Transcript Banking

Financial Institutions and
Banking
Canada’s Financial Institutions
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Chartered Banks
Trust Companies
Caisses Populaires
Credit Unions
Canadian Banking
• Banks are businesses
• Banks sell services and earn profits on these services
• Most of their revenue is earned by charging interest on
money they loan to consumers, businesses, and the
government.
• They invest a portion of the money customers deposit
into accounts and earn more interest than they pay their
customers.
• They also charge service fees depending on the type of
account you have with them and services they perform
for you
The Bank Act
• Canadian Constitution of 1867
gave the federal government
control over banking and money
which means the federal
government makes all laws and
regulations concerning banking
and money so all banks in
Canada operate under similar
rules
• An individual province or city can
not change the rules and allow
banks in their area do something
that the federal government
doesn’t allow them to do.
The Bank Act
• Outlines procedures for:
1. opening new banks;
2. forming mergers with other banks;
3. other details on what they can and can
not do
For example, banks must:
1. make regular reports to the federal minister of
finance
The Bank Act
• Every few years, the
federal government
reviews the Bank Act to
ensure it continues to
meet the needs of society
and the business
community
The Bank Act
• The government introduced new pieces of
legislation (bills) which go through the
legislative process to become new laws
that are added to the Bank Act.
Example:
• 1980 changes to the act allowed foreign
banks to operate in Canada for the first
time.
The Bank Act
• Established three classes of chartered
banks:
1. Schedule I
2. Schedule II
3. Schedule III
• The class to which a bank belongs is
determined by its ownership
Three Classes of Canadian Banks
Schedule I Banks
• Owned by Canadian
shareholders
• Shares are traded on the
major Canadian stock
exchanges
• Investors buy shares in
these banks in order to
receive a share of the
profits
• Canada has 19 Schedule I
banks.
• Examples include CIBC,
RBC, TD, BMO,
Scotiabank, Canadian Tire
Bank
Schedule II Banks
• Mostly foreign owned banks
but are controlled by a small
number of shareholders
• They don’t generally offer
shares to the public
• Have the same powers as
Schedule I banks, but the
government limits the total
number of branches they can
have and the total amount of
assets they can hold
• Examples include the Amex
Bank of Canada, the HSBC
Bank of Canada, ING Bank of
Canada
• Most focus on investment
banking and corporate
customers
Classes of Banks
Schedule III Banks
• Foreign bank branches with permission to
operate in Canada
• The Bank Act sets restrictions on these
banks
• Most offer investment banking and
corporate services
• Examples include Capital One Bank,
Deutsche Bank A.G., and Citibank
Branch Banking
Each Schedule I bank has a head
office on one of Canada’s cities
Head office is connected to thousands
of bank branches across Canada.
Branches are also in more than
40 foreign countries.
Bank of Canada
The Bank of Canada is
NOT:
1. A chartered bank
2. A bank where
consumers can
open up accounts or
borrow money
Bank of Canada
The Bank of Canada:
is the government’s bank;
issues Canada’s paper money
helps keep the Canadian economy as
stable as possible.
Bank of Canada
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How does it try to keep the Canadian economy as stable
as possible?
It regulates the money supply which is all the money in
circulation in the country.
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How does it regulate the money supply?
It raises or lowers the interest rate also referred to as the
bank rate or prime lending rate.
3.
What is the bank rate, also referred to as the prime
lending rate?
It is the interest rate the Bank of Canada charges for loans
it makes to the chartered banks (i.e. CIBC).
Chartered banks borrow very little and rarely from the
Bank of Canada.
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Impact of Interest Rates on the
Economy
• Raising or the lowering
of the Bank of Canada’s
prime lending rate
indicates that chartered
banks should follow suit
• Bank of Canada
announces its new
bank interest rate
several times a year
and it is always in the
news.
Impact of Interest Rates on the
Economy
Raising Interest Rates
• Makes it more expensive to
borrow money from the bank.
• Used to help keep inflation
from increasing too much to
quickly
• Results in less money
circulating in the economy and
people cut back on their
spending.
• Fewer dollars being spent
leads to a drop in demand for
goods and services, thus
helping to control inflation as
the price of goods does not
increase or at least as much as
it might if people have more
money to spend.
Lowering Interest Rates
• Makes it less expensive and
thus more attractive to borrow
money from the bank
• Results in more money
circulating in the economy and
encourages people to spend
more money
• More dollars being spent leads
to an increase in demand for
products and services which
helps businesses make more
money leading to more jobs for
society who have money to
spend. This cycle may then
lead to price increases.
Trust Companies
First established in the late 1800’s:
• Their purpose was to manage and invest funds entrusted
to them by customers
Today:
• They provide many of the same services as banks such
as providing chequing and savings accounts, and
providing loans.
• They assist customers with the purchase or sale of real
estate (property)
• They maintain trust accounts for charitable organizations
an minors
• Sometimes called “near banks.”
Who Governs Trust Companies
• The Bank Act does not
regulate trust companies.
