1.6 - Financial Institutions

Question 1

Definition of Financial Institutions

Answer 1

• act as intermediaries between investors and firms that are raising funds
• provide a variety of services that promote efficient allocation of funds

Question 2

List the Canadian Financial Institutions

Answer 2

1. chartered banks (and other depository institutions)
2. trust companies
3. credit unions
4. investment dealers
5. insurance companies
6. pension funds
7. mutual funds

Question 3

List the Big Six

Answer 3

The Big Six are the 6 biggest chartered banks in Canada
1. Royal Bank of Canada
2. Bank of Montreal
3. Bank of Nova Scotia
4. Canadian Imperial Bank of Commerce
5. National Bank of Canada
6. Toronto Dominion (TD) Bank

Question 4

Explain the role of Chartered Banks as a financial institution

Answer 4

• operate under federal regulation
• accept deposits and make loans

Question 5

How do chartered banks make income

Answer 5

1. Spread Income
- the difference between the interest rate paid to the supplier of the funds and the interest rate received by the borrower of the funds
- they make most of their income this way
- this security passes through the balance sheet of the bank (they own it and then sell it)

2. Fee Income
- gaining income from fees on their services
*Example: *
Bankers’ Acceptances (BA): the bank receives a stamping fee
- does not go through the balance sheet of the bank

Question 6

Define Securitization

Answer 6

Securitization is a financial process that involves pooling various types of debt—such as mortgages, car loans, credit card debt receivables, or other assets generating receivables—and selling them as consolidated financial instruments, or securities, to investors on the capital markets.

BA is a form of securitization because a security is created from a debt

Question 7

Explain the role of Trust Companies as a financial institution

Answer 7

• accept deposits and make loans
• engage in fiduciary duties (managing assets for others)

Question 8

Explain the role of credit unions as a financial institution

Answer 8

Credit unions are member-owned financial cooperatives that operate with the primary purpose of serving their members rather than maximizing corporate profits.

• accept deposits and make loans

Question 9

Explain the role of insurance companies as financial institutions

Who are the major insurance companies

Answer 9

• accept deposits from policy holders
• pay out funds to those who suffer covered losses

Major life insurance companies are Manulife and Sun Life - they have expanded aggresively to become rivals of chartered banks

Question 10

Explain the role of pension funds as a financial institution

Answer 10

• invest contributions from employers and employees in secutiries in financial markets
• pay pensioners based on their contributions

Question 11

Explain the role of mututal funds as a financial institution

list the types of mututal funds

Answer 11

• pool together money from investors and then purchase diversified portfolio of securities
• allows smaller investors to make investments they could not usually make

Types of Mututal Funds:
- balanced funds
- equity funds
- bond funds
- specialty funds
- money market funds

Question 12

Explain the role of Hedge Funds as a financial institution

Answer 12

Hedge funds are less regulated investment funds that cater to sophisticated investors who seek high returns

They use financial strategies that are prohibited by mututal funds

These strategies may include
- arbitrage
- high levels of leverage
- active involvement in derivatives market

more risky than mututal funds because they are not regulated and may be subject to faud

Question 13

Why are the different types of financial institutions likely to become more alike

Answer 13

degregulation allows the financial institutions to engage in the activities of the othets

the exception is that chartered banks are not allowed to sell life insurance through their branch networks