1、Chapter 10Banking Industry: Structure and Competition 2005 Pearson Education Canada Inc.Historical Development of the Banking Industry 2005 Pearson Education Canada Inc.2Financial InnovationInnovation is result of search for profitsResponse to Changes in DemandMajor change is huge increase in intere

2、st-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 banking facilities

3、3.Junk bonds4.Commercial paper market5.Securitization 2005 Pearson Education Canada Inc.3Avoidance of Existing RegulationsRegulations Behind Financial Innovation1.Reserve requirementsTax on deposits = i r2.Deposit-rate ceilingsAs i , loophole mine to escape reserve requirement tax and deposit-rate c

4、eilingsExamples1.Money market mutual funds2.Sweep accounts4 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Decline in Traditional BankingLoss of Cost Advantages in Acquiring Funds (Liabilities) i then disintermediation because1.Deposit rate ceilings 2.Money market mutual funds3.Forei

5、gn banks have 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

6、2005 Pearson Education Canada Inc.5Banks ResponseLoss 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 activities3.Creates problems f

7、or regulatory systemSimilar problems for banking industry in other countries6 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.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 bank

8、s are 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 C

9、anada Schedule I, Schedule II, and Schedule III Banks7 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Canadian Chartered Banks8 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Schedule I banks and big Schedule II banks (those with over $5 billion in equity capital) mus

10、t be widely held: no individual can own more than 10% of any class 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 h

11、ave to be at least 35% widely heldPermitted Ownership Structure9 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.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

12、, other than a bank, may own 100% of a bank Schedule II banks can add branches to their initial branch only with ministerial approvalSchedule III banks can branch directly into Canada, following authorization by the Minister of Finance (Continued)10 2005 Pearson Education Canada Inc.Pearson Educatio

13、n Canada Inc.As of October 2002, there were 68 chartered banks in Canada and around 8000 in the United StatesThe presence of so 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 beca

14、use a large bank capable of driving them out of business was often restricted from opening a branch nearbyIt was easier for a bank to open a branch in a foreign country than in another state in the U.S. Comparison with the U.S.11 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Structu

15、re of the Commercial Banking Industry in the United States12 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Ten Largest U.S. Banks13 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Branching Regulations in the U.S.Branching Restrictions: McFadden Act and Douglas Amendm

16、entVery 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 corporate structure for banks2. Automated Teller MachinesNot considered to be branch of bank, so networks

17、 allowed14 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Competition Across All Four Pillars and ConvergenceUntil recently, Canadas financial services industry was regulated by institution (banks, securities, insurance, and real estate). This approach to regulation has been known as

18、 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 15 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.

19、Bank ConsolidationBank 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.Banking institutions will become not

20、only larger, but increasingly complex organizations, engaging in the full gamut of financial service activities 16 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Bank Consolidation:Pros and ConsBank Consolidation: A Good Thing?Cons:Rush to consolidation may increase risk takingFear o

21、f decline of small banks and small business lendingPros:Community banks will surviveIncrease competitionIncreased diversification of bank portfolios: lessens likelihood of failures17 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Trust and Mortgage Loan Companies (TMLs)RegulatorsOper

22、ate under a charter 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 sub

23、ject to provincial legislation, even if the company is federally incorporated CDIC and QDIB (for Qubec TMLs) 18 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Credit Unions (Outside Qubec)RegulatorsEach each province has a central credit union, owned by the member credit unions, prov

24、iding financial services to member credit unions 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 c

25、overed by a provincial stabilization fund (on terms similar to the CDICs)19 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.(Qubec) Caisses populaires Caisses populaires are organized into 11 regional federations that belong to the Confdration des caisses populaires et dconomie Desjar

26、dins du Qubec, which has a similar structure to the provincial central credit 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 2

27、0 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Government Savings InstitutionsProvince 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 branche

28、s in 240 communities across Alberta, operating in three target markets: individual financial services, agricultural operations, and independent business21 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.International Activity of the Big Six22 2005 Pearson Education Canada Inc.Pearson

29、Education Canada Inc.Largest Banks in the World23 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.Financial Services Reformfor the 21st CenturyBank Holding CompaniesThe Permitted Investment RegimeNew Ownership RulesAccess to the Payments and Clearance SystemMerger Review Policy24 2005

30、 Pearson Education Canada Inc.Pearson Education Canada Inc.Advantages of the Holding Company Form of OwnershipAllows banks to engage in other activities related to banking (i.e., provision of investment advice, data processing and transmission services, leasing, and credit card services) Allows for

31、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 flexibility to achieve economies of scale and scope through strategic partnerships, alliance

32、s, and joint ventures 25 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.The Permitted Investment RegimeThe new legislation provides greater flexibility for bank involvement in the information technology area - i.e., the Internet and wireless technologyImplications:Although bank invol

33、vement 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 technological advances that are already taking place26 2005 Pearson E

34、ducation Canada Inc.Pearson Education Canada Inc.New Ownership RulesThe 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 Increases the limit a single shareholder c

35、an 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 bank subsidiary under the BHC

36、 at the same time 27 2005 Pearson Education Canada Inc.Pearson Education Canada Inc.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 bi

37、llion 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. 28 2005 Pearson Education Can

38、ada Inc.Pearson Education Canada Inc.Access to the Payments and Clearance SystemThe 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 taking financial institution