Lecture 3: other lending institutions

Question 1

what is a trust company?

Answer 1

A depository institution also serving as a corporate
trustee with two distinct roles

Question 2

what are the 2 distinct roles of trust companies?

Answer 2

 intermediation function by accepting deposits and
making loans (mainly mortgages)
 fiduciary function by providing estates, trusts and
agencies business (i.e., administering assets it does
not own)

Question 3

when did the first Canadian trust company arise?

Answer 3

1843

Question 3

Trust companies and mortgage loan companies are founded as:

Answer 3

separate kinds of institutions in Canada

Question 4

when did the trust industry undergo major changes

Answer 4

1960s

Question 5

Legislative reforms over the years allowed

Answer 5

banks and
insurance companies to own trust companies
E.g., TD acquired Canada Trust in 2000 to form TD
Canada Trust.
 Most are subsidiaries of banks and insurers;
independent ones are a small portion

Question 5

What filled the need as banks were long precluded from offering residential mortgages

Answer 5

mortgage loan companies (MLCs)

Question 6

how do clients do not want to manage their day-to-day finanaces benefit from using a trust company?

Answer 6

as one-stop shopping

Question 7

MLCs and trust companies are together known as

Answer 7

trust and loan companies (TMLs), one of the four pillars in Canadian financial services industry up to the mid 1980s

Question 8

what do TMLs do?

Answer 8

take deposits and primarily make residential
mortgage loans, but also make loans for commercial
properties

Question 9

how do TMLs fund their assets?

Answer 9

with chequable and savings
deposits, term deposits, GICs and debentures

Question 10

“Borrowing short and lending long” easily exposes TMLs to what 2 types of risks?

Answer 10

to interest rate risks and liquidity risks

Question 11

what are the two cooperative
banks that focus on servicing their members only in Canada?

Answer 11

credit unions (people’s banks) and caisses
populaires (savings banks)

Question 12

to properly address issues, TMLs must have what 3 properties?

Answer 12

adequate amount of liquid assets associated with their
cash flows and lending practices
 contingency plan in place for funding requirement
 timely statement of risk assessment results to be
reported to the OSFI

Question 13

when was the credit union first established?

Answer 13

at St. Francis Xavier
University in Antigonish, Nova Scotia in the late 1920
following people’s bank movement during the 19th
century.

Question 14

what are credit unions and caisses populaires?

Answer 14

are local
alternatives to savings and borrowing institutions

Question 14

when was the fist caisses populaires established?

Answer 14

in Levis, Quebec
by Desjardins in 1900 following the mutual savings
bank movement in Europe during the 18th century

Question 15

how can a credit union or caisses populaire be set up?

Answer 15

by a handful of members with a minimum share capital
contribution from each member between $5 and $25

Question 16

what are 3 of the largest credit unions (excluding Quebec)?

Answer 16

Vancity
 Coast Capital Savings Credit Union
 Meridian Credit Union

Question 17

how many credit unions and caisses populaires are there?

Answer 17

Currently, there are 241 credit unions and caisses
populaires outside Quebec and 271 under the Desjardins Group in Quebec
(The importance of these institutions varies from province to province.)

Question 18

what are the 5 advantages of a cooperative structure that provides
services to members:

Answer 18

 earn higher interest rates than big banks, but not as
high as Tangerine and EQ Bank
 pay lower transaction fees
 get discounted rates for personal loans, mortgages
 have superb customer services with personalized
attention
 stronger support from local entities for community
developments

Question 18

what is membership based on in a credit union and caisses populaire?

Answer 18

based on a shared “common
bond of association” such as being in the same industry,
trade union or community

-This common bonding requirement has restricted the
growth of these institutions.

Question 19

what are the 5 disadvantages to this cooperative strucuture?

Answer 19

 common bond membership is required, which typically
involves a cost such as equity share purchased
 fewer financial products offered
 limited accesses with fewer branch locations to
confined areas
 technology deficiencies
 benefits may not be shared equally by members

Question 20

With no pressure from shareholders, credit unions and caisses populaires report to

Answer 20

their members, who are part
owners.

Question 21

are profits their primary goal?

Answer 21

Profits (measured by return on assets, ROA) are not necessarily their primary goal

Question 22

With simpler financial structures and democratic management styles, they just need to have sufficient _____

Answer 22

capital to cover financial and operational risks

Question 23

how do these institutions make money?

