholders, reorganize into companies held by shareholders (provides access to capital markets and will lead to fewer larger companies)

INVESTMENT FUNDS

*Are companies or trusts that sell their shares to the public and invest the proceeds in a diverse securities portfolio

* Closed-End Funds: issue shares only at start up and reinvest the proceeds and borrowings in a portfolio of securities to produce income and capital gain

* Open-End Funds or Mutual Funds: continually issue shares and redeem these shares on demand at the net asset or "break-up" value per share of the funds investment portfolio (larger of the two)

OTHER INTERMEDIARIES

1. Trust and Loan Companies - broad range of financial services; accept savings, issue term deposits, make personal and mortgage loans, and sell RRSP's, estate planning, and asset management (trust companies are the only authorized companies to engage in trust business, now subsidiaries of major banks - Trust and Loan Companies Act)

2. Pension Plans

a. Trusteed Pension Plans - pension contributions made by employee and employer and paid to a trustee

b. Government Operated Pension Plans - Canada Pension Plan and Quebec Pension Plan are compulsory, CPP funds made available to provinces with each provinces share determined by plan contributions of its residents

3. Credit Unions and Caisses Populaires - seek member savers from common interest groups, legislated under the Cooperative Credit Associations Act which limits credit unions to providing financial services to their members, to entities which they have a substantial investment, to certain types of cooperative institutions, and to providing administrative, educational, and other services to cooperative credit societies

4. Sales Finance and Consumer Loan Companies - direct cash loans, and installment sales contracts on new cars, appliances, home improvements, etc

5. Property and Causality Insurance Companies - more interested in short-term securities

6. Savings Banks

7. Business Development Bank of Canada - fixed term loans to businesses unable to obtain funds on reasonable terms and conditions from other lenders

REGULATORY ORGANIZATIONS

1. The Office of the Superintendent of Financial Institutions

* Provide a simple regulatory body for all federally regulated financial institutions and is responsible for regulating and supervising banks, insurance, trust, lean and investment companies, that are chartered, licensed or registered by the federal government

2. The Provincial Regulators - each province is responsible for creating legislation and regulation

* Thirteen regulators joined together to for the Canadian Securities Administrators (CSA) - protects investor form unfair, improper or fraudulent practices and that fosters