Banking by gjmpzlaezgx


									Financial Institutions and
    Canada’s Financial Institutions

•   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
• They invest a portion of the money customers deposit
  into accounts and earn more interest than they pay their
• 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

• 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
              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
             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.

• 1980 changes to the act allowed foreign
  banks to operate in Canada for the first
            The Bank Act
• Established three classes of chartered
  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 II Banks
Schedule I Banks
                              • Mostly foreign owned banks
• Owned by Canadian             but are controlled by a small
  shareholders                  number of shareholders
• Shares are traded on the    • They don’t generally offer
  major Canadian stock          shares to the public
  exchanges                   • Have the same powers as
• Investors buy shares in       Schedule I banks, but the
  these banks in order to       government limits the total
  receive a share of the        number of branches they can
                                have and the total amount of
  profits                       assets they can hold
• Canada has 19 Schedule I    • Examples include the Amex
  banks.                        Bank of Canada, the HSBC
• Examples include CIBC,        Bank of Canada, ING Bank of
  RBC, TD, BMO,                 Canada
  Scotiabank, Canadian Tire   • Most focus on investment
  Bank                          banking and corporate
         Classes of Banks
Schedule III Banks
• Foreign bank branches with permission to
  operate in Canada
• The Bank Act sets restrictions on these
• 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
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
1.   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.

2.   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.
   Impact of Interest Rates on the
• 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
    Impact of Interest Rates on the
Raising Interest Rates              Lowering Interest Rates
• Makes it more expensive to        • Makes it less expensive and
  borrow money from the bank.         thus more attractive to borrow
• Used to help keep inflation         money from the bank
  from increasing too much to       • Results in more money
  quickly                             circulating in the economy and
• Results in less money               encourages people to spend
  circulating in the economy and      more money
  people cut back on their          • More dollars being spent leads
  spending.                           to an increase in demand for
• Fewer dollars being spent           products and services which
  leads to a drop in demand for       helps businesses make more
  goods and services, thus            money leading to more jobs for
  helping to control inflation as     society who have money to
  the price of goods does not         spend. This cycle may then
  increase or at least as much as     lead to price increases.
  it might if people have more
  money to spend.
              Trust Companies
First established in the late 1800’s:
• Their purpose was to manage and invest funds entrusted
   to them by customers

• 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.
Products insured and not Insured by CDIC
See link:
    Caisses Populaires and Credit
• 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
• (i.e. Teachers Credit Union,
  Niagara Credit Union)
        Credit Union and Caisses
          Populaires Services
• 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
• If you want to borrow money from a credit union or
  caisses populaire, you must have a savings account with
Credit Union and Caisses Populaires
 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
• Provide money to cover the financial
  costs should some kind of accident,
  theft, or other loss happen
  associated with what is being

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
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
• 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

• Financial institutions offer different types of
  deposit accounts depending on one’s needs.

• i.e. Savings account, chequing account, joint

• Interest rates vary from account to account and
  from one bank to another
   Opening and Accessing an Account
Step 1
Provide personal information

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                           Step 2
Personal information required:   Identification:
•   Full name;                   • Student card
•   Home address                 • Drivers license
•   Date of birth                • Passport
•   Telephone number             • Credit card
•   Occupation, if applicable    • Health card
  Opening and Accessing an Account
Step 3
                            You will need to fill
Signature Card:             out a 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.
   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

• 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
Making a Deposit or Withdrawal
Using the ABM:
1. Use your bank card
                           Enter PIN
2. Input your personal
   identification number
   (PIN) – like an
   electronic signature
3. Follow the onscreen
4. Take a copy of the
   receipt printed out
Making a Deposit or Withdrawal
At the bank:
• Fill out a deposit slip
• Teller inputs
• You will either give
    or receive money
    from the teller
• The teller will give
    you a receipt
Types of Common Bank Accounts

1. Transaction accounts/Chequing
2. Savings account
3. Transaction/Savings account
4. Current Accounts
5. Joint Accounts
          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.
  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 withdrawals
• 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

• Withdrawals 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, withdrawal and cheque that is
• 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
• 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
• 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
                                Amount in Numbers

    Amount in words                       Drawer
                Cheque Essentials
• The date, month and year the cheque can be cashed must be

Stale dated 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
• 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
• This is the name of your financial institution (i.e.

