CHAPTER 11 Banking Industry: Structure and Competition 275 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 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