• Each province and the
federal government
specify which types of
investments trust
companies can make with
their customer’s money.
Canada Deposit Insurance
Company (CDIC)
• The Canada Deposit Insurance Corporation (CDIC) is a
federal Crown corporation created by Parliament in 1967
to protect your deposits made with member financial
institutions in case of their failure.
• CDIC is NOT a bank.
• CDIC is NOT a private insurance company.
• CDIC automatically insures many types of savings
against the failure of a bank or financial institution that is
a CDIC member. However, not all savings are insured
and CDIC deposit insurance does not protect against
fraud, theft or scam.
CDIC
Products insured and not Insured by CDIC
See link:
• http://www.cdic.ca/e/coveredornot/covered
ornot.html
Caisses Populaires and Credit
Unions
• Organized and owned by a
group of people who agree to
pool and share their resources
• Members share a common
bond such as profession, place
of employment, geographic
area, cultural or ethnic
backgound.
• (i.e. Teachers Credit Union,
Niagara Credit Union)
Credit Union and Caisses
Populaires Services
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Receive Deposits
Lend money
Offer chequing services
Provide investment products like RRSP’s and GIC’s.
Offer competitive interest rates on deposits and loans
Focus on residential mortgages, consumer credit and
deposits.
• If you want to borrow money from a credit union or
caisses populaire, you must have a savings account with
them
Credit Union and Caisses Populaires
Characteristics
Provide services only to members and their families
To become a member, you must purchase at least one share of
the company
Each member has one vote regardless of how many shares you
own, when making collective decisions for the institution
Not-for-profit organization, thus all profits earned must be
returned to their members in the form of dividends or rebates at
the end of the year.
Depositor’s accounts are protected/insured through provincial legislation.
Insurance Companies
What are Insurance Companies?
• Financial institutions that insure
risks
• Provide money to cover the financial
costs should some kind of accident,
theft, or other loss happen
associated with what is being
insured
What types of insurance are there?
• Life and accident
• Car and home
• Drug and health
Factors influencing an individual’s
insurance needs:
• Age, marital status, children, home,
car and other personal items, risk
comfort level
Why Do Business’s Need Insurance?
Fire insurance
• To protect a business from losing everything in a
fire
Property or liability insurance
• Protects against an accident with an employee
or customer
Auto Insurance
• Allows companies to transport goods without
concern for being sued for an auto accident
Why Do Business’s Need Insurance?
Professional Insurance
• Protects physicians, dentists, and lawyers
from being sued for professional
misconduct or malpractice
Product Liability Insurance
• Protects against a lawsuit from a product
being faulty and/or injuring a customer
How Insurance Works
• Customers are call policyholders.
• The type of insurance one receives and
the extent of the coverage is called the
policy.
• Customers pay a determined amount of
money called a premium. ($120)
• Premiums are usually paid to the
insurance company on monthly basis.
How Insurance Works
• Premiums are determined based on a
number of factors including, but not
excluded to:
1. type of insurance
2. age
3. financial and scope of coverage wanted
4. previous insurance record and claims
5. risk level to the insurance company
How Insurance Works
• An insurance company has many policyholders each
contributing premiums
• The insurance company using the premiums of the many
to pay out the claims of a few.
• A major disaster can quickly cause an insurance
company to run out of funds to cover claims
• 911 caused a number of insurance companies to go
bankrupt as they were unable to meet all the claims from
business and individual loses.
• Insurance companies make most of their money from
taking premiums and investing.
Bank Accounts
• Bank accounts where you deposit money until
you need it are often referred to as deposit
accounts.
• Financial institutions offer different types of
deposit accounts depending on one’s needs.
• i.e. Savings account, chequing account, joint
account
• Interest rates vary from account to account and
from one bank to another
Opening and Accessing an Account
Step 1
Provide personal information
required
Step 2
Provide 2 pieces of identification
Step 3
Fill out a signature card
Step 4
Receive a bank card
Opening and Accessing an Account
Step 1
Personal information required:
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Full name;
Home address
Date of birth
Telephone number
Occupation, if applicable
Step 2
Identification:
• Student card
• Drivers license
• Passport
• Credit card
• Health card
Opening and Accessing an Account
Step 3
Signature Card:
• Provides a sample of
the signature you will
use when you deposit
and withdraw money,
write cheques, and
engage in other
financial transactions.
You will need to fill
out a signature card
Opening and Accessing an Account
Step 4
• Receive bank card that
can be used to conduct
financial transactions
such as at an Automated
Banking Machine (ABM)
• Can be used as a debit
card to make purchases
at a store and your bank
account will automatically
be deducted by the
amount of the purchase.
Account Statements and
Passbooks
• When you open an account, your account will be
assigned an account number for easy reference
of your keeping tack of your account activity
• Depending on the financial institution you may
receive a monthly, quarterly, or annual bank
statement reviewing all of your account activity.
• Activity would include deposits, withdraws,
service charges, interest received, cheques
cashed, etc.
