Download Finance Companies

Mishkin/Serletis
The Economics
of Money, Banking,
and Financial Markets
Fifth Canadian Edition
Chapter 12
NONBANK FINANCE
Copyright © 2014 Pearson Canada Inc.
Learning Objectives
-Learn more about the Non Bank/Non depository
financial institutions out of the ‘Canadian 4-Fillars’:
Insurance companies and
Investment companies- dealers.
- Learn about the regulation in these industries.
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• We have defined the Canadian 4 Pillar System in the financial sector as
consisting of
-Commercial Banks
-Trust and Mortgage Companies
- Insurance companies
- Investment dealers-companies
In the previous chapter, we have examined Commercial Banks. Now most trust
companies are associated with Commercial Banks. They can be together
categorized as Depository Institutions. So we have two – Insurance and
Investment Companies- to examine.
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• First, let’s look at Insurance Companies.
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Life Insurance Companies
• Regulated by the OSFI(financial soundness only),
Provincial Governments, and backed up by Assuris
• Demutualization
• Hold illiquid long-term assets
• Individual life insurance
– permanent life (endowment insurance)
– temporary life
• Group life insurance
• Annuinities
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Property and Casualty Insurance
• Regulated by OSFI, Provincial Government, and PACICC
• Property Insurance covers loss of real property
• Casualty insurance protects against legal liability
exposure
• Reinsurance
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The federal and provincial governments share jurisdiction over life and health
insurers.
• Federal regulator or OSFI conducts prudential reviews of the federally
regulated insurers to determine their financial soundness, while
• the provinces regulate the licensing of insurers operating within their
jurisdictions as well as the marketing of insurance products.
• The industry-funded compensation organization is known as Assuris.
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*Credit Insurance
• Credit Default Swaps (CDS)
– seller is required to make a payment to the holder of the CDS
if there is a credit event (i.e. bankruptcy) of the firm’s credit
rating
• Mono-line Insurance
– supply credit insurance directly
– Important for less known debtors, such as Municipal
government Bond issuers, than for Sovereign bond issuers;
their credit ratings are not as clear and thus needs credit
insurance.
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Relative Shares of OSFI_Regulated Financial
Intermediary Assets
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The New Legislative Framework
• Government passed legislation reforming regulatory
framework.
• Demutualized life and health insurance companies
• Allowed access to Canadian payments and clearance
systems
• Does not allow mergers involving large banks and large
demutualized life and health insurance companies
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Pension Funds
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Rapid growth: encouraged by tax policy
Bigger role in stock market
Problem of underfunding
Private plans
– RPPs
• Public plans
–
–
Social Security
CPP and QPP
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• Now let’s look at Investment Dealers-Companies as
One Pillar of the Canadian financial system.
• First review the Investment related concepts:
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Investment Industry
• When a Long-term funding of a investment project is needed, you will go to
the ‘Capital Market’ which deals in long-term financial products, such as
Long-term Bonds of the government and companies and Stocks.
-> They are created by Investment Banks and are being traded by brokerage
firms.
• When a Short-term funding of an investment project is needed, you will go to
the ‘Money Market’ which deals in short-term financial instruments, such as
T-Bills/Repros, and Commercial Papers(CP).
-> These are dealt in by financial companies.
• Both are regulated by the Provincial Securities Commission, and by the IIROC
or Investment Industry Regulatory Organization of Canada(IIROC). For
example, RBC Dominion Securities Co. and Acumen Co.
http://www.iiroc.ca/about/ourroleandmandate/Pages/default.aspx
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Finance Companies
• Minimal regulation by provinces
• Rapid growth
• Three types:
1. Sales finance companies: facilitate sales of their products by
providing credit to the buyer (eg Toyota FC; GM FC, etc.)
2. Consumer finance companies (for those who are generally
not qualified for bank loans)
3. Business finance companies (for leasing)
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There are other formats of Finance Companies,
such as
• Payday Loan companies = Cash Advance Companies
A very short-term (few weeks) and a small amount of personal loans for those individuals who have no access to, or are not
qualified to get, bank credits
General Ideas: https://www.ontario.ca/home-and-community/payday-loan-your-rights
A Deeper Analysis: http://www.parl.gc.ca/content/lop/researchpublications/prb0581-e.html#what
Actual Cost Comparison http://www.statcan.gc.ca/pub/75-001-x/10407/4096813-eng.htm
-Community Financial Services Association of America
-Canadian Payday Loans: eg) Canadian Payday Loans Association
Companies: http://www.zippycash.ca/
 Some Innovative Finance Companies in Canada
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Securities Market Operations
• Investment Banking
– seasoned issues
– underwriters
• Securities Brokers and Dealers
– brokerage firms
• Organized Exchanges
– Specialist
* Canada has no federal regulator.
http://www.getsmarteraboutmoney.ca/en/managing-your-money/investing/investor-protection/Pages/How-regulatorsprotect-investors.aspx#.VMP7JEfF_Tp
* Provincial Government Regulators in Canada: Provincial and Territorial Securities
Commissions
* Canadian Self(industry) Regulator: IIROC (the Investment Industry Regulatory Organization
of Canada)
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Mutual Funds
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Sovereign wealth funds
Institutional Investors
Open-end vs. closed-end
Load vs no-load
Money Market Mutual Funds
Hedge Funds
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Private Equity and Venture Capital Funds
• Private Equity Fund
• Venture Capital Funds
– capital buyout funds
– leveraged buyout (LBO)
– carried interest
http://www.cvca.ca/staff/who-we-are/
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Government Financial Intermediation
• Crown Finance Companies
– *CMHC provides funds to the mortgage market by borrowing
from the federal government and the private sector(now the
largest Canadian Shadow Banking sector with little risk or
uncertainty, though)
– FCC
– EDC
– BDC
• Government Sponsored Enterprises in the United
States (GSE)
– GNMA (“Ginnie Mae”)
– FNMA (“Fannie Mae”)
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