• 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
• A form will then need to filled out with the details
  of the cheque you would like the stop payment
• 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 the person
  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.
             Shared ABM Networks
• Automated bank machines which
  allow customers to deposit and
  withdraw funds, may bill payments,
  and account transfers
• Located in stores, banks, schools, bus
  stations, gas stations, credit unions,
• Many different financial institutions
  share them which reduces costs of
  having their own and providing
  services through branch personnel.
• Three main networks in Canada are
  Interac, Cirrus, and Plus.
• Some financial institutions will charge
  service fees to customers who use
  another’s financial institutions ABM.

• Electronic Funds Transfer System
              Debit Cards and Direct Payment

Interac Direct Payment (IDP)
• Consumers can use their ABM
  cards as debit cards to pay
  businesses on the spot for goods
  and services rather than using
  cash or their credit cards
• Money is directly transferred
  from the customer’s account into
  the business’ account. If there is
  insufficient funds, the transaction
  will not occur.
• It is important for consumers to
  protect their PIN so as to prevent
  theft and identity theft.
• Because businesses are
  charged a fee for having and
  using the Direct Payment
  machines in their stores, many
  stores charge an additional fee
  to the customer when paying
  with a debit card.
                Telephone Banking
• Customers can pay bills,
  make transfers, and cheque
  their account balance using
  the telephone.
• Customers must have an
  account, bank card and
  telephone to conduct
  telephone banking.
• A number is provided by the
  institution which you call
  and then simply follow the
  instructions on the
• Service charges may apply
  depending on the financial
  institution and transaction.
                  Online Banking
• Available 24 hours a day, 7 days a
• All telephone services are
  available online as well as
  additional services such as:
   – Purchasing RRSP's,
      downloading files, and printing
      out financial data and past and
      updated account statements.
• Customers will have a PIN
  number in order to access their
• Cheaper way to provide services
  to consumers
• Service charges may be applied
               Online Banking
• Caution is necessary as
  there is no full proof
  computer system that is
  safe from hackers and
  individuals obtaining your
  personal information.
• Not everyone feels
  comfortable performing
  online banking due to
  identity theft and general
  theft concerns.
            Online Banks
• Also known as virtual banks
• Banks do not have physical branches
• All transactions are completed online,
  through the telephone, ABM, or
  independent professionals.
• Examples include ING DIRECT,
  President’s Choice Financial and Citizens
  Bank of Canada.
                 Online Banks
Advantages                   Disadvantages
• No branches thus they      • No institution specific
  cheaper to run               ABM’s
• Savings passed on to       • Service charges for
  customers in the form of     deposits at other
  fewer service charges        institution’s ABMs.
• Interest on loans is       • Some deposits must be
  cheaper                      mailed or transferred from
• Interest on savings          another account
  accounts is higher         • Customer service is
                               limited to a 1 -800
                             • Cheque clearing can be
     Other Financial Services
Financial institutions offer a variety of other services such
1. Loans
2. Lines of credit
3. Credit Cards
4. Direct deposits
5. Money orders and drafts
6. Night depositories
7. Overdraft protection
8. Preauthorized bill payments
9. Safety deposit boxes
10. Combination service packages
• Lending money to customers (consumers, businesses,
  and government)
• Most important financial service provided
• Interest charged on loans is a major source of income for
  financial institutions.

