Lecture 2: commercial banks

Question 1

how did the canadian banking system evolve?

Answer 1

from free banking to
the current system with extensive government
involvement.

Question 2

when did chartered banking begin?

Answer 2

Chartered banking in Canada began shortly after
Confederation when the federal government began
regulating the financial system.

Question 3

how many banks were there in 1876 and were charters difficult to obtain?

Answer 3

yes and there were 35 banks

Question 4

what is the bank act (1871)

Answer 4

forms the base for financial
legislation governing a bank and includes decennial
revision process.

Question 5

what did The increased start-up capital for banks in 1891 create?

Answer 5

entry barriers, cutting off growth

Question 6

how many banks were there in 1961?

Answer 6

8 banks because of mergers and amalgamation

Question 6

what are the big 5?

Answer 6

-RBC
-TD-Canada Trust
-Scotia
-BMO
-CIBC

Question 7

how many assets in the industry do the big 5 own?

Answer 7

up to 90%

Question 7

what are the big 5 banks?

Answer 7

they are financial powerhouses with full services

Question 8

as of 2019, majority of canadians are shareholders of the banks either

Answer 8

directly through share ownership or indirectly through pension and mutual funds.

Question 9

as of 2019, how many banks in Canada, how many branches and how many ABMs

Answer 9

86 banks in Canada, with 5,907 branches and
approximately 18,640 ABMs

Question 10

how many employees do banks employ

Answer 10

275,825 domestic workers and 109,094
people abroad

Question 11

as of 2019, how much do banks contribute to GDP?

Answer 11

approximatetly 3.3%

Question 12

how much taxes are paid by big 5 in Canada and worldwide?

Answer 12

Big Five are $12.5 billion in Canada, $18.2
billion worldwide

Question 13

what does canada’s banking sector include?

Answer 13

includes domestic banks,
foreign bank subsidiaries, representative offices of
foreign banks operating in Canada

Question 14

what banks must operate under the Bank Act?

Answer 14

-all must

Question 15

what are the categories of schedule 1 banks

Answer 15

Full-services banks (e.g., The Big Five, National Bank,
Laurentian Bank, Canadian Western Bank)
 Consumer-oriented institutions (e.g., Canadian Tire
Bank, Simplii Financial)
 Niche players (e.g., Exchange Bank of Canada,
HomeEquity Bank)

Question 15

what are schedule I banks?

Answer 15

re domestic and Canadian-owned
institutions, not subsidiaries of any foreign bank

Question 16

what are schedule II banks?

Answer 16

Owned and controlled by a foreign parent bank and
act as a subsidiary.
 Focus on commercial loans to businesses rather than
on retail banking services to individuals.
 Loan size is based on the capital base of the
subsidiary rather than on their parent bank, with
limited ability to extend large loans.
 Lacking extensive branch systems, they largely seek
deposits from corporations rather than individualsBesides accepting deposits, Schedule II banks often
raise added funds through the issuance of financial
papers in the money market.
 Examples: HSBC Bank Canada (UK), Bank of China
(Canada) (China), ICICI Bank Canada (India),
Shinhan Bank Canada (South Korea), Bank of Tokyo-
Mitsubishi UFJ Canada (Japan), Amex Bank of
Canada (USA)

Question 17

what are schedule III banks?

Answer 17

Schedule III banks are branch offices that represent foreign
banks in Canada.
 27 full-service branches: Capital One Bank (Canada
branch), Wells Fargo Bank, National Association (Canada
branch), Mizuho Bank Ltd (Canada branch) and Barclays
Bank PLC (Canada branch)
 3 lending branches: Credit Suisse AG (Toronto branch),
Union Bank of California N.A., Natixis.
 Are distinguished as lending branches and subject to
restrictions under subsection 524 (1) of the Bank Act.
 Are prohibited from accepting deposits or otherwise
borrowing money except from financial institutions.Not incorporated under the Bank Act but are authorized to
branch directly in Canada with some restrictions (e.g., can
only accept deposits over $150,000).
 Major function is to promote the services of the foreign
bank and act as a liaison between the foreign bank and its
clients in Canada.
 Operate within large cities under the name of their parent
institutions, who are permitted to carry on business in
Canada

Question 18

when was the above bank legal system discountinued?

