Lecture 2: commercial banks Flashcards
how did the canadian banking system evolve?
from free banking to
the current system with extensive government
involvement.
when did chartered banking begin?
Chartered banking in Canada began shortly after
Confederation when the federal government began
regulating the financial system.
how many banks were there in 1876 and were charters difficult to obtain?
yes and there were 35 banks
what is the bank act (1871)
forms the base for financial
legislation governing a bank and includes decennial
revision process.
what did The increased start-up capital for banks in 1891 create?
entry barriers, cutting off growth
how many banks were there in 1961?
8 banks because of mergers and amalgamation
what are the big 5?
-RBC
-TD-Canada Trust
-Scotia
-BMO
-CIBC
how many assets in the industry do the big 5 own?
up to 90%
what are the big 5 banks?
they are financial powerhouses with full services
as of 2019, majority of canadians are shareholders of the banks either
directly through share ownership or indirectly through pension and mutual funds.
as of 2019, how many banks in Canada, how many branches and how many ABMs
86 banks in Canada, with 5,907 branches and
approximately 18,640 ABMs
how many employees do banks employ
275,825 domestic workers and 109,094
people abroad
as of 2019, how much do banks contribute to GDP?
approximatetly 3.3%
how much taxes are paid by big 5 in Canada and worldwide?
Big Five are $12.5 billion in Canada, $18.2
billion worldwide
what does canada’s banking sector include?
includes domestic banks,
foreign bank subsidiaries, representative offices of
foreign banks operating in Canada
what banks must operate under the Bank Act?
-all must
what are the categories of schedule 1 banks
Full-services banks (e.g., The Big Five, National Bank,
Laurentian Bank, Canadian Western Bank)
Consumer-oriented institutions (e.g., Canadian Tire
Bank, Simplii Financial)
Niche players (e.g., Exchange Bank of Canada,
HomeEquity Bank)
what are schedule I banks?
re domestic and Canadian-owned
institutions, not subsidiaries of any foreign bank
what are schedule II banks?
Owned and controlled by a foreign parent bank and
act as a subsidiary.
Focus on commercial loans to businesses rather than
on retail banking services to individuals.
Loan size is based on the capital base of the
subsidiary rather than on their parent bank, with
limited ability to extend large loans.
Lacking extensive branch systems, they largely seek
deposits from corporations rather than individualsBesides accepting deposits, Schedule II banks often
raise added funds through the issuance of financial
papers in the money market.
Examples: HSBC Bank Canada (UK), Bank of China
(Canada) (China), ICICI Bank Canada (India),
Shinhan Bank Canada (South Korea), Bank of Tokyo-
Mitsubishi UFJ Canada (Japan), Amex Bank of
Canada (USA)
what are schedule III banks?
Schedule III banks are branch offices that represent foreign
banks in Canada.
27 full-service branches: Capital One Bank (Canada
branch), Wells Fargo Bank, National Association (Canada
branch), Mizuho Bank Ltd (Canada branch) and Barclays
Bank PLC (Canada branch)
3 lending branches: Credit Suisse AG (Toronto branch),
Union Bank of California N.A., Natixis.
Are distinguished as lending branches and subject to
restrictions under subsection 524 (1) of the Bank Act.
Are prohibited from accepting deposits or otherwise
borrowing money except from financial institutions.Not incorporated under the Bank Act but are authorized to
branch directly in Canada with some restrictions (e.g., can
only accept deposits over $150,000).
Major function is to promote the services of the foreign
bank and act as a liaison between the foreign bank and its
clients in Canada.
Operate within large cities under the name of their parent
institutions, who are permitted to carry on business in
Canada
when was the above bank legal system discountinued?
2001
what is a schedule I bank NOW
Voting shares of large Schedule I banks must be widely
held, subject to rules that restrict the control of any single
shareholder to no more than 20%.
what is a medium-sized bank?
A single shareholder can own up to 65% of the voting
shares of a medium-sized bank (equity >$12 billion),
provided that the remaining shares remain publicly traded
what do large banks focus on?
Large banks usually engage in both retail and wholesale banking, often
focusing on the wholesale side of the business
-full lines of business
what is a small bank?
A small bank (equity >$2 billion) can be owned by one
individual
what do small banks focus on?
Small banks typically focus on the retail side.
-nice markets
what is interest rate spread?
is the difference between lending and
deposit rates
what is net interest margin?
is interest income minus interest expense
divided by earning assets
what is return on assets?
is net income divided by assets
what is return on equity?
is net income divided equity.
what are the 4 principal earning assets of a bank balance sheet?
-Canadian securities
-business loans
-mortgages
-personal loans
what are the 2 major liabilities on a banks balance sheet?
deposits and borrowed funds
(94.5%)
banks are highly leveraged and hold very little equity (true or false)
true
what are the reasons for the strong performance measures of the Canadian banking industry?
Lower interest rates make debt cheaper to service
and keep many households and small firms
borrowing.
Lower interest rates make home purchasing more
affordable, and housing market booms throughout the period.
