The Canadian Financial System

Jean Roy PhD

École des HEC

June 1999

Content

1. Introduction

2. Legal framework

3. Present state

4. Current developments

5. Conclusion

1. Introduction

• Context: Many internal and external factors putting pressure for changes

• Objective: Providing a quick overview of the present situation and current trends

• Sections: Legal, Economic, Trends

2. Legal framework

Legal jurisdiction for various types of financial

institutions

• Government Federal Provincial• Chartered banks Yes No• Trust companies Yes Yes• Credit unions No Yes• Insurance co. Yes Yes• Securities & exch. No Yes

Federal Regulators and Supervisors of F.I.

• Department of Finance of Canada• Bank of Canada• Office of the Superintendant of

Financial Institutions (OSFI)• Canada Deposit Insurance

Corporation (CDIC)• Bank Ombudsman

Majors restrictions for banks

• Activities– Cannot lease automobiles– Cannot sell insurance in branches

• Ownership– Cannot be owned by a holding– No shareholder can have more than 10%– Can only own financial affiliates

3. Present state of the canadian financial system

McKinsey Report

Reference:http://finservtaskforce.fin.gc.ca/research/research.htm

Exhibits 2-9 to 2-16, 2-24, 2-27

Value of share trading for 1998 (millions of USD)

• NYSE 7 317 948 52,9%

• Nasdaq 5 518 946 39,9%

• Toronto 331 847 2,4%

• Chicago 298 912 2,2%

• Amex 287 928 2,1%

• Montreal 37 506 0,3%

• Mexico 31 192 0,2%

• Vancouver 2 573 0,0%

• Total 13 826 856 100,0%

4. Current developments

Reform process

• The task force on the future of the Canadian financial services sector (Mackay report) September 1998

• Feedback and comments Fall 1998

• Policy paper from the Department of finance to be released this month of June

Banks

• Two major merger proposals turned down (RBC-BMO and CIBC-TD) dec 1998

• Expected goverment position– No new activities (leasing or insurance)– Relaxed ownership rules

• Increase of the 10% ceiling to 20%

• Upstream financial holding co. to be allowed

Life Insurance Co.

• Four major Life Ins. Co. are currently in a process of demutualization:– Mkt share– Sun Life Ass. Co. (#2) 12%– Manufacturers Life Ins. Co(#3) 11%– Mutual Life Ass. Co (#5) 10%– Canada Life Ass. Co. (#6)

9.5%

Other federaly regulated F.I.

• Insurance co., Trust co and Stock brokers to be allowed to participate directly in the payment system

Foreign access to Can. Fin. Sys.

• Government has recently abolished the requirement that foreign banks have to create a Canadian affiliate to operate in Canada. They may now simply operate as branches of the mother company.

Canada Deposit Insurance Corp.

• CDIC has now (Spring 1999) put in place a system of premium that is risk-adjusted.

• Premium vary from 1/6 to 1/3 of 1% of deposits

Stock exchanges

• The four Canadian stock exchanges have agreed on a major reorganization plan– Toronto to trade senior equities– Montreal to specialize in derivatives– Vancouver and Alberta to merge and trade

junior equities

• Plan is still to be approved by regulators

5. Conclusion

Characteristics of the Canadian Financial System

It used to be:

• protected

• bank dominated

• concentrated

• secure and stable

Nature of current evolution

• Protection is being lifted both by NAFTA and commitments to WTO

• Non bank institutions will be favored by the coming reform

• Stock exchanges will go through a major reorganization to survive against US competition

Final word

• Whereas the Canadian Financial System used to evolve quietly,

• it is now in a process of rapid and substantial changes to cope with technological progress and internationalization.