Answer 18

2001

Question 19

what is a schedule I bank NOW

Answer 19

Voting shares of large Schedule I banks must be widely
held, subject to rules that restrict the control of any single
shareholder to no more than 20%.

Question 20

what is a medium-sized bank?

Answer 20

A single shareholder can own up to 65% of the voting
shares of a medium-sized bank (equity >$12 billion),
provided that the remaining shares remain publicly traded

Question 20

what do large banks focus on?

Answer 20

Large banks usually engage in both retail and wholesale banking, often
focusing on the wholesale side of the business
-full lines of business

Question 21

what is a small bank?

Answer 21

A small bank (equity >$2 billion) can be owned by one individual

Question 21

what do small banks focus on?

Answer 21

Small banks typically focus on the retail side. -nice markets

Question 22

what is interest rate spread?

Answer 22

is the difference between lending and deposit rates

Question 23

what is net interest margin?

Answer 23

is interest income minus interest expense divided by earning assets

Question 24

what is return on assets?

Answer 24

is net income divided by assets

Question 25

what is return on equity?

Answer 25

is net income divided equity.

Question 26

what are the 4 principal earning assets of a bank balance sheet?

Answer 26

-Canadian securities -business loans -mortgages -personal loans

Question 27

what are the 2 major liabilities on a banks balance sheet?

Answer 27

deposits and borrowed funds (94.5%)

Question 28

banks are highly leveraged and hold very little equity (true or false)

Answer 28

true

Question 29

what are the reasons for the strong performance measures of the Canadian banking industry?

Answer 29

Lower interest rates make debt cheaper to service and keep many households and small firms borrowing.  Lower interest rates make home purchasing more affordable, and housing market booms throughout the period.  Development of new financial instruments (e.g., credit derivatives) helps banks shift their credit risk to others.  Improved information technologies lower banks’ operating and transaction costs

Question 30

how safe is the Canadian banking sector?

Answer 30

The Canadian banking sector is one of the safest in the world

Question 31

what are transaction deposits?

Answer 31

sum of noninterest-bearing demand deposits and interest-bearing chequing accounts.  Deposits can be withdrawn without notice.

Question 32

what are non-transaction deposits? and what do they include?

Answer 32

deposits are core funding that include the following:  Personal savings accounts  Personal fixed-term deposits (e.g., GICs)  Large time deposits (e.g., BDNs)  Money market deposit accounts  Non-transaction deposits require notification before withdrawal; otherwise, no access.

Question 33

what are non-deposit liabilities?

Answer 33

(borrowed funds)  Overnight funds purchased (i.e., interbank borrowings)  Purchase and resale agreements  Notes and bonds

Question 34

what generates the most revenue for banks?

Answer 34

Loans

Question 35

what is required to act as a buffer against losses?

Answer 35

Minimum levels of equity capital are required to act as a buffer against losses.  Common and preferred stock, retained earnings Loan loss reserve account  Recognition of expected bad loans for the period

Question 36

what is the primary asset of the banking security?

Answer 36

Loans and investment securities continue to be the primary assets of the banking industry

Question 37

what do investment securities do for banks?

Answer 37

Investment securities generate revenue and provide banks with liquidity

Question 38

why are cash assets held?

Answer 38

Cash assets are held to meet target reserve requirements and to provide liquidity

Question 39

what are other assets for the banks?

Answer 39

Other assets include premises and equipment, other real estate owned, etc

Question 40

Commercial banks engage in many fee-related activities that are conducted off the balance sheet. they are:

Answer 40

Guarantees such as letters of credit involve future commitments to lend.  Derivative transactions such as futures, forwards, options, and swaps

Question 41

Off-balance-sheet assets, When an event occurs,

Answer 41

this item moves onto the asset side of the balance sheet or income is realized on the income statement.

