Canada - Banking and securities

The Bank of Canada, which was established in 1934, is a government-owned institution that regulates the total volume of currency and credit through changes in the cash reserves of eight domestic chartered banks and 45 foreign bank subsidiaries. The Bank of Canada also acts as the government's fiscal agent, manages the public debt, and has the sole right to issue paper money for circulation in Canada. It is empowered to buy and sell securities on the open market, to fix minimum rates at which it will make advances, and to buy and sell bullion and foreign exchange.

The Federal Business Development Bank, established as the Industrial Development Bank in 1944 as a subsidiary of the Bank of Canada, has operated as a separate entity since 1974. It does not engage in the business of deposit banking but supplements the activities of the chartered banks and other agencies by supplying medium-and long-range capital for small enterprises.

The eight domestic chartered banks are commercial and savings banks combined, and they offer a complete range of banking services. Canada's banks were reorganized in 1992 under the Banking Act. Every 10 years the banks' charters are subject to renewal and the Banking Act is revised to keep abreast of changing trends, a practice unique to Canada. The banks were reorganized into Schedule I and II banks. The Schedule I banks are banks whose ownership is public. No one shareholder in Schedule I banks controlled more than 10% of the shares until the law was revised in 2000. Schedule II banks are subsidiaries of foreign or domestic banks that are held privately or semi-privately. In 1999, foreign banks were given the right to operate branches in the full-service and lending sectors. Schedule I banks include the Bank of Montreal, Bank of Nova Scotia, Canadian Imperail Bank of Commerce, Canadian Western Bank, Laurentian Bank of Canada, National Bank of Canada, Royal Bank of Canada, and the Toronto-Dominion Bank of Canada.

Canada's four biggest banks—Royal Bank of Canada (RBC), Canadian Imperial Bank of Commerce (CIBC), Bank of Montréal, and Bank of Nova Scotia—were all among the top 10 in North America in the 1980s. In 1997, only RBC and CIBC qualified. The Canadian banks began in mid-1996 to speak out in favor of liberalized ownership rules if they were to maintain their competitive edge. In October 1996, the Bank of Montréal chairman, Matthew Barrett, said domestic banks should have the freedom to merge, and that serious thought should be given to dripping the 10% ownership limit. In 1999, banks with equity of over C $5 billion were allowed to merge, and the ownership limit was raised to 20% on vote-taking shares, and 30% on non-vote taking shares. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to US $163.9 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was US $463.9 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 4.11%. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 2.5%.

The Toronto Stock Exchange (TSE) was founded in 1852 and incorporated in 1878; the Standard Stock and Mining Exchange, incorporated in 1908, merged with it in 1934. Its members have branch offices in principal Canadian cities and in some US financial centers.

The Montréal Stock Exchange was incorporated in 1874. In 1974, it merged with the Canadian Stock Exchange, which was organized in 1926 as the Montréal Curb Market. Other securities exchanges were the Winnipeg Stock Exchange, founded in 1903; the Vancouver Stock Exchange, founded in 1907; and the Alberta Stock Exchange (formerly Calgary Stock Exchange), founded in 1913.

In 1999, the TSE took over all senior equity exchanges from the Montreal market. The Vancouver and Alberta stock exchanges merged to form the Canadian Equities Exchange, handling only junior exchanges. Also, in 2000 the TSE conducted a demutualization, in essence becoming a for-profit organization in order to stimulate growth in the securities sector.