1. Banking in Canada
Canadian Economy 2203

2. Types of Financial Institutions
Deposit taking and Lending Institutions
Insurance companies/Pension Funds
Investment Dealers/Sales & Finance Companies

3. Deposit taking and lending institutions
Charter banks – have a close relationship with government
Near banks – similar to charter banks, but can’t call themselves “banks”
Trust companies – accept deposits, administer estates and trusts
Mortgage companies – invest their depositor's assets into real estate
Credit unions – cooperatives that offer banking services to members

4. Insurance companies/pension funds
Cover individuals and businesses against:
Fire
Damage
Automobile accidents
Other risks
Pensions are pools of capital invested in financial assets such as shares, bonds, and real estate in order to provide retirement income for its investors

5. Investment dealers/sale&finance companies
Investment dealers – sell new issues of company shares to the public and act as brokers for the investors in the stock market
Sales finance/consumer loan companies – lend money to businesses and individuals
6 of the largest banks in Canada dominate our financial system, owning 70% of its total assets.
Their lending services makes it possible to create the goods and services of our economy.

6. Canadian Banking system
Two main types of banks which a modern economy operates on:
Unit banking system (allows many independent banks to exist but sometimes puts restrictions on how many branch banks are allowed)
Branch banking system (restricts the number of banks but not the number of bank branches)
Canada has a BRANCH BANKING SYSTEM.
USA has a UNIT BANKING SYSTEM (over 14,000 individual banks)

7. Branch Banking Advantage: Criticism:
Can borrow money from another branch if someone makes a huge withdrawal.
Criticism:
Not enough competition between only a few banks

8. Chartered banks
Canada has the “Big Five” banks which are the main 5 banks in Canada
Can you name them?
________________
These banks have overseas and international branches and locations which contribute to the bank revenue.

9. Bank of Canada goals Review:
When the business cycle is expanding (recovering), people make more money, and businesses take in more profit.
People start to borrow money for cars, houses, etc.
The bank raises interest rates to slow down borrowing to prevent consumers from fueling demand for goods and services so much that the inflation rate will increase dramatically.
Banks must careful with their timing, and must not use too much restraint – which could cause a recession.

10. During a recession
Banks will lower interest rates to encourage borrowing, therefore increasing consumer and business spending.
“Easy Money” – used to describe monetary policies of low interest rates, availability of credit and growth of the money supply. Attempt to slow down/reverse recessions.
“Tight Money” – used to describe monetary policies of high interest rates, difficulty availability of credit, and decrease of money supply. Used to rein in economy during an expansion.

11. Why should I care about interest rates?
Interest is the price paid for a loan
They are a large deciding factor in a consumers choice whether to SAVE or BORROW.
Interest rates (depending on high or low) could help you save money or cost you a lot of money over time!
As interest rates DECREASE, money that is borrowed INCREASES.
Rate of return – the amount of extra revenue an investment by a business in new machinery, technology or new plant will bring in. (e.g. Is the investment going to make us more money in the long-run?)

12. Different types of interest rates
Prime rate – the lowest interest rate institutions will offer (it is the base/lowest interest rate available)
Normally, people will be offered a rate of x% above prime which is dependent on a number of factors including
Amount of the loan
Credit rating
Term of the loan
Bank rate – rate of interest charged by the Bank of Canada to chartered banks and other financial institutions.

13. Banks/Bank of Canada
Goal – to keep price stability and low inflation rate
Want to keep inflation between 1-3%
If it falls close to 1, Bank of Canada decreases short-term interest rates (easy money policy)
If it rises close to 3, Bank of Canada raises rates to pull inflation down (tight money policy)
Bank of Canada can control inflation rates by changing OVERNIGHT RATE TARGET

14. Overnight Rate Target
Lowest available interest rate (Bank of Canada charges this to other institutions)
By charging this, the BoC tells other banks and institutions the direction of monetary policy
An increase in the target encourages other banks to increase their own interest rates

15. Bank of Canada Balance Sheet
3 Types of Assets
3 Types of Liabilities

16. 3 Assets of Bank of Canada
Government of Canada bonds
Bonds: a financial asset that represents a debt owed by a corporation to the holder, the corporation pays interest to the holder
GoC bonds: Govt sells bonds to BoC, bank gives government money, government promises to pay back the Bank by selling bonds to individuals, businesses, institutions
Foreign exchange
Stock of foreign currencies used to defend the Canadian dollar on international money markets and these currencies are used to purchase Canadian dollars which props up the dollars price
Advances to the Chartered Bank
The BoC lends money to chartered banks for investment purposes, the chartered banks charge the interest to borrowers

17. 3 Liabilities of bank of Canada
Currency outstanding
Consists of bank notes issued by the Bank of Canada or paper money in circulation
Deposits of the chartered banks
Balances held by chartered banks at the BoC for the purpose of settling debts
Deposits of the federal government
Government deposits revenue and makes payments from the account (e.g. to pay employees)

18. Assignment 1. Explain the concept of monetary policy.
2. Explain how monetary policy affects the level of inflation in the economy. 
3. Analyze how the Bank of Canada uses monetary tools to promote price stability, full employment, and economic growth. 
4. Explain how interest rates influence decisions of savers and borrowers.