The most common types of loans include:
• Term loans
• Student loans
• Credit cards
• Lines of credit
• mortgages
               Term Loan
• Borrowing money and paying it back at a
  specified time
• The interest rate on the loan can be fixed
  (a rate that won’t change over a period of
• The interest rate can be variable, which
  rises and falls with general interest rates
  as they are reported
               Lines of Credit
• A form of instant credit (borrowed money) when
  you need it.

• An account is established, like a chequing
  account, only it is your line of credit account.
  You may withdraw or transfer money from it to
  your chequing account usually at an IBM or
  through online or telephone banking.

• It is a one-time approved loan that you can
  access at any time. You only have to access the
  money when you need it up to the maximum
  limit approved.
             Line of Credit
• You only pay interest on the exact amount
  your borrow and only for the number of
  days that you use the money.
• Interest rates are much lower than basic
  credit card rates.
• Lines of credit are extremely important for
  individuals starting a new business which
  often have more bills to pay than revenue
  coming in.
              Credit Cards
• Financial institutions usually offer one of
  the two major credit cards: Visa or

• There are usually many types of these
  cards available offering different features,
  services and interest rates.
             Direct Deposits
• Transfers funds from another source directly into
  your account

For example:
• Many employers pay their employees through
  direct deposit. Rather than giving the employee
  a cheque to deposit, the deposit is made directly
  through electronic funds transfer from the
  employers account to the employees account.
      Money Orders and Drafts
• Payment similar to a cheque, but;
• The issuing institution (i.e. bank) on the order
  guarantees to pay the payee the amount on the order.
• The amount is not held back for clearance approval.
• Money orders/drafts are usually for larger sums of up to
• Some businesses will require a money order for payment
  as opposed to a cheque to guarantee payment.
• A small service fee is usually charged for someone
  wanting a money order.
• Money orders can usually be obtained from your
  financial institution.
• Technology has changed the need for money orders.
  Many financial institutions e-mail money transfers
  directly into another’s account.
           Night Depositories
• Allows customers to make deposits or drop off
  important financial documents at any time.

• Business do not have to hold large sums of
  money overnight which leads to a reduced risk
  of theft and thus insurance costs for businesses.

• Customers place their deposits in locked
  pouches or bags and drop them of in a chute
  which is secure.
         Overdraft Protection
• To withdraw more money than you actually have
  in the bank or financial institution.

• Overdraft protection is a service you ask for
  which allows you to withdraw more money than
  you have in the bank up to a certain amount.
  You are charged interest and/or a fee for the
  overdraft amount until it is paid back.

• The amount of overdraft permitted is arranged
  with the bank.
   Preauthorized Bill Payments
• You can prearrange to have regular monthly
  payments such as loan payments, mortgage
  payments, etc., be automatically deducted from
  your account.
• Provides convenience so that you don’t have to
  write and mail cheques for payment and/or pay
  bills through the ABM.
• You should always keep track of what you owe
  and your own payments for budgeting purposes
  and to ensure no errors have occurred.
          Safety Deposit Boxes
• Fireproof, metal
  boxes store at a
  financial institution
• Customers can rent a
  box in which to place
  important documents
  such as wills, stocks,
  bonds, jewelry,
  passports, etc.
• Only the person
  renting the box knows
  its contents.
 Combination Service Packages
• Most financial institutions offer various package deals
  where service fees for a variety of bank services used
  are reduced if you meet certain conditions.

For example:
• If you keep a minimum balance in your account, you may
  not bank charges for any of your ABM withdrawals.
• Youth, full-time college and university students, and
  senior citizens may obtain reduced service fee
 Selecting Your Financial Institution to Business With

 Financial institutions are businesses, so shop
 around for the service that meets your needs
 best. Consider:
 1. reputation
 2. convenience
 3. service fees/bank charges
 4. types of services available

Note: You can do business with more than one
      type of financial institution and your needs
     may change throughout your life time.
• Wilson, Jack et al. The World of Business,
  5th Ed., Nelson Education Ltd., Canada,

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