Chapter 19: Learning Objectives OTHER DEPOSITORY INSITUTIONS & FINANCIAL INSTITUTIONS What are “Near-Banks”? A Brief History of “Near-Banks” Types: Trusts, MLC, and Credit Unions Other depository institutions Performance

Learning Objectives (CONT’D) Other Financial Institutions: What Are They? Insurance Industry: General Characteristics Mutual Funds & Pension Funds: General Overview Government Programs & Incentives

What are the Near Banks? Trust & Mortgage Loan Cos. Credit Unions and Caisses Populaires Provincially based depository institutions

Trust & Mortgage Loan Cos. Offer typical banking type services Estate, Trust, and Agency function remains most important distinguishing characteristic vis-à-vis Chartered banks A bit of history: filling the gap left by the Chartered banks What do their operations look like?

Trusts & Mtge Loan Companies : Asset & Liabilities Composition in 1990&2004

Trust & Mortgage Loans Cos

Credit Unions & Caisses Populaires Primarily savings type institutions offering a “smorgasboard” of financial and non-financial services Depositors are also the shareholders A little history: the need to generate a pool of savings in a community Big changes are underway to merge with other institutions and to bring in non depositing shareholders

Credit Unions: Asset & Liabilities Composition in 1990 & 2004

Credit Unions: Balance Sheet 2004

Other Financial Institutions Financial and Leasing Corporations Investment Dealers Government Financial Institutions Insurance Companies Mutual Funds Pension Funds

Sales & Finance Cos.

Investment Dealers Underwrite securities Also act as primary market dealers Since the early 1990s have been largely bought out by Chartered banks Serious regulatory issues have affected the industry in the 1990s

Government Financial Institutions In theory, fill in gaps left behind by the private market either because of risk or low profitability Examples include: CMHC, FBDB, EDC, FCC

Insurance Companies Most are federally regulated Separate Acts regulate domestic vs. foreign based companies There are 2 types of cos.: Joint-stock (shareholder owned) & mutual cos (policy holder owned). Assets must be sufficient to cover liabilities segregated fund component acts like an intermediary by offering RRIFs They have their own “protection” fund that acts like deposit insurance Demutualization is the dominant current trend

The Largest Insurance Cos.

Investment Funds & Cos Mutual Funds Closed-end (fixed no. of shares) Open-end (no share limit) usually specialize (e.g., bonds, mortgages, etc.)

Mutual Funds and Market Timing How much is your mutual fund worth? Depends on the time/date used in the calculation of Price X No. of shares If the price used is at 4pm Eastern time then the price is “stale” by 4:01pm! Stock/bond trading is a 24 hour round the world phenomenon If prices rise in North America they tend to rise in Asia where its later. There is, therefore, an arbitrage opportunity. How would the investor know that a shares sold between time t and t+ would earn a profit without their knowledge? Estimates of the returns from market timing? 35 to 70% annually Not everyone agrees with these estimates + there is also a risk of loss from the same phenomenon!

Investment Funds & Cos Pension funds Who operates them? Public vs. Private How are funds built up? Contributory vs. compulsory Who manages them? Trusteeship How are benefits paid? Defined (size & fund return) vs flat benefit (tenure)

The CPP in 2004

Summary There exist a large variety of public and private institutions which function as intermediaries but are not necessarily deposit-taking institutions Public institutions attempt to fill a perceived void left by the private market either because risks are too high or anticipated profits too low Other financial institutions include leasing cos., investment dealers, insurance companies, government financial institutions, mutual and pension funds Other financial institutions have been termed “near banks” since they offer typical banking type services as well as other financial and non-financial services The most important such institutions are the Trust&Mortgage Loan Cos. and Credit Unions They emerged to fill the financial gap left by the Chartered banks but competition and technology are forcing them to change into institutions largely indistinguishable from the Chartered banks