User:CdnBankers/sandbox

Banking in Canada is widely considered the most efficient and safest banking system in the world, ranking as the world's soundest banking system for the past three years according to reports by the World Economic Forum. Released at October 2010, Global Finance magazine put Royal Bank of Canada at number 10 among the world's safest bank and Toronto-Dominion Bank at number 15. According to the Department of Finance, Canada’s banks have over 8,000 branches and almost 18,000 automated banking machines (ABMs) across the country. In addition, "Canada has the highest number of ABMs per capita in the world and benefits from the highest penetration levels of electronic channels such as debit cards, Internet banking and telephone banking".

Origins
Banking in Canada began to migrate in earnest from colonial overseas banking operations to a local banking system with the founding of the Bank of Montreal in 1817. Other banks soon began business and, after a lengthy approval process, began unregulated banking business. These institutions issued the only local currency notes until amendments in the British North America Act allowed federal and provincial governments to begin to introduce their own notes starting in 1866. Official Canadian currency took the form of the Canadian dollar in 1871, overriding the currency of individual banks. The establishment of the Bank of Canada in 1935 was also an important milestone in banking and monetary governance. “See full article, Early Canadian banking system”

Despite various loss events (such as the Latin American debt crisis, the collapse of Olympia and York, Enron-related liabilities, and the U.S. Subprime mortgage crisis), the big five banks have thus far proven to be safe and stable companies. For example, in securities prospectuses the Royal Bank of Canada says it has paid a common share dividend in every year since 1870, the year after it received its banking charter.

According to the Department of Finance, two small regional banks failed in the mid-1980s, the only such failures since 1923, which is the year Home Bank failed. There were no bank failures during the Great Depression compared to 9000+ in the US.

Recent History
In the 1980s and 1990s, the largest banks acquired almost all significant trust and brokerage companies in Canada. They also started their own mutual fund and insurance businesses. As a result, Canadian banks broadened out to become supermarkets of financial services. After large bank mergers were ruled out by the federal government, some Canadian banks turned to international expansion, particularly in various U.S. markets such as banking and brokerage. Two other notable developments in Canadian banking were the launch of ING Bank of Canada (which relies mostly on a branchless banking model), and the slow emergence of non-bank mortgage origination companies. A survey conducted by the World Economic Forum called the Global Competitiveness Report of twelve-thousand corporate executives, in 2008, concluded that Canada has the best banking system in the world, receiving a score of 6.8 out of possible seven.

Banks Operating in Canada
The banking industry in Canada is made up of 22 domestic banks, 26 foreign bank subsidiaries and 23 full-service foreign bank branches and six foreign bank lending branches operating in Canada. In total, these institutions manage close to $3.1 trillion in assets.

As major players in Canada's financial services industry, the banks serve millions of customers including individuals, small and medium-sized businesses, large corporations, governments, institutional investors and non-profit organizations.

The major domestic banks offer a full range of banking, investment and financial services. They have extensive, national bank branch networks and also are active in the United States, Latin America, the Caribbean, Asia and other parts of the world. Close to half of their earnings are generated outside of Canada.

Many large international banks have a presence in Canada — through a subsidiary, representative office or branch of the parent bank, most specializing in corporate and investment banking. A notable exception is HSBC Bank Canada, which has a strong retail presence with branches across Canada.

In everyday commerce, the banks in Canada are generally referred to in two categories: 1) the five large national banks and 2) smaller second tier banks (notwithstanding that a large national bank and a smaller second tier bank may share the same legal status and regulatory classification - see Safety and Soundness below.)

The five largest banks in Canada are:
 * Royal Bank of Canada
 * Toronto Dominion Bank
 * Bank of Nova Scotia
 * Bank of Montreal
 * Canadian Imperial Bank of Commerce

Notable second tier banks include the National Bank of Canada, Laurentian Bank of Canada, the Desjardins Group (technically not a bank but an alliance of credit unions). HSBC Bank Canada, and ING Bank of Canada. These second tier organizations are largely Canadian domestic banking organizations. Insurance companies in Canada have also created deposit-taking bank subsidiaries. For a complete list of institutions see: List of banks in Canada

The "Big Five" Banks
Unlike the smaller Canadian banks, the Big Five are not just Canadian banks, but are instead better described as international financial conglomerates, each with a large Canadian banking division. In fiscal 2007, RBC's Canadian segment called "Personal Financial Services" (the segment most related to what was traditionally thought of as retail banking) had revenue of only CAD$5,082 million (or 22.6%) of a total revenue of CAD$22,462 million. Canadian retail operations of the Big Five comprise other activities that do not need to be operated from a regulated bank. These other activities include mutual funds, insurance, credit cards, and brokerage activities. In addition, they have large international subsidiaries. The Canadian banking operations of the Big Five are largely conducted out of each parent company, unlike U.S. banks that use a holding company structure to hold their primary retail banking subsidiaries.

