Lecture 3: other lending institutions Flashcards
what is a trust company?
A depository institution also serving as a corporate
trustee with two distinct roles
what are the 2 distinct roles of trust companies?
intermediation function by accepting deposits and
making loans (mainly mortgages)
fiduciary function by providing estates, trusts and
agencies business (i.e., administering assets it does
not own)
when did the first Canadian trust company arise?
1843
Trust companies and mortgage loan companies are founded as:
separate kinds of institutions in Canada
when did the trust industry undergo major changes
1960s
Legislative reforms over the years allowed
banks and
insurance companies to own trust companies
E.g., TD acquired Canada Trust in 2000 to form TD
Canada Trust.
Most are subsidiaries of banks and insurers;
independent ones are a small portion
What filled the need as banks were long precluded from offering residential mortgages
mortgage loan companies (MLCs)
how do clients do not want to manage their day-to-day finanaces benefit from using a trust company?
as one-stop shopping
MLCs and trust companies are together known as
trust and loan companies (TMLs), one of the four pillars in Canadian financial services industry up to the mid 1980s
what do TMLs do?
take deposits and primarily make residential
mortgage loans, but also make loans for commercial
properties
how do TMLs fund their assets?
with chequable and savings
deposits, term deposits, GICs and debentures
“Borrowing short and lending long” easily exposes TMLs to what 2 types of risks?
to interest rate risks and liquidity risks
what are the two cooperative
banks that focus on servicing their members only in Canada?
credit unions (people’s banks) and caisses
populaires (savings banks)
to properly address issues, TMLs must have what 3 properties?
adequate amount of liquid assets associated with their
cash flows and lending practices
contingency plan in place for funding requirement
timely statement of risk assessment results to be
reported to the OSFI
when was the credit union first established?
at St. Francis Xavier
University in Antigonish, Nova Scotia in the late 1920
following people’s bank movement during the 19th
century.
what are credit unions and caisses populaires?
are local
alternatives to savings and borrowing institutions
when was the fist caisses populaires established?
in Levis, Quebec
by Desjardins in 1900 following the mutual savings
bank movement in Europe during the 18th century
how can a credit union or caisses populaire be set up?
by a handful of members with a minimum share capital
contribution from each member between $5 and $25
what are 3 of the largest credit unions (excluding Quebec)?
Vancity
Coast Capital Savings Credit Union
Meridian Credit Union
how many credit unions and caisses populaires are there?
Currently, there are 241 credit unions and caisses
populaires outside Quebec and 271 under the Desjardins Group in Quebec
(The importance of these institutions varies from province to province.)
what are the 5 advantages of a cooperative structure that provides
services to members:
earn higher interest rates than big banks, but not as
high as Tangerine and EQ Bank
pay lower transaction fees
get discounted rates for personal loans, mortgages
have superb customer services with personalized
attention
stronger support from local entities for community
developments
what is membership based on in a credit union and caisses populaire?
based on a shared “common
bond of association” such as being in the same industry,
trade union or community
-This common bonding requirement has restricted the
growth of these institutions.
what are the 5 disadvantages to this cooperative strucuture?
common bond membership is required, which typically
involves a cost such as equity share purchased
fewer financial products offered
limited accesses with fewer branch locations to
confined areas
technology deficiencies
benefits may not be shared equally by members
With no pressure from shareholders, credit unions and caisses populaires report to
their members, who are part
owners.
are profits their primary goal?
Profits (measured by return on assets, ROA) are not
necessarily their primary goal
With simpler financial structures and democratic
management styles, they just need to have sufficient _____
capital to cover financial and operational risks
how do these institutions make money?
from transaction fees, interest on loans, mortgages and credit cards paid by their members.
Although they will likely remain small compared to other
financial institutions, what has contributed toward their growth and popularity?
their cost advantages
They have become more important in bank mergers with
branch closures in :
small towns and remote communities
in Canada
what do credit unions concentrate on?
providing their
members with consumer loans that are funded by
members’ shares rather than deposits.
Emphasize the provision of credit facilities for the “little
man.”
what do Caisses populaires emphasize?
residential mortgage
lending and deposit taking.
Encourage the habit of savings
why might each local entity may have its own financial problems
Due to various operating scales
how do credit unions help eachother?
a three-tier structure is formed by
local credit unions, provincial credit union centrals and
the Canadian Credit Union Association (CCUA).
what is the CCUA?
The CCUA is the national credit union trade
association acting as a central bank for credit unions.
All provinces outside Quebec have credit union
centrals with which local credit unions are affiliated.
what is the organizational structure of a caisses populaire?
The system in Quebec is slightly different but also
includes three tiers.
Local caisses populaires are organized into eleven
federations belonging to the Desjardins Group.
As this group consists of other financial and service
organizations, the complex structure makes it difficult to
differentiate their individual functions.
Besides acting as a central bank, the entire group serves
as a regulator for system stability
how are credit unions and caisses populaires regulated?
most at the provincial/territorial level
what are regulators responsible for?
Regulators are responsible for ensuring these institutions
follow sound financial practices and submit annual
financial statements with external auditors.
Each institution is visited by the regulator once a year
each province has legislation to define the statutory
liquidity for a credit union to maintain at its _____
central credit union
are Credit unions and caisses populaires directly
covered by the Canada Deposit Insurance Corporation
(CDIC
no - Each provincial/territorial government has an agency
providing deposit guarantees.
