Copyright © 2014 Pearson Canada Inc. Chapter 12 NONBANK FINANCE Mishkin/Serletis The Economics of Money, Banking, and Financial Markets Fifth Canadian Edition
Copyright © 2014 Pearson Canada Inc Learning Objectives 1.Identify the difference between banks and nonbank financial institutions 2.Explain the regulation of nonbank financial institutions in the context of asymmetric information problems 3.Report how recent financial-sector legislation is expected to lead to larger and increasingly complex financial groups, engaging in a full gamut of financial activities
Copyright © 2014 Pearson Canada Inc Life Insurance Companies Regulated by the OSFI(financial soundness only), Provincial Governments, and backed up by Assuris Demutualization Hold illiquid long-term assets Individual life insurance –permanent life (endowment insurance) –temporary life Group life insurance Annuinities
Copyright © 2014 Pearson Canada Inc Property and Casualty Insurance Regulated by OSFI, Provincial Government, and PACICCProvincial Government Property Insurance covers loss of real property Casualty insurance protects against legal liability exposure Reinsurance
Copyright © 2014 Pearson Canada Inc The federal and provincial governments share jurisdiction over life and health insurers. Federal regulator or OSFI conducts prudential reviews of the federally regulated insurers to determine their financial soundness, while the provinces regulate the licensing of insurers operating within their jurisdictions as well as the marketing of insurance products. The industry-funded compensation organization is known as Assuris.Assuris
Copyright © 2014 Pearson Canada Inc *Credit Insurance Credit Default Swaps (CDS) –seller is required to make a payment to the holder of the CDS if there is a credit event (i.e. bankruptcy) of the firm’s credit rating Mono-line Insurance –supply credit insurance directly –Important for less known debtors, such as Municipal government Bond issuers, than for Sovereign bond issuers; their credit ratings are not as clear and thus needs credit insurance.
Copyright © 2014 Pearson Canada Inc Relative Shares of OSFI_Regulated Financial Intermediary Assets
Copyright © 2014 Pearson Canada Inc The New Legislative Framework Government passed legislation reforming regulatory framework. Demutualized life and health insurance companies Allowed access to Canadian payments and clearance systems Does not allow mergers involving large banks and large demutualized life and health insurance companies
Copyright © 2014 Pearson Canada Inc Pension Funds Rapid growth: encouraged by tax policy Bigger role in stock market Problem of underfunding Private plans –RPPs Public plans –Social Security –CPP and QPP
Copyright © 2014 Pearson Canada Inc Finance Companies Minimal regulation by provinces Rapid growth Three types: 1.Sales finance companies 2.Consumer finance companies 3.Business finance companies There are other formats, such as Payday Loan companies = Cash Advance Companies General Ideas: A Deeper Analysis: Actual Cost Comparison -Community Financial Services Association of America -Canadian Payday Loans: eg) Canadian Payday Loans Association Companies:
Copyright © 2014 Pearson Canada Inc Securities Market Operations Investment Banking –seasoned issues –underwriters Securities Brokers and Dealers –brokerage firms Organized Exchanges –Specialist * Canada has no federal regulator. protect-investors.aspx#.VMP7JEfF_Tp * Provincial Government Regulators in Canada: Provincial and Territorial Securities Commissions * Canadian Self(industry) Regulator: IIROC (the Investment Industry Regulatory Organization of Canada)
Copyright © 2014 Pearson Canada Inc Mutual Funds Sovereign wealth funds Institutional Investors Open-end vs. closed-end Load vs no-load Money Market Mutual Funds Hedge Funds
Copyright © 2014 Pearson Canada Inc Private Equity and Venture Capital Funds Private Equity Fund Venture Capital Funds –capital buyout funds –leveraged buyout (LBO) –carried interest
Copyright © 2014 Pearson Canada Inc Government Financial Intermediation Crown Finance Companies –*CMHC provides funds to the mortgage market by borrowing from the federal government and the private sector(now the largest Canadian Shadow Banking sector with little risk or uncertainty, though) –FCC –EDC –BDC Government Sponsored Enterprises in the United States (GSE) –GNMA (“Ginnie Mae”) –FNMA (“Fannie Mae”) –FHLMC (“Freddie Mac”)