Brands used by the big five by major financial service*
* Marketing brands are shown rather than division names. For example, for internal and investor relation purposes, CIBC uses CIBC Retail Markets as a division name, but this does not normally appear in advertisements and does not feature prominently on account statements. Brand names are sometimes used across legal entities within a financial group. Intermediate umbrella brands (such as RBC Investments that includes the brands RBC Funds, RBC Action Direct, and RBC Dominion Securities) are not shown.

Canadian Banks and the Economy
The Canadian banking industry is a major contributor to the country’s economic growth - banks are leading taxpayers, progressive employers and major purchasers of goods and services from Canadian suppliers.

Some facts on banks’ contribution to Canada’s economy:
 * As of July 2010 banks directly employ 267,240 Canadians – up 11.5 per cent in the past 10 years.
 * Banks provide start-up and growth financing to more than 1.2 million Canadian small and medium sized enterprises (SMEs).
 * The banking industry is a major purchaser of goods and services from outside suppliers, spending $14.4 billion in 2010
 * Canada’s largest six banks paid $8.3 billion in taxes to all levels of government in Canada in 2010.
 * Canada’s banks provided $10.3 billion in dividend income to millions of Canadians in 2010.
 * The banking sector generated over $55 billion or 3.4 per cent of gross domestic product (GDP) in 2010.

Canadian banks continue to invest in new technology to allow clients to bank whenever and however it suits them, and customers have access to more than 58,000 ABMs and more than 630,000 Interact Direct Payment terminals. Canadians can conduct transactions in a variety of ways including: online, mobile, ABM and telephone banking as well as traditional in-branch services. From 1996 to 2009, the six largest banks invested $55.8 billion in technology to ensure an accessible, secure and convenient banking system.

Serving small and medium-sized business (SME)
The majority of bank business customers are small businesses and banks provide products and services that range from accounts and merchant payment processing solutions to payroll and international trade services.

Banks in Canada provide approximately 58 per cent of small business financing in Canada, with other sources including credit unions and caisses populaires, finance companies, insurance companies and venture capital/investment funds. The top three banking services that SMEs use at their main financial institution are deposit services (82 per cent), transaction accounts (59 per cent) and payments facilitation (51 per cent).

Banks as employers
Canada’s banks and their subsidiaries contribute significantly to employment and job creation. In 2010, banks in Canada employed 267,240 Canadians. Industry employment has increased by 11.5 per cent over the past ten years while full-time industry employment has increased by 21.5 per cent over the same period.

Canada’s banks have built workforces that reflect the diversity of the Canadian labour market. As of 2009, close to 70 per cent of the banks’ workforce was comprised of women and 25 per cent of all bank employees were visible minorities.

In 2009, just over 2,500 aboriginal people and more than 6,800 people with disabilities were bank employees. Banks are currently engaged in a number of initiatives to increase representation and advancement in employment of aboriginal people and people with disabilities.

Banks as international competitors
Canadian banks are successful exporters, with banks’ foreign operations contributing significantly to each bank’s bottom line. Approximately 29 per cent of bank income in 2010 was generated outside Canada.

Banks involvement in financial literacy
Banks and their employees work in communities across the country to provide consumers with information to make sound financial decisions. In addition to initiatives sponsored or led by the individual banks to promote financial literacy, the banks also jointly support a non-commercial in-class seminar called YourMoney, developed by the Canadian Bankers Association, which delivers basic money management information to senior high-school students in communities across Canada. Approximately 800 bankers volunteer their time to deliver this seminar, which has reached 200,000 students.

Canadian Banks and the Economic Crisis, 2007 – 2010
Emerging from the economic turbulence of the past few years, Canada’s banks have remained strong, contributing substantially to the economic recovery without requiring the taxpayer-funded bailouts that have occurred in many other countries.

Canada’s banks are well-diversified organizations; investment banks are anchored by solid deposit-taking institutions. This system of national financial institutions diversifies regional risk, so a downturn in an individual economic sector is balanced. And a national system contributes to economic growth by moving funds from areas of excess deposits to regions where growth is creating demand for new credit.