Funds are protected at varying levels by provincial and
territorial agencies.
Effective June 2019, the Financial Service Regulatory
Authority (FSRA) of Ontario has replaced the Deposit
Insurance Corporation of Ontario (DICO).
what does FRSA protect?
depositors of Ontario credit unions and
caisses populaires from loss of their deposits up to
$250,000
Deposits in registered account (e.g., RRSP, RRIF,
TFSA) are insured with
no maximum.
Other terms are quite similar to the CDIC’s
All credit unions incorporated in Ontario are required by
legislation to be insured by
FSRA.
Each member is required to display a blue-coloured
official decal to confirm its status
what are finance companies now known as in Canada?
non-depository credit intermediaries
what do finance companies do?
Like banks, they offer lending services such as
mortgages, loans, equipment leasing and credit cards,
but no depository function
They act as intermediaries in the money market by
borrowing in large amounts but often lending in small
amounts, unlike banks.
Although they lend to many of the same customers as
banks, they are virtually unregulated
what are finance companies in Canada dominated by?
unregulated institutions that are subsidiaries of US-
based firms.
E.g., Ford Credit Canada is the financing arm of the
US automobile manufacturer
explain finance companies history
The history of finance companies can be traced back to
the 1800s.
Retail firms allowed installment credit, which increased
their sales, generated more profit, and created a market
for finance companies
what are banks interaction with finance companies?
Compete with finance companies for consumer
loan business (including credit cards),
commercial loans and leasing
what are credit unions interaction with finance companies?
Compete with finance companies for consumer
loan business
what are securities firms interaction with finance companies?
Underwrite bonds that are issued by finance
companies
what are pension funds interaction with finance companies?
Compete with insurance subsidiaries of finance
companies that manage pension plans
what are insurance companies interaction with finance companies?
Compete directly with insurance subsidiaries of
finance companies
what are sales finance institutions?
specialize in loans to
customers of a particular retailer or manufacturer
E.g., Ford Credit Canada, GE Capital
what are personal credit institutions?
specialize in installments and
other loans to consumers
E.g., Easyfinancial, iCash
what are business credit institutions?
specialize in business loans,
especially through equipment leasing and factoring
E.g., Hitachi Capital Canada
how do personal credit institutions make loans to risker customers?
make loans at higher interest rates than banks
what are subprime lenders?
are finance companies that lend to
subprime borrowers, accepting items not taken by
banks for collaterals and charging unfairly exorbitant
rates
E.g., may accept cars and charge more than 60%
annually
who owns personal credit institutions?
often owned by
a manufacturer who uses them to make loans to
consumers interested in purchasing its goods
what do payday lenders provide?
provide short-term cash advances
that are often due when borrowers receive their next
paycheque.
80 companies are listed in Canada.
Effective January 1, 2018, the maximum total cost
of borrowing for a payday loan is $15 per $100
advanced for two weeks.
are finance companies subject to the bank act or CDIC?
no as they do not accept deposits
-much lower regulatory burden than depository institutions
what are the 5 advantages that business credit institutions have over banks?
They are not subject to regulations that restrict the
type of products and services they can offer.
They do not accept deposits—accordingly, bank-type
regulators do not monitor their behaviour.
They often have substantial industry and product
expertise.
They are more willing to accept risky customers.
They generally have lower overhead than banks
explain floor plan loans
Floor plan loans are common in the auto industry.
Finance company pays for the car dealership’s inventory
from the manufacturer and puts a lien on each car on the
showroom floor to secure the loans.
When a car is sold, the dealer must pay off the debt
owed on it before the finance company will provide a
clear title of ownership.
The dealer must pay the finance company interest on the
floor loans until the inventory has been sold off.
Curtailment schedules vary by floor plan providers
finance companies have strong profits for the largest firms because? and what is an example of one of largest firms
E.g., HSBC Finance, Associates First Capital,
Beneficial
Effects of low interest rates
what is the consumer protection act
Truth in leading legislation: disclose the APR charged
Usury statutes: set a ceiling on interest rates that can
be charged on finance company loan
Bankruptcy statutes: eliminate debt and retain
ownership of many assets
what kinda risk do finance companies face?
credit, interest rate and liquidity risk
do finance companies have a strong loan demand?
yes
even with less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to:
obtain funds.
Have a higher capital-to-total-asset ratio (8.60%) than
banks (4.52%
in terms of regulation, Sales finance companies may employ
default protection
guarantees or borrow directly from parent company
what is the primary asset of a typical finance company?
the loan portfolio
what are finance companies in foreign countries?
finance companies are generally
subsidiaries of commercial banks or industrials
most successful finance companies have become ____
takeover targets
Citigroup: merged with Associates First Capital
Household International: merged with HSBC Holdings
CIT: merged with Laurentian Capital
what are finance companies liabilities (source of funds)?
Corporate papers (77%) having short maturities of 30 days
or less
Debt consisting of longer-term notes & bonds (23%)
Finance companies rely heavily on issuing corporate papers
(frequently through direct sale programs).
Corporate papers are short-term unsecured promissory
notes sold by high credit quality corporations.
Have bank lines of credit as backup
what are most canadian finance companies?
subsidiaries of
US companies.
what are the assets (use of finance company funds) of a finance company?
Consumer loans (58.5%)
Business loans (28.7%)
Mortgages (12.8%)
where are largest finance companies located?
US
