Development in Canadian Banking Industry since 1970

Development in Canadian Banking Industry Since 1970
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Development in Canadian Banking Industry Since 1970
Introduction
The Canadian industry is significantly controlled by five top banks that include; Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD Bank), Bank of Nova Scotia (Scotiabank), Bank of Montreal, and Canadian Imperial Bank of Commerce. The combined total assets of TD Bank and RBC are the top most valuable company based on market capitalization. The domestic banks are the leading lenders to business in Canada as of 2020. In our study we will focus on the development of the Canadian banking industry since the 1970s. Historical economic events will be used to demonstrate the banking industry's uniqueness. Many factors that influenced the banking industry's growth will be applied to show and explain the evolution of the banking sector in Canada. The elements and what happened in Canadian banking history will be covered to see how these events affected demand and supply in the banking industry. The growth of the Canadian banking industry is inextricably linked to the rising demand for Canadian bank loans. The hope of this study is to demonstrate that the banking industry in Canada is critical its economic prosperity. Canadians generally feel satisfied with the banking industry because it is more stable and has a sound regulatory system today.
The banks arose as a result of social circumstances and economic activities that increasing depended on auxiliary services. In the past, people's demand for banks may have risen. More banks joined in to fill this gap of growing needs and demands leading to the formation of the banking system. The government regulates banks to ensure that they stay on track and that the number of securities purchased from banks and markets is balanced. Banking has benefited greatly from technological advancements. People nowadays prefer to use e-banking rather than going to the bank. Banking has become an integral part of people's lives, assisting them in their financial endeavors. Banks can provide them with mortgages and insurance. With the help of the central bank or the federal bank and the government, the banking system
Methodology
To illustrate the actual situation using economic tools and understanding of concepts is important. Bank regulation refers to the government imposing restrictions and guidelines on banks in order to ensure that financial services providers remain solvent and avoid unnecessary risks. The government regulates banks by intervening in the market to eliminate asymmetric information, which means that one party knows more about the company than the others. Having more information has the effect of causing adverse selection and moral hazard. When buyers and sellers have unequal information, this is known as adverse selection. Sellers of used cars, for example, have more information about the vehicle than buyers. Buyers want to pay a fair price for this car that is in line with its value. A moral hazard is when one party takes a risk and then passes it on to others, this is known as hazard. A driver with car insurance, for example, may be less cautious because they know the insurance company will compensate them in the event of an accident.
To evaluate banks, an assessment of its assets, return on assets, and return on equity was undertaken. An asset is a resource that a company controls and uses to create future value or that has value in and of itself. For example, inventories purchased for production purposes are an asset. The amount of return that total assets can generate is known as return on assets. Net income divided by total assets as a percentage is the formula for return on assets. Revenue minus expenses equals net income. To demonstrate the company's ability to generate earnings from its assets, the return on assets should be as high as possible. According to the accounting equation, shareholder equity equals assets minus liabilities. Return on equity tells us how much profit a company can generate from its shareholders' money.
Inflation occurs when prices rise while people's purchasing power decreases. Stagflation occurs when the rate of inflation and unemployment are both high while the rate of economic growth is low. The rate of unemployment is described as the proportion of the labour force that is actively looking for jobs but cannot find any, and it can be used to assess economic conditions. The amount of money borrowed to expand your business is referred to as leverage. A higher level of leverage entails a higher level of risk. Stock refers to the division of a company's ownership into shares. A security is a financial instrument with intrinsic value.
Analysis
Inflation was persistent in Canada during the 1970s. In 1973, 1974, and 1975, the consumer price index increased by 7.5 percent, 10.9 percent, and 10.8 percent, respectively. Canada's average inflation rate in the 1970s was 7.4%, three times higher than in the 1950s and 1960s ("Canada's Inflation Performance, and Why It Matters," n.d.). Furthermore, in 1974 and 1975, Canada experienced a severe economic downturn ("Canada's Inflation Performance, and Why It Matters," n.d.). Despite the fact that the unemployment rate had risen dramatically, the inflation rate had remained above 10%, a phenomenon known as stagflation. As a result, the main goal of the Canadian government in the mid-1970s was to reduce inflation.
