Chapter 11

How did new tech cause banks traditional activities to decline in balance-sheet importance?

-> Easier to 1. screen out bad from good risks without the assistance of banks 2. issue long-term debt securities in the junk bond market 3. Raise funds by issuing short-term debt securities

Why have banks been losing income advantages on their assets in recent years

1. -> Growth of commercial paper -> Development of jun bond market Means corporation can issue bonds thus eroding competitive advantage for lending from banks 2. Securitization has enabled other financial institutions to originate loans

Why have banks been losing cost advantages in acquiring funds?

1. Rise in inflation --> Higher interest rates on alternatives to CDs. 2. Money market mutual funds mean banks lost deposit accounts

Which decade had the largest average yearly growth in money market investment funds?

1990 - 2000 1.52 % yearly

How does the most 2014 - 2013 growth compare to the highest average yearly growth (1990 - 2000)

2013 - 2014 is -0.12% growth rate which is small than 1990 - 2000

Contrast Schedule 1, Schedule 2 banks, trust company and credit union

A) 1 and 2 have same powers. 1 must be widely held where as 2 may not be if small. B) Credits unions accept funds and lend funds only to their members Credit unions are not directly covered by the CDIC (covered by government agencies) C) Assets portfolio for trust and credit mostly made up of RESIDENTIAL MORTGAGE Assets portfolio for banks made up mostly of COMMERCIAL AND INDUSTRIAL LOANS

Commercial baking industry in Canada is less competitive than US because Canada only has few large banks vs US has 6500. True or False?

False. Does not mean it is more competitive. Reason for large number of banks is the existence of anticompetitive regulations which restrict the number of branches and limit the provision of some services.

Describe how the 2001 Bank Act Reform attempted to introduce more competition

Introduced holding company structure New ownership rules Expanded access to the payments and clearance system New opportunities for strategic alliance and jv

When did assets start entering money Market funds and how much was it worth?

January 1977 $58 million

If a bank at which u keep your chequing account is owned by foreigners should you be worried it is less safe?

No. Foreign banks are subject to same regulations as the Canadian-owned banks

Regulatory agency responsibility for supervising TRUST AND LOAN COMPANIES

OFSI and provincial banking authorities

Regulatory agency responsibility for supervising CHARTERED BANKS

Office of the Superintendent of Financial Institutions, Bank of Canada and CDIC

Regulatory agency responsibility for supervising CREDIT UNIONS

Provincial banking authorities

How sovereign loans in 1970s and early 1980s caused problem for the Big 6

Recession hit Argentina Brazil, Mexico and Peru threatened to default on their loans Banks let them service there debts Led to debt conversions schemes (debt-debt swaps, debt-currency swaps)

Explain how securitization can be used to change illiquid assets into liquid assets?

Securitization: Transforms illiquid assets into marketable securities for trade in the capital markets 1. Bundle portfolios of illiquid assets and sell third party making it liquid

Explain how the early development of chartered banks in Canada differed from the development of commercial banks in the US

Small number of chartered banks in Canada Large number of chartered banks in US Due to restrictive state-branching regulations that prohibited branching across state lines and led to a large number of banks in US

What incentive do Canadian regulatory agencies have o encourage the establishment of foreign banks in Canada?

To introduce new competition into the Canadian financial services industry

If inflation had not risen in the 1960s and 1970s, the banking industry might be healthier today. True or False

True. Higher interest rate led to disintermediation process --> created money market mutual funds + Information tech eroded income advantages on the assets side --> led to decline in the banking industry

The invention of the computer is the major factor behind the decline of the banking industry. True, false or uncertain

Uncertain. Benefit: -> lower transaction costs and costs of collecting information. Con: Leads to other corporations to bypass banks and borrow directly from securities markets Loss of cost advantages for banks in acquiring funds due to inflation