Banking in Canada
From Wikipedia, the free encyclopedia
Banking in Canada is one of the most efficient and safest banking systems in the world. According to the Ministry of Finance, Canada’s banks, also called chartered banks, have over 8,000 branches and almost 18,000 automated banking machines (ABMs) across the country. In addition, "Canada has the highest number of ABMs per capita in the world and benefits from the highest penetration levels of electronic channels such as debit cards, Internet banking and telephone banking".
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[edit] History
[edit] Origins
Banking in Canada began to migrate in earnest from colonial overseas banking operations to a local banking system with the founding of the Bank of Montreal in 1817. Other banks soon followed and began business and after a lengthy approval process began unregulated banking business. These institutions issued the only local currency notes until amendments in the British North America Act allowed federal and provincial governments to begin to introduce their own notes starting in 1866. Official Canadian currency took the form of the Canadian dollar in 1871, overriding the currency of individual banks. The establishment of the Bank of Canada in 1935 was also an important milestone in banking and monetary governance. See full article, Early Canadian banking system
Despite various loss events (such as the Latin American debt crisis, the collapse of Olympia and York, and Enron-related liabilities), the big five banks have proven to be safe and stable companies. For example, in securities prospectuses the Royal Bank of Canada says it has paid a common share dividend in every year since 1870, the year after it received its banking charter.
According to the Department of Finance, two small regional banks failed in the mid-1980s, the only such failures since 1923, which is the year Home Bank failed. There were no bank failures during the Great Depression.
[edit] Recent History
In the 1980's and 1990's, the largest banks acquired almost all significant trust and brokerage companies in Canada. They also started their own mutual fund and insurance businesses. As a result, Canadian banks broadened out to become supermarkets of financial services.
After large bank mergers were ruled out by the federal government, some Canadian banks turned to international expansion, particularly in various U.S. markets such as banking and brokerage.
Two other notable developments in Canadian banking were the launch of ING Bank of Canada (which relies mostly on a branchless banking model), and the slow emergence of non-bank mortgage origination companies.
[edit] Canadian Banks
In everyday commerce, the banks in Canada are generally referred to in two categories: 1) the five large national banks and 2) smaller second tier banks (notwithstanding that a large national bank and a smaller second tier bank may share the same legal status and regulatory classification - see Safety and Soundness below.)
The largest five banks in Canada are the Royal Bank of Canada, the Toronto Dominion Bank, the Bank of Montreal, the Bank of Nova Scotia, and the Canadian Imperial Bank of Commerce. Notable second tier banks include the National Bank of Canada, the Mouvement Desjardins (technically not a bank but an alliance of credit unions), HSBC Bank Canada, and ING Bank of Canada. These second tier organizations are largely Canadian domestic banking organizations. Insurance companies in Canada have also created deposit-taking bank subsidiaries. For a complete list of institutions see: List of banks in Canada
[edit] The "Big Five" Banks
Unlike the smaller Canadian banks, the Big Five are not just Canadian banks, but are instead better described as large financial conglomerates, each with a large Canadian banking division. Some of the other divisions form large parts of their overall activities and financial results. For example, in fiscal 2006, RBC's Canadian segment called "Personal Banking" (the segment most related to what was traditionally thought of as retail banking) had revenue of only CAD$3,614 million (or 17.5%) of a total revenue of CAD$20,637 million.[1] Canadian retail operations of the Big Five comprise other activities that do not need to be operated from a regulated bank. These other activities include mutual funds, insurance, credit cards, and brokerage activities. In addition, they have expanded into various international markets. The Canadian banking operations of the Big Five are largely conducted out of each parent company, unlike U.S. banks that use a holding company structure to hold their primary retail banking subsidiaries.
[edit] Brands used by the big five by major financial service*
| RBC | TD | BMO | Scotia | CIBC | |
|---|---|---|---|---|---|
| Parent legal name | Royal Bank of Canada | Toronto-Dominion Bank | Bank of Montreal | Bank of Nova Scotia | Canadian Imperial Bank of Commerce |
| Group brand | RBC Financial Group | TD Bank Financial Group | BMO Financial Group | Scotiabank Group | CIBC |
| Canadian banking | RBC Royal Bank | TD Canada Trust | BMO Bank of Montreal | Scotiabank | CIBC |
| U.S. banking | RBC Centura | TD Banknorth (51%; will be 100% owned by March or April 2007) | Harris | ||
| Other major international banking operations | Royal Bank of Canada Global Private Banking (many countries) | Scotiabank International (in the Americas) | |||
| Canadian mutual funds | RBC Funds | TD Mutual Funds | BMO Mutual Funds and Guardian Group of Funds | Scotia Mutual Funds | CIBC Mutual Funds |
| U.S. mutual funds | Tamarack Funds | ||||
| Canadian brokerage | RBC Direct Investing and RBC Dominion Securities | TD Waterhouse | BMO InvestorLine and BMO Nesbitt Burns | ScotiaMcLeod | CIBC Investor's Edge and CIBC Wood Gundy |
| U.S. brokerage | RBC Dain Rauscher | TD Ameritrade (32%) | BMO Harris Investor Services | ||
| Canadian insurance | RBC Insurance | TD Insurance and TD Meloche Monnex | BMO Life | Scotia Insurance | CIBC Insurance |
| U.S. insurance | RBC Insurance | ||||
| Capital markets | RBC Capital Markets | TD Securities | BMO Capital Markets | Scotia Capital | CIBC World Markets |
| Large custodial operations | RBC Dexia (50%) | CIBC Mellon (50%) |
*Marketing brands are shown rather than division names. For example, for internal and investor relation purposes, CIBC uses CIBC Retail Markets as a division name, but this does not normally appear in advertisements and does not feature prominently on account statements. Brand names are sometimes used across legal entities within a financial group. Intermediate umbrella brands (such as RBC Investments that includes the brands RBC Funds, RBC Action Direct, and RBC Dominion Securities) are not shown.