By the end of the 1970s, Canada's inflation had been somewhat contained, so the government's goal had shifted to the development of the banking industry. The Banking Amendment, passed by the Canadian government in 1980, allowed banks to own subsidiaries in a variety of financial sectors, including venture capital firms. Furthermore, banks would be more competitive with other trust companies if their mortgage investment subsidiaries could raise deposits without having to meet reserve requirements (Daniel, 2003). Simultaneously, the amendment allowed foreign banks to open subsidiaries in Canada, but the subsidiaries' business scale was limited. However, in the 1980s, this Bank Act aided the development of the banking industry.
Moreover, in the 1980s, a number of significant bank amendments aided the development of the financial service sector. In the 1970s and early 1980s, a growing number of businesses used the direct market to borrow money (Daniel, 2003). The banks were concerned about the potential for business loss as a result of the situation. In fact, underwriting securities was not considered a bank's business prior to the 1987 amendment (Daniel, 2003). Furthermore, prior to the 1992 amendment, Canadian banks were prohibited from managing business-related securities investment portfolios or providing investment advice. Provincial laws also prohibited foreign institutions from participating in the Canadian securities market. As a result, more companies began to lend directly rather than through banks, and the core areas of banks and securities firms became increasingly similar. These are the reasons for the 1987 amendment's implementation. Only by entering the securities market would banks be able to mitigate these losses to some extent. Following the amendment's passage, the bank participated in the issuance of company stocks and bonds through its securities subsidiary.
Therefore, beginning June 30, 1987, Canadian financial institutions had no restrictions on security company investments. Non-residents were allowed to own 50% of existing securities companies beginning June 30, 1987, and 100% of existing securities companies beginning June 30, 1988. (Daniel, 2003). Beginning June 30, 1987, foreign securities companies could enter the Ontario market without restrictions (Daniel, 2003). This amendment sparked the growth of the Canadian banking industry and aided in the expansion of the Canadian financial sector. However, Canada has always had a strict regulatory system in place to manage banking risks.
Canada established an early intervention system in 1996 to intervene appropriately in financial institutions in distress. Then, in 1998, the Canadian government introduced a new risk monitoring mechanism to implement and fine-tuning the regulatory measures remain in order to remain effective in the rapidly changing financial markets.
Consequently, since 1999, the number of companies in the Canadian securities industry has increased dramatically. The total assets of the "big 6" banks continued to grow in 2000, and the return on ordinary shares reached 16.8%, which was higher than the global average return of 14.5 percent (Freedman, n.d). Whereas interest income is the bank's traditional main source of revenue, non-interest income now accounts for 55.6 percent of the bank's gross income (Freedman, n.d). Service fees from mutual funds and wealth management, securities underwriting, derivatives transactions, asset securitization, credit card transactions, foreign exchange conversion, and savings and payments are all examples of non-interest income. Furthermore, according to the regulator ‘The International Monetary Fund's 'financial industry stability assessment,' bank regulation in Canada focuses on comprehensive regulation and is risk-centered, which allows regulatory authorities to deal with the challenges faced by financial institutions in recent years. The study concludes that Canadian banks successfully weathered the debt turmoil of developing countries in the 1980s, the early 1990s real estate downturn, and the Asian financial crisis a few years later.
Furthermore, the International Monetary Fund published a 'financial industry stability assessment' in 2000, claiming that the Canadian financial system is one of the world's most stable and advanced. It is suggested that the Canadian financial system has a strong supervision and management system, that bank operations meet international standards, and that service fees, credit card costs, and medium-term loan interest rates are lower than in other developed countries, all of which factors contribute to the long-term growth of the Canadian economy. Furthermore, Canadian Banks have reliable payment systems. Since 1995, the number of non-cash payments made by direct debit and credit transfer in Canada has steadily increased. In December 2001, the...