Past and Present of Canadian Financial Institutions

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In 1792, a group of Montreal businessmen made an attempt to establish a Bank in Canada. This attempt was unsuccessful. In 1817, nine Montreal merchants established the Montreal Bank (now the Bank of Montreal). This Bank is the oldest existing Сanadian Bank. By 1867, there were 35 banks in British North America. Initially, banks were registered as legal entities in the provinces. With the creation of the Confederation in 1867, the new Federal government received exclusive jurisdiction over all matters related to money and banking. The final version of the law on banks was adopted in 1871. 

The law on banks regulates the activities of commercial banks. The law revised in 1980 allows for the existence of two types of banks. The 11 banks that operated before the law was revised in 1980 are known as List A banks. List B Banks are either branches of international banks or banks owned by Canadians, with one of the owners owning more than 10% of the issued and outstanding shares. Shares of List l banks may not be held by a limited number of persons. Registered commercial banks have almost 7 thousand branches serving all provinces and territories.

The Bank of Canada is a ‘Bank of Banks” because it controls the clearing system through licensed commercial banks and other financial institutions. The Minister of Finance regularly monitors the activities of banks

Each Bank has a chief Executive officer who is directly responsible to the Board of Directors. Shares of A-list banks are bought and sold on major stock exchanges.

The three main types of deposit accounts are savings accounts, checking accounts, and term deposits. New types of accounts have also been introduced. Deposits in сanadian dollars placed in licensed commercial banks are insured for up to $ 60 thousand per depositor in each Bank by the Canada Deposit Insurance Coit Insurance Corporation, a Federal Agency.

Canadian banks are active in the financial markets. In 1986, foreign exchange assets accounted for more than 45% of all assets. A significant part of the banks income is provided by international operations. Canadian banks have about 300 branches in almost 30 countries around the world.

The level of interest rates depends on market factors that affect the supply and demand of money. Significant influence on these rates is exerted by the Federal government, which, through its agent, the Bank of Canada, conducts a monetary policy that takes into account international conditions and domestic challenges.

Banking in Canada is heavily regulated

The law on banks defines the principles of banking regulation. Other Federal laws that directly or indirectly affect banks include the Bill of Exchange Act, the Canadian Settlement Association Act, the сanadian labor law, the Canada Pensions Act, the Canada Deposit Insurance Corporations Act, the Canada mortgage and housing corporations Act, the Canada manufacturing and Trading Corporations Act, and the Income Tax Act. Bank of Canada, established in 1945 as a Central Bank, it also has a large impact on the operations of the country’s commercial banks.

Under the banking Act of 1980, an annual report must be submitted to the Bank’s shareholders, including:

1. consolidated statement of claims and obligations in the form attached to the law (List K).

2. consolidated profit and loss account in the form attached to the law (List L).

3.consolidated statement of allocation of funds for unforeseen expenses in the form specified in List M attached to the law.

4. consolidated statement of changes in equity in the form specified in List N of the law.

As a result of changes introduced by the banking Act of 1980 the financial statements of banks in Canada are aligned with generally accepted accounting principles in the main areas, except for accounting for loan losses and accounting for the provision for unforeseen expenses, which is excluded from equity. 

Relations with the Bank of Canada

The Central Bank of Canada does not accept deposits from individuals and does not compete with licensed commercial banks in the field of commercial banking. However, under the provisions of the banking Act, the Bank of Canada may set the total amount of cash reserves that can be used by commercial banks as a group.

Each commercial Bank must hold with the Bank of Canada a certain average amount of cash reserves in the form of deposits and holdings in Bank of Canada notes. (The Bank of Canada has the exclusive right to issue banknotes for circulation in Canada.) Instead of the 4% reserve requirement for deposits with notification of withdrawal and the 12% reserve requirement for demand deposits, the new rates set out in the law on banks are set at 3% and 10%, respectively, and for the first 500 million dollars. for deposits with a notification, the reserve requirement is only 2%.

The reduction of mandatory reserve rates occurred in stages over three and a half years. Cash on hand was deducted from the amount of reserve claims. According to preliminary estimates, these changes should have reduced the reserve contributions of banks by about one-fiftieth.

Reserve requirements for non-cash deposits (non-encashable deposits) for a period of more than one year, as well as for some other deposits, including RRSPs, RHOSPs, deposits of other banks, deposits of non – Bank organizations-members of the IAS (Association of canadian bankers), as well as deposits of non-residents in canadian currency, were canceled. Reserve requirements were extended to foreign branches that are fully owned, as well as to deposits of factoring and leasing companies that are fully or partially owned.

The Bank of Canada may provide loans or advances to commercial banks for a period of no more than 6 months, secured by certain types of securities. Loans or loans may be granted under certain conditions and for a limited period of time to the government or provinces. The Bank’s discount rate is the minimum rate at which the Bank of Canada is willing to provide loans or borrowings.

The Bank of Canada may also require licensed commercial banks to hold a second reserve, the amount of which may be changed by the Bank within certain limits. The second provision applies to excess cash reserves in relation to share capital, treasury bills and one-day loans to dealer investors.

Other canadian government credit and financial institutions

The farm credit Corporation was established in 1959 to provide long-term mortgage loans to farmers. The Canada Mortgage and Housing Corporation (formerly: Central Mortgage and Housing Corporation) was incorporated as a joint-stock company in 1945 and has two functions: insuring mortgage loans provided by certain lenders and providing direct mortgage loans. The Federal business Development Bank (FBDB) was established in 1975 to provide financial services and management consulting services for small and medium-sized enterprises. The Bank is the successor to the industrial Development Bank, established in 1944 as a branch of the Bank of Canada.

International activities of сanadian banks

The growing importance of the international activities of canadian banks, as well as the activities of the Committee of Bank Supervisors of the Bank  for International Setlements are reflected in three ways in the banking Act of 1980. First, banks must submit consolidated financial statements. reports, including the balance sheets of their branches (previous legislation provided for the consolidation of the balance sheet only of those branches of the Bank that were fully owned by them).

Secondly, the Bank will not be subject to control by canadian or foreign companies. corporations, unless he receives a resolution from the Board of Directors of that Corporation giving the Inspector General of Banks the right of access to the company’s books and records.. 

Finally, the inspector may, as a special exception to the strict secrecy provision required by his office, provide information relating to the state of Affairs of the Bank to  senior officials responsible for overseeing the activities of banks in a jurisdiction other than Canada, where, in the opinion of the inspector, the exchange of such information serves the interests of Canada and where the officials to whom this information is provided are required by law to maintain secrecy with respect to the information provided in this way`. (The office of the Inspector General of Banks was established in Canada in 1924 under an amendment to the Banking Act after the bankruptcy of the Home Bank in 1923).

Foreign banks in Canada

The criteria under the banking Act of 1980 for an International Bank wishing to open branches in Canada are as follows:

1. It must be an International Bank.

2. It must have assets, experience, and income sufficient to support the operation of branches in Canada.

3. Its shares, as a rule, should be in the hands of a wide range of shareholders.

4. It should be under proper control and have a good financial position.

5. It must provide evidence of the ability to contribute to the development of competitive banking in Canada, as well as the existence of the principle of reciprocity in the jurisdiction of his country.

6. It must be ready to submit a letter of guarantee (letter of comfort) confirming the readiness to be responsible for the activities of the branch.

There is a limitation on the total amount of assets of branches of foreign banks operating in the dominion: it should make up 8% of all NATs.

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