Account Statements and Passbooks
• Passbooks which you update
at the bank or at an ABM,
provide you with a record of
all your financial activity
• Passbooks are seldom used
now, as customers can use
online and phone banking to
keep up with their account
activity.
Making a Deposit or Withdrawl
Using the ABM:
1. Use your bank card
2. Input your personal
identification number
(PIN) – like an
electronic signature
3. Follow the onscreen
instructions
4. Take a copy of the
receipt printed out
Enter PIN
Making a Deposit or Withdrawl
At the bank:
• Fill out a deposit slip
• Teller inputs
information
electronically
• You will either give
or receive money
from the teller
• The teller will give
you a receipt
Types of Common Bank Accounts
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Transaction accounts
Savings account
Transaction/Savings account
Current Accounts
5. Joint Account
Transaction Accounts
• Formerly called chequing accounts
• Transaction account is used to pay bills and for
purchasing goods and services with cash, cheques, or
debit cards
• May use an ABM, online banking or telephone banking
• You should receive a receipt of some sort which has
recorded the details of the transaction.
• Transactions records ensure you know how much money
is in your account.
• Most financial institutions do not pay interest on this type
of account
• Some institutions charge service fees depending on the
number of transactions per month and the balance in
your account
Savings Account
• Used by people who want
to save some money
• Banks will pay interest on
the balance of your account
• The interest paid is the
lowest interest rate
available compared to all
other types of investments.
• The amount of interest and
how it is calculated varies
from bank to bank.
• Some banks require the
customer to have a
minimum balance at the
end of each month – i.e.
$4000.00.
Transaction/Savings Account
• Allows you to pay bills but also to save money.
• A small amount of interest may be paid, but less
than what a savings account would pay
• Service charges may apply to processed
cheques, debit and withdrawls
• You may be exempt from some or all the service
fees if you maintain a minimum balance in your
account at the end of each month. (i.e. $3000)
Joint Account
• An account
(transaction, savings,
or the combination)
can be opened in the
name of two or more
people
• Withdrawls from joint
accounts may require
one or more
signatures, depending
on the wishes of the
people who opened
the account.
Current Accounts
Current Accounts
• Used by businesses
• Business must be registered with the
provincial or federal government
• Account must be in the business name
• No interest is paid on these accounts
• Bank charges a service fee for each
deposit, withdrawl and cheque that is
procesed
• Cancelled cheques (cashed cheques)
are returned to the business for their
accounting records at the end of each
month along with a bank statement
outlining the account activity for the
month.
• Business usually have a deposit book
with duplicate deposit slips for the
clients accounting records.
Cancelled Cheques
• A cheque a business or your wrote out for
someone, who then cashed the cheque at the
bank.
• The business or individual’s financial institution
will stamp the cheque with the date the money
was taken from the account.
• The institution will either return the cancelled
cheques to the issuer with a monthly statement
or provide photocopies of the cancelled
cheques, or store them for future reference.
• Cancelled cheque is legal proof of payment and
can be used to prove a payment was made.
Writing Cheques
Drawee – The name of the
financial institution would also be
present on the cheque
Payee
Amount in words
Date
Amount in Numbers
Drawer
Cheque Essentials
Date:
• The date, month and year the cheque can be cashed must be
present.
Staledated Cheques:
• Most financial institutions will not cash a cheque when the
date is six months after the date on the cheque.
Postdated Cheques:
• When someone writes a date on the cheque which is later
than the actual date.
• A financial institution will not cash a cheque until the date that
is actually on the cheque or after up to six months.
Cheque Essentials
Payee
• The name of the person or business to
whom the cheque is written – Pay to the
order of Bart Simpson.
• Be sure to spell the name of the payee
correctly, or s/he may experience difficulty
cashing it.
Cheque Essentials
Drawee
• This is the name of your financial institution (i.e.
CIBC)
Drawer
• The person from whose account the money will
be taken
• Must sign the cheque on the line on the bottom
right corner of the cheque.
• The signature should be the same as the one on
the drawer’s bank signature card.
Cheque Essentials
Stopping Payment
• If a cheque you have written gets lost or stolen,
you can notify your financial institution and tell
them you would like a stop payment on a
cheque.
• A form will then need to filled out with the details
of the cheque you would like the stop payment
on.
• The financial institution will charge you a fee for
this service.
Cheque Essentials
Holds on Cheques
• The bank may delay when you can collect the
money from a cheque you are cashing.
• Holds are done until the bank can ensure that
the person who issued you the cheque actually
has enough money in the bank to cash it.
• Any interest you may have earned while the
money was withheld from you will be added to
your bank account.
• Holds are often placed on cheques above a
certain value.
Cheque Essentials
NSF Cheque (Non-sufficient funds)
• When a cheque is cashed and the
financial institution learns that theperson
who wrote the cheque does not have
adequate funds in his/her bank account to
cover the amount.
• The person who cashed and wrote the
cheque will be charged a service fee for
NSF cheques.
Source
• Wilson, Jack et al. The World of Business,
5th Ed., Nelson Education Ltd., Canada,
2007