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1、,Chapter 10,Banking Industry:Structure and Competition,2005 Pearson Education Canada Inc.,10-2,Historical Development of the Banking Industry,2005 Pearson Education Canada Inc.,10-3,Financial Innovation,Innovation is result of search for profitsResponse to Changes in DemandMajor change is huge incre
2、ase in interest-rate risk starting in 1960sExample:Adjustable-rate mortgagesFinancial DerivativesResponse to Change in SupplyMajor change is improvement in computer technology1.Increases ability to collect information2.Lowers transaction costsExamples:1.Bank credit and debit cards2.Electronic bankin
3、g facilities3.Junk bonds4.Commercial paper market5.Securitization,2005 Pearson Education Canada Inc.,2005 Pearson Education Canada Inc.,10-4,Avoidance of Existing Regulations,Regulations Behind Financial Innovation1.Reserve requirementsTax on deposits=i r2.Deposit-rate ceilingsAs i,loophole mine to
4、escape reserve requirement tax and deposit-rate ceilingsExamples1.Money market mutual funds2.Sweep accounts,10-5,Decline in Traditional Banking,Loss of Cost Advantages in Acquiring Funds(Liabilities)i then disintermediation because1.Deposit rate ceilings 2.Money market mutual funds3.Foreign banks ha
5、ve cheaper source of funds:Japanese banks can tap large savings poolLoss of Income Advantages on Uses of Funds(Assets)1.Easier to use securities markets to raise funds:commercial paper,junk bonds,securitization2.Finance companies more important because easier for them to raise funds,2005 Pearson Edu
6、cation Canada Inc.,2005 Pearson Education Canada Inc.,10-6,Banks Response,Loss of cost advantages in raising funds and income advantages in making loans causes reduction in profitability in traditional banking1.Expand lending into riskier areas:e.g.,real estate2.Expand into off-balance sheet activit
7、ies3.Creates problems for regulatory systemSimilar problems for banking industry in other countries,2005 Pearson Education Canada Inc.,10-7,The Big Six,together with the Laurentian Bank of Canada,the Canadian Western Bank,and another 8 domestic banks are Canadas Schedule I banks Schedule II banks ar
8、e some domestic banks and the Canadian subsidiaries of foreign banks.As of October 2002,there were 31 Schedule II banks in Canada A Schedule III bank is a foreign bank allowed(under certain restrictions)to branch directly into Canada.As of October 2002,there were 21 Schedule III banks in Canada,Sche
9、dule I,Schedule II,and Schedule III Banks,2005 Pearson Education Canada Inc.,10-8,Canadian Chartered Banks,2005 Pearson Education Canada Inc.,10-9,Schedule I banks and big Schedule II banks(those with over$5 billion in equity capital)must be widely held:no individual can own more than 10%of any clas
10、s of sharesSmall Schedule II banks with equity capital less than$1 billion dont have to be widely held-that is,may have a significant shareholder(more than 10%)Small Schedule II banks with equity capital in excess of$1 billion have to be at least 35%widely held,Permitted Ownership Structure,2005 Pea
11、rson Education Canada Inc.,10-10,Any widely held foreign bank can own 100%of a Canadian bank subsidiary(that is,of a foreign Schedule II bank)Any widely held and regulated Canadian financial institution,other than a bank,may own 100%of a bank Schedule II banks can add branches to their initial branc
12、h only with ministerial approvalSchedule III banks can branch directly into Canada,following authorization by the Minister of Finance,(Continued),2005 Pearson Education Canada Inc.,10-11,As of October 2002,there were 68 chartered banks in Canada and around 8000 in the United StatesThe presence of so
13、 many banks in the U.S.reflects past regulations that restricted the ability of these financial institutions to open branches Many small U.S.banks stayed in existence because a large bank capable of driving them out of business was often restricted from opening a branch nearbyIt was easier for a ban
14、k to open a branch in a foreign country than in another state in the U.S.,Comparison with the U.S.,2005 Pearson Education Canada Inc.,10-12,Structure of the Commercial Banking Industry in the United States,2005 Pearson Education Canada Inc.,10-13,Ten Largest U.S.Banks,2005 Pearson Education Canada I
15、nc.,10-14,Branching Regulations in the U.S.,Branching Restrictions:McFadden Act and Douglas AmendmentVery anticompetitiveResponse to Branching Restrictions1.Bank Holding CompaniesA.Allowed purchases of banks outside stateB.BHCs allowed wider scope of activities by FedC.BHCs dominant form of corporat
16、e structure for banks2.Automated Teller MachinesNot considered to be branch of bank,so networks allowed,2005 Pearson Education Canada Inc.,10-15,Competition Across All Four Pillars and Convergence,Until recently,Canadas financial services industry was regulated by institution(banks,securities,insura
17、nce,and real estate).This approach to regulation has been known as the four-pillar approach Recent legislative changes allowed cross-ownership via subsidiaries between financial institutionsAs a result,Canadas traditional four pillars have now converged into a single financial services marketplace,2
18、005 Pearson Education Canada Inc.,10-16,Bank Consolidation,Bank Consolidation:Why?The way is now open to consolidation in terms not only of the number of banking institutions,but also across financial service activitiesMega-mergers are likely on the way,like that of Citicorp and Travelers in the U.S
19、.Banking institutions will become not only larger,but increasingly complex organizations,engaging in the full gamut of financial service activities,2005 Pearson Education Canada Inc.,10-17,Bank Consolidation:Pros and Cons,Bank Consolidation:A Good Thing?Cons:Rush to consolidation may increase risk t
20、akingFear of decline of small banks and small business lendingPros:Community banks will surviveIncrease competitionIncreased diversification of bank portfolios:lessens likelihood of failures,2005 Pearson Education Canada Inc.,10-18,Trust and Mortgage Loan Companies(TMLs),RegulatorsOperate under a ch
