THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 316

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PA R T I I I

Financial Institutions
Medium-sized banks (and bank holding companies) with shareholders equity
between $1 billion and $5 billion can be closely held provided that there is a 35%
public float (that is, they could have a single shareholder own up to 65% of their
shares). Large banks (and bank holding companies), those with shareholders
equity in excess of $5 billion, are required to be widely held.
The new ownership regime, together with other provisions in the legislation,
such as the lowering of the capital needed to create a bank from $10 million to
$5 million and the allowance of domestic and foreign commercial enterprises
(such as department stores and grocery chains) to establish small and mediumsized banks, will fundamentally change Canada s financial sector.

The CP Act and
Access to the
Payments and
Clearance
System

Before the 2001 financial sector legislation, membership in the Canadian Payments Association (CPA), a nonprofit organization formed in 1980 by an Act of
Parliament to operate Canada s payments systems, was limited to the Bank of
Canada and the deposit-taking financial institutions chartered banks, trust and
mortgage loan companies, and credit unions and caisses populaires. The 2001
legislation introduced some important changes for the Canadian Payments
Association and also renamed the Canadian Payments Association Act to
Canadian Payments Act (CP Act).
In particular, the CP Act extends eligibility for membership in the Canadian
Payments Association and therefore access to Canada s two domestic payments
systems, the Large Value Transfer System (LVTS) and the Automated Clearing

Settlement System (ACSS), both to be discussed in detail in Chapter 17 to
non deposit-taking financial institutions, such as life insurance companies, securities dealers, and money market mutual funds. This regulatory change will significantly affect Canada s financial services sector, since it will allow these organizations
to provide bank-like services, such as chequing accounts and debit cards, without
being banks, thereby directly competing with banks, trust and mortgage loan
companies, and credit unions and caisses populaires.
Expanding access to the payments and clearance system, by allowing
non deposit-taking financial institutions to participate, will further accelerate the
process of the blurring of distinction between deposit-taking and non deposit-taking
financial institutions. As already noted, this process started in 1987, when securities
dealers were allowed to own banks, and was reinforced by the 1992 federal financial
reforms that permitted cross-ownership of financial institutions.

Merger Review The government has also issued a statement establishing a process for reviewing
mergers involving large banks banks like the Bank of Montreal and CIBC with
Policy
shareholder equity in excess of $5 billion. By doing so, the government acknowledges that mergers are a legitimate business option that should be available to
Canadian bank financial groups. The bank merger review process, however,
unlike those in other countries such as the United States and the United Kingdom,
is political, having Parliament directly involved in it.
Under the new merger review policy, the merger partners are required to submit a public interest impact assessment (PIIA), covering various effects of the
merger, such as the impact on the structure and competition of the banking industry, branch closures, and job losses. The merger proposal would then be submitted to the House of Commons Standing Committee on Finance and the Standing
Senate Committee on Banking, Trade, and Commerce for consideration and public
hearings. Each of these committees will report to the Minister of Finance, who
would make these reports public, together with a report from the Competition
Bureau on the competitive aspects of the proposed merger and a report from the