Answer 23

from transaction fees, interest on loans, mortgages and credit cards paid by their members.

Question 24

Although they will likely remain small compared to other financial institutions, what has contributed toward their growth and popularity?

Answer 24

their cost advantages

Question 25

They have become more important in bank mergers with branch closures in :

Answer 25

small towns and remote communities in Canada

Question 26

what do credit unions concentrate on?

Answer 26

providing their members with consumer loans that are funded by members’ shares rather than deposits.  Emphasize the provision of credit facilities for the “little man.”

Question 27

what do Caisses populaires emphasize?

Answer 27

residential mortgage lending and deposit taking.  Encourage the habit of savings

Question 28

why might each local entity may have its own financial problems

Answer 28

Due to various operating scales

Question 29

how do credit unions help eachother?

Answer 29

a three-tier structure is formed by local credit unions, provincial credit union centrals and the Canadian Credit Union Association (CCUA).

Question 30

what is the CCUA?

Answer 30

 The CCUA is the national credit union trade association acting as a central bank for credit unions.  All provinces outside Quebec have credit union centrals with which local credit unions are affiliated.

Question 31

what is the organizational structure of a caisses populaire?

Answer 31

The system in Quebec is slightly different but also includes three tiers.  Local caisses populaires are organized into eleven federations belonging to the Desjardins Group.  As this group consists of other financial and service organizations, the complex structure makes it difficult to differentiate their individual functions.  Besides acting as a central bank, the entire group serves as a regulator for system stability

Question 32

how are credit unions and caisses populaires regulated?

Answer 32

most at the provincial/territorial level

Question 33

what are regulators responsible for?

Answer 33

Regulators are responsible for ensuring these institutions follow sound financial practices and submit annual financial statements with external auditors.  Each institution is visited by the regulator once a year

Question 34

each province has legislation to define the statutory liquidity for a credit union to maintain at its _____

Answer 34

central credit union

Question 35

are Credit unions and caisses populaires directly covered by the Canada Deposit Insurance Corporation (CDIC

Answer 35

no - Each provincial/territorial government has an agency providing deposit guarantees.  Funds are protected at varying levels by provincial and territorial agencies.  Effective June 2019, the Financial Service Regulatory Authority (FSRA) of Ontario has replaced the Deposit Insurance Corporation of Ontario (DICO).

Question 36

what does FRSA protect?

Answer 36

depositors of Ontario credit unions and caisses populaires from loss of their deposits up to $250,000

Question 37

Deposits in registered account (e.g., RRSP, RRIF, TFSA) are insured with

Answer 37

no maximum.  Other terms are quite similar to the CDIC’s

Question 38

All credit unions incorporated in Ontario are required by legislation to be insured by

Answer 38

FSRA.  Each member is required to display a blue-coloured official decal to confirm its status

Question 39

what are finance companies now known as in Canada?

Answer 39

non-depository credit intermediaries

Question 40

what do finance companies do?

Answer 40

Like banks, they offer lending services such as mortgages, loans, equipment leasing and credit cards, but no depository function They act as intermediaries in the money market by borrowing in large amounts but often lending in small amounts, unlike banks.  Although they lend to many of the same customers as banks, they are virtually unregulated

Question 41

what are finance companies in Canada dominated by?

Answer 41

unregulated institutions that are subsidiaries of US- based firms.  E.g., Ford Credit Canada is the financing arm of the US automobile manufacturer

Question 42

explain finance companies history

Answer 42

The history of finance companies can be traced back to the 1800s.  Retail firms allowed installment credit, which increased their sales, generated more profit, and created a market for finance companies

Question 43

what are banks interaction with finance companies?

Answer 43

Compete with finance companies for consumer loan business (including credit cards), commercial loans and leasing

Question 44

what are credit unions interaction with finance companies?

Answer 44

Compete with finance companies for consumer loan business

Question 45

what are securities firms interaction with finance companies?

Answer 45

Underwrite bonds that are issued by finance companies

Question 46

what are pension funds interaction with finance companies?

Answer 46

Compete with insurance subsidiaries of finance companies that manage pension plans

Question 47

what are insurance companies interaction with finance companies?