21、arter issued by either the federal government or one of the provincesFederally incorporated TMLs are regulated and supervised by the OSFI and must also register in all provinces in which they operate and conform to their regulationsThe fiduciary component of trust companies is only subject to provin
22、cial legislation,even if the company is federally incorporated CDIC and QDIB(for Qubec TMLs),2005 Pearson Education Canada Inc.,10-19,Credit Unions(Outside Qubec),RegulatorsEach each province has a central credit union,owned by the member credit unions,providing financial services to member credit u
23、nions All central credit unions are members of the Credit Union Central of Canada(CUCC),also known as Canadian Central,which functions as a central bank(i.e.,provides cheque-clearing services for all provincial central credit unions)Credit unions are covered by a provincial stabilization fund(on ter
24、ms similar to the CDICs),2005 Pearson Education Canada Inc.,10-20,(Qubec)Caisses populaires,Caisses populaires are organized into 11 regional federations that belong to the Confdration des caisses populaires et dconomie Desjardins du Qubec,which has a similar structure to the provincial central cred
25、it unions in the rest of CanadaThe confederation owns Caisse centrale Desjardins,which functions as a central bank,as the CUCC does for the rest of Canada The QDIB insures caisses populaires,on terms similar to the CDICs,2005 Pearson Education Canada Inc.,10-21,Government Savings Institutions,Provin
26、ce of Ontario Savings OfficeEstablished in 1921Today only lends to the Treasurer of Ontario for provincial government purposes Alberta Treasury BranchesEstablished in 1938Today there are 275 branches in 240 communities across Alberta,operating in three target markets:individual financial services,ag
27、ricultural operations,and independent business,2005 Pearson Education Canada Inc.,10-22,International Activity of the Big Six,2005 Pearson Education Canada Inc.,10-23,Largest Banks in the World,2005 Pearson Education Canada Inc.,10-24,Financial Services Reformfor the 21st Century,Bank Holding Compan
28、iesThe Permitted Investment RegimeNew Ownership RulesAccess to the Payments and Clearance SystemMerger Review Policy,2005 Pearson Education Canada Inc.,10-25,Advantages of the Holding Company Form of Ownership,Allows banks to engage in other activities related to banking(i.e.,provision of investment
29、 advice,data processing and transmission services,leasing,and credit card services)Allows for lighter regulation throughout the bank financial group because certain activities(those not involving deposit-taking and insurance)can be undertaken by less-regulated,non-bank affiliatesProvides increased f
30、lexibility to achieve economies of scale and scope through strategic partnerships,alliances,and joint ventures,2005 Pearson Education Canada Inc.,10-26,The Permitted Investment Regime,The new legislation provides greater flexibility for bank involvement in the information technology area-i.e.,the In
31、ternet and wireless technologyImplications:Although bank involvement in the information technology area is subject to regulation,the new permitted investment regime will enhance the ability of bank financial groups to:pursue strategic alliances and joint ventures,and further accelerate the technolog
32、ical advances that are already taking place,2005 Pearson Education Canada Inc.,10-27,New Ownership Rules,The proposed legislation lowers the capital needed to create a bank from$10 million to$5 million and allows domestic and foreign commercial firms to establish small and medium-sized banks Increas
33、es the limit a single shareholder can own of a widely held financial institution(either a BHC or a bank subsidiary under the BHC)from 10%of any class of shares to 20%of voting shares and 30%of non-voting shares However,it does not permit a single shareholder to own more than 10%of both a BHC and a b
34、ank subsidiary under the BHC at the same time,2005 Pearson Education Canada Inc.,10-28,New Ownership Rules(Continued),Small banks dont have to be widely held and can be wholly owned(have one particular investor own 100%of their shares)Medium sized banks and BHC with shareholders equity between$1 bil
35、lion 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 BHC,those with shareholders equity in excess of$5 billion,are required to be widely held.,2005 Pearson Education Canada Inc.,10-2
36、9,Access to the Payments and Clearance System,The new legislation allows non-deposit taking financial institutions(life insurance companies,securities dealers,and money market mutual funds)access to the payments and clearance system Implications:This will increase competition by allowing non-deposit
37、 taking financial institutions to provide bank-like services(i.e.,chequing accounts and debit cards)without being banks,thereby directly competing with banks,TMLs,and CUCPs,2005 Pearson Education Canada Inc.,10-30,Merger Review Policy,The new legislation acknowledges that mergers are a legitimate bu
38、siness option that should be available to Canadian bank financial groups Does not allow mergers between large banks and large demutualized life insurance companiesNote that such mergers are not prohibited in countries such as Australia,Germany,the Netherlands,Switzerland,the U.K.,and the U.S.,2005 P
39、earson Education Canada Inc.,10-31,Implications for the Canadian Banking Industry,A BHC structure,new ownership rules,expanded permitted investments,expanded access to the payments and clearance system,and a transparent merger review policy will:further speed up the financial consolidation process,because the way is now open to both mergers and acquisitions,and strategic alliances,partnerships,and joint ventures together with new information technologies,make possible new financial products and services and a more vibrant and dynamic market for financial services,
