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 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 business and must conform to the regulations of those provinces 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 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 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 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 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? Contrast the activities of a Schedule I bank, a Schedule II bank, a trust company, and a credit union