THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 318

286

PA R T I I I

Financial Institutions

interest-rate risk; changes in supply conditions, especially improvements in information technology; and the
desire to avoid costly regulations have been major driving forces behind financial innovation. Financial innovation has caused banks to suffer declines in cost
advantages in acquiring funds and in income advantages on their assets. The resulting squeeze has hurt
profitability in banks traditional line of business and has
led to a decline in traditional banking.
5. The regulation and structure of the near banks (trust
and mortgage loan companies, and credit unions
and caisses populaires) parallel closely the regulation
and structure of the chartered banks. Federally incorporated near banks are regulated and supervised by
the OSFI. They must also register in all the provinces
in which they do business and must conform to the
regulations of those provinces.
6. With the rapid growth of world trade since 1960, international banking has grown dramatically. Canadian
banks engage in international banking activities by
opening branches abroad and owning controlling

interests in foreign banks. Foreign banks operate in
Canada by owning a subsidiary Canadian bank or by
operating branches or agency offices in Canada.
7. Until 1981, foreign banks were not allowed to operate in Canada. Today, we have 53 foreign bank subsidiaries and branches, operating as Schedule II and
III banks. They have the same powers as the domestic banks but differ in the ownership structure permitted. That is, all Schedule I banks must be widely
held, whereas Schedule II and III banks can be
closely held if small.
8. The 2001 Bank Act Reform introduced a bank holding
company structure, new ownership rules, expanded

access to the payments and clearance system, and
new opportunities for strategic alliances and joint
ventures. These changes are reshaping the financial
services marketplace in Canada by making it easier
to introduce new financial products and services
and increasing the competitive environment in the
industry.

KEY TERMS
automated teller machine (ATM),
p. 260

financial derivatives,

p. 259

Regulation Q,

four-pillar approach,

p. 272

Schedule I banks, p. 268

Bank Act Reform,

free banking,

p. 282

bank holding companies,
branches,

p. 271

p. 254

central bank,

p. 254

debt-currency swaps,
debt-debt swaps,

p. 280

p. 280

debt-equity swaps,

p. 280

deposit rate ceiling,

p. 264

disintermediation, p. 264
dual banking system,

p. 254

futures contracts,

p. 259

p. 264

Schedule II banks,

p. 268

Schedule III banks,

p. 268

gold standard, p. 256

seignorage, p. 256

hedge, p. 259

shadow banking system,

indebtedness, p. 280

sovereign loans, p. 279
state banks, p. 254

large, complex banking organizations (LCBOs), p. 273

sweep account,

p. 264

lender of last resort, p. 257

trustees,

national banks,

virtual bank, p. 261

p. 254

p. 258

p. 275

p. 254

QUESTIONS
You will find the answers to the questions marked with
an asterisk in the Textbook Resources section of your
MyEconLab.
1. Describe how the 2001 Bank Act Reform attempted
to introduce more competiton in Canada s financial
services marketplace.
*2. Which regulatory agency has the primary responsibility for supervising the following categories of
financial institutions?
a. chartered banks

b. trust and mortgage loan companies
c. credit unions and caisses populaires

3. The commercial banking industry in Canada is less
competitive than the commercial banking industry
in the United States because in Canada only a few
large banks dominate the industry, while in the
United States there are around 7100 commercial
banks. Is this statement true, false, or uncertain?
Explain your answer.
*4. How did new technology cause banks traditional lending activities to decline in balance-sheet importance?
5. Contrast the activities of a Schedule I bank, a Schedule
II bank, a trust company, and a credit union.