Prudential lending practices means banks make lending decisions on a case-by-case basis, extending credit to those who have the capacity to repay their loans. This prudent approach is the key reason why banks in Canada have largely avoided the problems that plagued banks elsewhere.

Banks in Canada are among the best capitalized in the world, exceeding Bank for International Settlements’ norms by significant margins. This allows banks to continue lending and provides a cushion against loan losses, which tend to increase during economic downturns. During the financial crisis, Canadian banks were able to strengthen their capital levels by raising new capital from investors in the marketplace, something banks in many other jurisdictions were unable to do.

Regulation
Canada's federal government has sole jurisdiction for banks according to the Canadian Constitution, specifically Section 91(15) of The Constitution Act, 1867 (30 & 31 Victoria, c.3 (UK)), formerly known as the British North America Act, 1867. Meanwhile, credit unions/caisses populaires, securities dealers and mutual funds are largely regulated by provincial governments.

The main federal statute for the incorporation and regulation of banks, or chartered banks, is the Bank Act (S.C. 1991, c.46), where Schedules I, II and III of this Act list all banks permitted to operate in Canada under these three distinct categories: Canada has a streamlined bank regulatory system with two primary regulators: the Office of the Superintendent of Financial Institutions (OSFI) for prudential regulation and the Financial Consumer Agency of Canada (FCAC) for consumer matters.
 * Schedule I: Banks allowed to accept deposits and which are NOT subsidiaries of a foreign bank. Examples include "The Big Five" banks (as mentioned above) and smaller second tier banks such as National Bank of Canada, Laurentian Bank of Canada, President's Choice Financial and Canadian Western Bank. Because the Schedule I banks are not subsidiaries of any foreign bank, they are the true domestic banks and are the only banks allowed to receive, hold and enforce a special security interest described and provided for under the Bank Act and known to Canadian lawyers and bankers as the Bank Act security.
 * Schedule II: Banks allowed to accept deposits and which are subsidiaries of a foreign bank. Examples include AMEX Bank of Canada, Citibank Canada, HSBC Bank Canada, ING Bank of Canada and Walmart Canada Bank. Like the Schedule I banks, the Schedule II banks are incorporated under the Bank Act.
 * Schedule III: Foreign banks permitted to carry on business in Canada. Examples include Bank of America, Capital One, Credit Suisse and Deutsche Bank AG. Unlike the Schedule I and Schedule II banks, the Schedule III banks are NOT incorporated under the Bank Act and they operate in Canada, usually within the country's largest cities (being Toronto, Montreal, Calgary and Vancouver), under certain restrictions mentioned in the Act.

Canada’s Bank Act is reviewed and updated every five years to ensure the regulatory structure is keeping pace with changes in the industry. Canada has been recognized by the International Monetary Fund and others for having a sound and effective regulatory system.

Bank Revenues and Profits
Revenues are the income generated from a business’ products and services before taxes and general expenses. Net income is left after all expenses and taxes are paid. The six largest banks’ net income in 2010 was $20.4 billion.

Where do bank revenues come from?




Being involved in a variety of businesses, banks have diverse revenue streams. This variety helps yield positive financial results, which makes for a secure and stable banking sector that contributes significantly to Canada’s economy.

Banks categorize their revenue into two broad areas based on how it is generated – interest income and non-interest or other income. As much as 55 per cent of bank revenues are earned mainly through lending activities in 2010.

Interest-based revenue is generated from what is known as the ‘spread’. The spread is simply the difference between the interest a bank earns on loans extended to customers and the interest paid to depositors for the use of their money. Banks extend loans to individuals to facilitate the purchase of homes, cars or vacations or to pay for an education. Loans to businesses facilitate purchases of new equipment or premises and allow for expansion into new markets. Interest income is also earned from securities the banks own, such as treasury bills or bonds.

Non-interest income accounted for 39.3 per cent of bank revenues in 2010. Banks earn this by providing a variety of value-added services, including trading of securities, assisting companies to issue new equity financing, commissions on securities and wealth management. Personal service fees for bank accounts make up about five per cent of total revenues. The fee for a particular service is based on the cost of providing it, staff time, technology and safety measures for any risks involved and the value-added benefit the customer receives.

Net income (income after taxes and expenses) is paid to shareholders and also put to use within the banks to do many things, including upgrading technology, training employees, expanding and improving products and services, and expanding the capital base of the institutions so the stability of the system is maintained.

Links

 * Bank Act, S.C. 1991, c.46, Department of Justice, URL accessed 2 November 2006
 * OSFI website, Office of the Superintendent of Financial Institutions, URL accessed 2 November 2006