THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 307

CHAPTER 11

Banking Industry: Structure and Competition

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to hold substantial equity stakes in commercial firms, whereas British-style universal banks cannot. Although the banking and securities industries are legally
separated in Japan under Section 65 of the Japanese Securities Act, commercial
banks are increasingly being allowed to engage in securities activities and are
thus becoming more like British-style universal banks.

THE NE AR BAN KS: REG U LATI O N AN D ST RU CTU RE
Not surprisingly, the regulation and structure of the near banks (trust and mortgage loan companies, and credit unions and caisses populaires) closely parallel the
regulation and structure of the chartered banking industry.

Trust
Companies

Over the years, the Bank Acts have denied to chartered banks the power to function as corporate trustees (or fiduciaries). Unlike the situation in the United States,
legislators in Canada reasoned that deposit-taking financial institutions might face
a conflict of interest if they were to act as both financial fiduciaries and banks. So
beginning in 1843, trust companies were established, under a variety of provincial
and federal laws, and specialized in the provision of fiduciary services. As financial
fiduciaries, trust companies administer estates, trusts, and agencies (i.e., assets that
belong to someone else), for a fee, and under conditions prescribed in a contract.
Over the years, the structure of the trust industry has changed significantly and
the trust companies became closely associated with the chartered banks. In the early
1900s, the trust companies were also allowed to act as financial intermediaries. In this
role, trust companies borrow funds by issuing deposit liabilities and then use these
funds to make loans and purchase assets. Moreover, over the years the Bank Acts
have allowed regulated federal financial institutions (domestic chartered banks and

life insurance companies) to own trust companies. As a result, and with the acquisition of Canada Trust (Canada s largest trust company) by the Toronto Dominion Bank
in early 2000, trust companies now constitute a relatively small market segment.

Mortgage Loan The development of trust companies was paralleled by the growth of mortgage
loan companies. The concept of mortgage loan companies came from the building
Companies
societies in the United Kingdom (during the early part of the nineteenth century),
whose purpose was to enable members to acquire land, build homes, or develop
farms. Today s mortgage loan companies take deposits and primarily make residential mortgage loans. They do not act as trustees, unless they are licensed specifically
for that purpose. Over the years, the mortgage loan companies together with the
trust companies formed the second pillar of the traditional financial services industry in Canada. However, as you can see in this chapter, financial innovation, competition, and regulatory evolution significantly changed the competitive position of
financial institutions in recent years.
Trust and mortgage loan companies (TMLs) operate under a charter issued by
either the federal government or one of the provincial governments. Federally
incorporated TMLs come under the federal Trust and Loan Companies Act and are
regulated and supervised by the Office of the Superintendent of Financial
Institutions Canada (OSFI). They must also register in all of the provinces in which
they operate and must conform to the regulations of those provinces. In the case
of trust companies, the fiduciary component of their business is only subject to
provincial legislation, even if the company is federally incorporated. Deposit insurance for TMLs outside Qu bec is provided by the CDIC (up to $100 000 per