Question 42

what is interest rate risk that commercial banks face because of their asset structure?

Answer 42

the risk that interest rate changes erode profitability or net worth; requires capital adequacy management

Question 42

off-balance-sheet liabilities, When an event occurs,

Answer 42

this item moves onto the liability side of the balance sheet or an expense is realized on the income statement

Question 42

what is credit (default) risk that commercial banks face because of their asset structure?

Answer 42

the risk that loans are not repaid; needs asset management with risk control.

Question 43

what is liquidity risk that commercial banks face because of their asset structure?

Answer 43

the risk that depositors will demand more cash than banks can immediately provide; requires liquidity management

Question 44

what do credit, liquidity and interest rate risk all contribute to?

Answer 44

a commercial bank’s level of insolvency risk

Question 45

in the past ten years, total amount spent on technologies was

Answer 45

$84.5 billion

Question 46

what are 6 Technology-led improvements in banking services since 1961?

Answer 46

1961: Computerized drive-in teller windows by RBC  1967: Telephone banking by CIBC  1986: National ABM network (Interac) by RBC and CIBC  1996: Internet banking by BMO  2016: Fingerprint and facial recognition payment by BMO  2016: EyeVerify, VocalPassword, and In-App Secure Chat by Tangerine

Question 47

how are future performance affected by the extent to which banks adopt new technologies?

Answer 47

Loans are the primary activity of banks and are also one of the banking products most susceptible to disruption Marketplace lenders and rigid regulations kill banks

Question 48

what is disintermediation:

Answer 48

: firms go directly to financial markets to raise finds, bypassing banks

Question 49

how is retail banking consumer-oriented?

Answer 49

Focus more on the individual or small business.  Residential and consumer loans are funded by accepting small deposits.

Question 50

how is corporate banking commercial-oriented?

Answer 50

Commercial and industrial loans often funded with purchased funds, foreign deposits, and brokered deposits.  Serve larger clients or organizations (e.g., pension funds, governments) with a complete array of corporate financial activities mostly offered by Schedule II and III banks.  Rely heavily on non-deposit or borrowed sources of funds, often borrowed in the inter-bank money market to manage liquidity risk

Question 51

how is Canadian banking fully integrated with universal banking?

Answer 51

Banks provide a wide variety of financial services (commercial and investment) within one entity.  Services include regular banking activities, investment banking services, foreign exchange, cash management, and even insurance selling.  Canada has a British-style universal banking model with a parent-subsidiary structure.  Banks are prevented from retailing of insurance products

Question 51

what are the issues involved in expansion of product powers?

Answer 51

safety and soundness  economy of scale and scope  conflict of interest  deposit insurance  regulatory oversight  competition

Question 52

can expansion be domestic or international?

Answer 52

both In Canada, no branching restriction for domestic banks, but certain constraints are applied to Schedule II and III banks.

Question 53

the attractiveness of a geographic expansion depends on the following what 3 things?

Answer 53

regulation and the regulatory framework  cost and revenue synergies  firm- or market-specific factors

Question 54

what are the advantages of international expansion?

Answer 54

risk diversification  economies of scale  innovations  funds source  customer relationships  regulatory avoidance

Question 55

what are the disadvantages of international expansion?

Answer 55

information/monitoring costs  nationalization/expropri ation  fixed costs

Question 56

how did the 2008-2209 financial crisis impact the banks?

Answer 56

banks saw losses that were magnified by illiquid markets The largest banks in the Netherlands, Switzerland, and U.K. had net losses in 2008.  Banks in Ireland, Spain, and the U.S. were especially hard hit because they had large investments in mortgages and mortgage-backed securities.  Many European banks averted outright bankruptcy thanks to direct support from their central banks and national governments.