Answer 47

Compete directly with insurance subsidiaries of finance companies

Question 48

what are sales finance institutions?

Answer 48

specialize in loans to customers of a particular retailer or manufacturer  E.g., Ford Credit Canada, GE Capital

Question 49

what are personal credit institutions?

Answer 49

specialize in installments and other loans to consumers  E.g., Easyfinancial, iCash

Question 50

what are business credit institutions?

Answer 50

specialize in business loans, especially through equipment leasing and factoring  E.g., Hitachi Capital Canada

Question 51

how do personal credit institutions make loans to risker customers?

Answer 51

make loans at higher interest rates than banks

Question 52

what are subprime lenders?

Answer 52

are finance companies that lend to subprime borrowers, accepting items not taken by banks for collaterals and charging unfairly exorbitant rates  E.g., may accept cars and charge more than 60% annually

Question 53

who owns personal credit institutions?

Answer 53

often owned by a manufacturer who uses them to make loans to consumers interested in purchasing its goods

Question 54

what do payday lenders provide?

Answer 54

provide short-term cash advances that are often due when borrowers receive their next paycheque.  80 companies are listed in Canada.  Effective January 1, 2018, the maximum total cost of borrowing for a payday loan is $15 per $100 advanced for two weeks.

Question 55

are finance companies subject to the bank act or CDIC?

Answer 55

no as they do not accept deposits -much lower regulatory burden than depository institutions

Question 55

what are the 5 advantages that business credit institutions have over banks?

Answer 55

They are not subject to regulations that restrict the type of products and services they can offer.  They do not accept deposits—accordingly, bank-type regulators do not monitor their behaviour.  They often have substantial industry and product expertise.  They are more willing to accept risky customers.  They generally have lower overhead than banks

Question 55

explain floor plan loans

Answer 55

Floor plan loans are common in the auto industry.  Finance company pays for the car dealership’s inventory from the manufacturer and puts a lien on each car on the showroom floor to secure the loans.  When a car is sold, the dealer must pay off the debt owed on it before the finance company will provide a clear title of ownership.  The dealer must pay the finance company interest on the floor loans until the inventory has been sold off.  Curtailment schedules vary by floor plan providers

Question 55

finance companies have strong profits for the largest firms because? and what is an example of one of largest firms

Answer 55

E.g., HSBC Finance, Associates First Capital, Beneficial  Effects of low interest rates

Question 55

what is the consumer protection act

Answer 55

Truth in leading legislation: disclose the APR charged  Usury statutes: set a ceiling on interest rates that can be charged on finance company loan  Bankruptcy statutes: eliminate debt and retain ownership of many assets

Question 55

what kinda risk do finance companies face?

Answer 55

credit, interest rate and liquidity risk

Question 55

do finance companies have a strong loan demand?

Answer 55

yes

Question 55

even with less regulatory scrutiny, finance companies must signal safety and soundness to capital markets in order to:

Answer 55

obtain funds.  Have a higher capital-to-total-asset ratio (8.60%) than banks (4.52%

Question 55

in terms of regulation, Sales finance companies may employ

Answer 55

default protection guarantees or borrow directly from parent company

Question 55

what is the primary asset of a typical finance company?

Answer 55

the loan portfolio

Question 55

what are finance companies in foreign countries?

Answer 55

finance companies are generally subsidiaries of commercial banks or industrials

Question 55

most successful finance companies have become ____

Answer 55

takeover targets  Citigroup: merged with Associates First Capital  Household International: merged with HSBC Holdings  CIT: merged with Laurentian Capital

Question 55

what are finance companies liabilities (source of funds)?

Answer 55

 Corporate papers (77%) having short maturities of 30 days or less  Debt consisting of longer-term notes & bonds (23%)  Finance companies rely heavily on issuing corporate papers (frequently through direct sale programs).  Corporate papers are short-term unsecured promissory notes sold by high credit quality corporations.  Have bank lines of credit as backup

Question 55

what are most canadian finance companies?

Answer 55

subsidiaries of US companies.

Question 55

what are the assets (use of finance company funds) of a finance company?

Answer 55

 Consumer loans (58.5%)  Business loans (28.7%)  Mortgages (12.8%)

Question 56

where are largest finance companies located?

Answer 56

US