Development of new financial instruments (e.g., credit derivatives) helps banks shift their credit risk to others.
Improved information technologies lower banks’
operating and transaction costs
how safe is the Canadian banking sector?
The Canadian banking sector is one of the safest in
the world
what are transaction deposits?
sum of noninterest-bearing demand
deposits and interest-bearing chequing accounts.
Deposits can be withdrawn without notice.
what are non-transaction deposits? and what do they include?
deposits are core funding that include the
following:
Personal savings accounts
Personal fixed-term deposits (e.g., GICs)
Large time deposits (e.g., BDNs)
Money market deposit accounts
Non-transaction deposits require notification before
withdrawal; otherwise, no access.
what are non-deposit liabilities?
(borrowed funds)
Overnight funds purchased (i.e., interbank
borrowings)
Purchase and resale agreements
Notes and bonds
what generates the most revenue for banks?
Loans
what is required to act as a buffer against losses?
Minimum levels of equity capital are required to act as a buffer against losses.
Common and preferred stock, retained earnings
Loan loss reserve account
Recognition of expected bad loans for the period
what is the primary asset of the banking security?
Loans and investment securities continue to be
the primary assets of the banking industry
what do investment securities do for banks?
Investment securities generate revenue and provide
banks with liquidity
why are cash assets held?
Cash assets are held to meet target reserve
requirements and to provide liquidity
what are other assets for the banks?
Other assets include premises and equipment, other
real estate owned, etc
Commercial banks engage in many fee-related activities that are
conducted off the balance sheet. they are:
Guarantees such as letters of credit involve future commitments
to lend.
Derivative transactions such as futures, forwards, options, and
swaps
Off-balance-sheet assets, When an event occurs,
this item moves onto the asset side of the
balance sheet or income is realized on the income statement.
what is interest rate risk that commercial banks face because of their asset structure?
the risk that interest rate changes erode
profitability or net worth; requires capital adequacy
management
off-balance-sheet liabilities, When an event occurs,
this item moves onto the liability side of
the balance sheet or an expense is realized on the income
statement
what is credit (default) risk that commercial banks face because of their asset structure?
the risk that loans are not repaid;
needs asset management with risk control.
what is liquidity risk that commercial banks face because of their asset structure?
the risk that depositors will demand more
cash than banks can immediately provide; requires liquidity
management
what do credit, liquidity and interest rate risk all contribute to?
a commercial bank’s level of insolvency risk
in the past ten years, total amount spent on technologies was
$84.5 billion
what are 6 Technology-led improvements in banking services since 1961?
1961: Computerized drive-in teller windows by RBC
1967: Telephone banking by CIBC
1986: National ABM network (Interac) by RBC and CIBC
1996: Internet banking by BMO
2016: Fingerprint and facial recognition payment by BMO
2016: EyeVerify, VocalPassword, and In-App Secure Chat
by Tangerine
how are future performance affected by the extent to which banks adopt new technologies?
Loans are the primary activity of banks and are also one of the banking products most susceptible to disruption
Marketplace lenders and rigid regulations kill banks
what is disintermediation:
: firms go directly to financial markets to raise
finds, bypassing banks
how is retail banking consumer-oriented?
Focus more on the individual or small business.
Residential and consumer loans are funded by accepting small
deposits.
how is corporate banking commercial-oriented?
Commercial and industrial loans often funded with purchased
funds, foreign deposits, and brokered deposits.
Serve larger clients or organizations (e.g., pension funds,
governments) with a complete array of corporate financial
activities mostly offered by Schedule II and III banks.
Rely heavily on non-deposit or borrowed sources of funds, often
borrowed in the inter-bank money market to manage liquidity risk
how is Canadian banking fully integrated with universal banking?
Banks provide a wide variety of financial services
(commercial and investment) within one entity.
Services include regular banking activities,
investment banking services, foreign exchange, cash
management, and even insurance selling.
Canada has a British-style universal banking model
with a parent-subsidiary structure.
Banks are prevented from retailing of insurance
products
what are the issues involved in expansion of product powers?
safety and soundness
economy of scale and scope
conflict of interest
deposit insurance
regulatory oversight
competition
can expansion be domestic or international?
both
In Canada, no branching restriction for domestic
banks, but certain constraints are applied to
Schedule II and III banks.
the attractiveness of a geographic expansion depends on the following what 3 things?
regulation and the regulatory framework
cost and revenue synergies
firm- or market-specific factors
what are the advantages of international expansion?
risk diversification
economies of scale
innovations
funds source
customer relationships
regulatory avoidance
what are the disadvantages of international expansion?
information/monitoring
costs
nationalization/expropri
ation
fixed costs
how did the 2008-2209 financial crisis impact the banks?
banks saw losses that were magnified by illiquid
markets
The largest banks in the Netherlands, Switzerland,
and U.K. had net losses in 2008.
Banks in Ireland, Spain, and the U.S. were especially
hard hit because they had large investments in
mortgages and mortgage-backed securities.
Many European banks averted outright bankruptcy
thanks to direct support from their central banks and
national governments.
