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26.2 The Canadian Banking System - Coggle Diagram
26.2 The Canadian Banking System
Commercial Banks in Canda
profit-maximizing private corporation
characteristics
invest in gov. securities (short term bonds like Treasury bills and longer-term bonds
hold deposits for their customers
permit certain deposits to be transferred electronically or by cheque from an individual account to other accounts in same or other banks
Provision of Credit
credit is lifeblood of economy
– seen with households making large purchases, or firms requiring credit to finance their operations
banks are financial intermediaries in credit market – banks borrow (accept deposits) and lend (provide credit)
the economy runs on credit, loans for investment
; even though it can be easily overlooked,
credit freeze of 2008 crisis shows how important credit is too economy
Interbank Activities
pooled loans to large companies - loans offered by group of banks
includes credit cards (Visa, Mastercard, etc.), debit cards and online transfers
interbank debts are settled through
clearing house system
– arises from transfer of cheques b/w banks; net difference accomplished by change in deposits at BOC
Banks as Profit Seekers
seek to make profits through the variety of services they provide i.e deposits, return on savings, etc.
liabilities
→
deposits
owed to its depositors (
taking money out of bank
); principle
assets
are
securities
they own (
money in bank
) which pay interest; ALSO ASSETS INCLUDE interest-earning
loans
earn profits through
borrowing $ for less than it lends
the wealth-management and investment services they provide to their customers
The Canadian Banking System
Basic Functions of the Bank of Canada
Regulate Financial Markets
commercial banks borrow short-term and loan long-term, thus an increase in i-rate squeezes them - overnight market
prevent panic and bank failures
Regulator of Money Supply
printing money - only done as a reaction in Canada
Banker to Federal Gov.
G borrows money by selling short term T-bills or long term G-bonds
– BOC credits the G's account with the amount of purchase
G has "checking acct" at BOC
Banker to Commercial Banks
lender of last resort to Banks, at bank rate
settle accounts – Banks transfer funds b/w accts
reserves = include Bank's "checking accts" at BOC
The Bank of Canada
joint-responsibility = day-to-day independence from Cabinet but ultimately accountable to Cabinet
its organization is designed to keep operation of monetary policy free from day-to-day political influence
central bank = gov.-owned and gov.-operated institution that is sole money-issuing authority; banks of commercial banks and gov.
commercial banks = financial intermediaries that accept deposits and create deposit money including charter banks, trust companies, credit unions and causes populaires
Commercial Banks' Reserves
Purpose: held by Banks to meet demands on deposits
bank run:
more depositors wish to withdraw deposits than there are reserves; happens when public loses confidence in banks
Methods to avoid bank runs
reserves
:
BOC can induce an increase in reserves and avert a run on banks by loan money or OMO (Open Market Operations
); loan money directly to banks on overnight market (affecting I-rates) OR OMO → buy securities from Bank (affecting credit)
CDIC: Canada Deposit Insurance Corporation
insures deposits in one account to $100k
Problem
: incentive for bank to pursue riskier investments - i.e "heads the depositor wins, tails the taxpayer loses"
Narrow Banking:
Banks restricted to safe loans; NEVER IMPLEMENTED YET; why not? cause of meltdown? size of banks and risk regulated
Target and Excess Reserves
Canadian bank system is a fractional-reserve system
→ a banking system in which commercial banks keep only a fraction of their deposits in cash or on deposit with the central bank
reserve ratio
→ bank's fraction of deposit liability held in cash or BOC deposits
target reserve ratio
→ the fraction a banks' deposits it would
ideally
like to hold as reserves; generally not constant over time
excess reserves
→ any reserves in excess of target level
OVERALL, commercial banking revolves around confidence and risk;
depositors having confidence in banks safely investing their money and banks recognizing risks involved in giving out loans