[edit] Safety and Soundness
According to the World Economic Forum’s Global Competitiveness Report, Canada is tied with Australia for the soundest banking system in the world.
[edit] Bank Regulation
Canada's federal government has sole jurisdiction for banks according to the Canadian Constitution, specifically Section 91(15) of The Constitution Act, 1867 (30 & 31 Victoria, c.3 (UK)), formerly known as the British North America Act, 1867. Meanwhile, credit unions/caisses populaires, securities dealers and mutual funds are largely regulated by provincial governments.
The main federal statute for the incorporation and regulation of banks, or chartered banks, is the Bank Act (S.C. 1991, c.46), where Schedules I, II and III of this Act list all banks permitted to operate in Canada under these three distinct categories:
- Schedule I: Banks allowed to accept deposits and which are NOT subsidiaries of a foreign bank. Examples include "The Big Five" banks (as mentioned above) and smaller second tier banks such as National Bank of Canada, Laurentian Bank of Canada and Canadian Western Bank. Because the Schedule I banks are not subsidiaries of any foreign bank, they are the true domestic banks and are the only banks allowed to receive, hold and enforce a special security interest described and provided for under the Bank Act and known to Canadian lawyers and bankers as the "Bank Act security".
- Schedule II: Banks allowed to accept deposits and which are subsidiaries of a foreign bank. Examples include AMEX Bank of Canada, Citibank Canada, HSBC Bank Canada, ING Bank of Canada and ICICI Bank Canada. Like the Schedule I banks, the Schedule II banks are incorporated under the Bank Act. Some of the Schedule II banks, such as HSBC Bank Canada, are used heavily by specific immigrant groups such as Canada's large Chinese community who are familiar with the HSBC brand name from their country of origin.
- Schedule III: Foreign banks permitted to carry on business in Canada. Examples include Bank of America, Capital One, Credit Suisse and Deutsche Bank AG. Unlike the Schedule I and Schedule II banks, the Schedule III banks are NOT incorporated under the Bank Act and they operate in Canada, usually within the country's largest cities (being Toronto, Montreal and Vancouver), under certain restrictions mentioned in the Act.
The bank regulator is the Office of the Superintendent of Financial Institutions (best known as OSFI), whose authority stems from the Bank Act. The financial groups are also governed by regulatory bodies (bank regulators, securities regulators, insurance regulators, etc) in each country they operate in.
[edit] Political Governance
Recent regulatory issues considered by federal politicians include:
- Bank mergers
- In 1998, the large Canadian banks sought approval for various mergers. These mergers were rejected by the then governing Liberal Party of Canada. The banks have expressed continuing interest in the subject as their global size ranking continues to fall in the face of large bank mergers taking place in other countries.
- Insurance distribution channels
- The large Canadian banks all have Canadian insurance subsidiaries but have been prevented from using their branch network to market insurance. The non-bank-owned insurance company and insurance broker lobby has been vocal in opposing the bank-owned insurance companies in order to maintain their market share. The banks have noted that Canadians can buy insurance at any type of store except their primary financial service location and that they eliminate unnecessary middle-men (brokers) and, unlike the commission-paid brokers, the banks are motivated to serve under-insured lower-income customers with smaller insurance needs, while on the other side of the debate, insurance companies say it could ultimately reduce competition if insurance companies declined in prominence. The largest insurance companies in Canada are currently roughly the same size as the large Canadian banks. No other industrialized nation restricts the sale of insurance in bank branches.
- Mortgage insurance
- The government has recently approved 3 new entrants into the Canadian mortgage insurance market. This added PMI Mortgage Insurance Canada Company, Triad Guaranty Insurance Corporation Canada, and AIG United Guaranty Mortgage Insurance Company Canada to the market that had been shared between Canada Mortgage and Housing Corporation (a federal government agency) and Genworth Financial Canada. The government has also moved to increase the loan-to-value limit on banks from 75% to 80% given the banks' increasing ability to securitize or self-insure risk themselves. Other countries such as the U.S. do not impose a loan-to-value limit on banks.
[edit] See also
[edit] References
- Financial Institutions and Markets, Ministry of Finance, URL accessed 6 August 2006
[edit] Links
- Bank Act, S.C. 1991, c.46, Department of Justice, URL accessed 2 November 2006
- OSFI website, Office of the Superintendent of Financial Institutions, URL accessed 2 November 2006
