THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 312

280 PA R T I I I Financial Institutions At the same time, the oil exporters were depositing huge sums in banks and as a result the banks were lending not only to the oil-importing countries but also to the oil-exporting countries, because the latter had large oil reserves and seemed like good credit risks The banks underestimated the indebtedness of these countries the total amount these countries had borrowed from banks and, as a result, were severely punished in the early 1980s when the recession hit and real interest rates increased significantly With Argentina, Brazil, Mexico, and Peru threatening to default on their loans, the banks had two choices: to reschedule their loans and make more loans to these countries (to enable them to pay the interest on the debt), or to declare these countries in default and acknowledge large losses on their balance sheets The banks chose to make more loans, because in many cases the losses would have been large enough to destroy them Today, the LDC debt is no longer a significant threat to the international banking system, because of other arrangements as well In recent years, for example, a variety of debt conversion schemes have been proposed to alleviate the debt service obligations of the major indebted LDCs There are three main forms of debt conversion: debt-debt swaps (where banks holding the debt of one LDC exchange it for the debt of another LDC), debt-currency swaps (where the debt denominated in foreign currency is converted into domestic currency), and debt-equity swaps (where the debt is converted into the equity of public and private domestic enterprises) The main impetus of all these debt conversion schemes has been the recognition that the true value of the sovereign debt is well below its face value As a result of their lending experience in Latin America, the Big Six have withdrawn from certain countries and focused more of their international activities in the United States Moreover, the international activities of Canadian banking organizations are now regulated, primarily by the Office of the Superintendent of Financial Institutions Canada (OSFI), created in 1987 to succeed two separate regulatory bodies: the Inspector General of Banks and the Department of Insurance In particular, in 1991, the OSFI asked the chartered banks to set up special reserves in the amount of 35% 45% of their exposure to a number of LDCs Foreign Banks in Canada The growth in international trade not only has encouraged Canadian banks to open offices overseas but also has encouraged foreign banks to establish offices in Canada Foreign banks have been extremely successful in Canada Over the past 20 years, since the 1981 revision to the Bank Act, globally prominent foreign banks have set up and expanded banking subsidiaries in Canada Foreign banks are a highly fragmented group and currently hold about 8% of total Canadian bank assets, with HSBC Bank Canada (the former Hongkong and Shanghai Banking Corp.) enjoying a national market share of over 3% It should be noted, however, that these institutions target specific groups, achieving a higher representation within their target groups than their national share would suggest For example, HSBC, the largest of the Schedule II banks, enjoys a strong presence and success in the Chinese communities of British Columbia and Ontario Foreign banks may enter the Canadian financial services industry as either Schedule II or Schedule III banks As already noted, Schedule II banks don t have to be widely held if small If, however, their equity capital exceeds $1 billion, then at least 35% of it must be widely held In the case that their equity capital exceeds $5 billion, then the same widely held ownership rule applies as for Schedule I banks The major difference between Schedule II and Schedule III banks is that Schedule III banks can branch directly into Canada, following authorization by the Minister of Finance, whereas Schedule II banks can add branches to their initial branch only with