Free «History of Banking in Canada» Essay

We can argue that the changes in Canadian financial institutions have been happening since the introduction of formal banks around two hundred years ago. For the last six decades, there have been changes in legislative level to correct the situation. However, the process of change has been slow compared to other countries like the United States that had liberal financial institutions. The government laws that outlawed foreign ownerships or individuals having more than ten percent shares had several implications. Firstly, they greatly affected expansion and subsequent economics of large scale that was usually enjoyed by their foreign counterparts.  Secondly, these inhibited their competitive advantage for a long time at local and international levels.

In recent times, there have been a myriad of positive steps that have fostered progress in the financial systems triggered by government efforts to loosen control and the forces of globalization. One of the notable changes is encroachments of the big five financial institutions into each other’s core operations. For example, banks have moved to trust companies services such as executioners and managers of properties, on the other hand, trust companies have started lending services to its members. This strategy has led to expansion of financial institutions as they have led to acquisitions and opening of subsidies that deal with new roles they have acquired. For example, banks opening subsidies to deal with selling of life insurance or other services that they did not do traditionally.

On the other hand, globalization has led to efficiency that is associated with fierce competitions. International banks have come into the country and revolutionized technology in the financial sector forcing the local banks to adapt in order to remain competitive. Another implication is the fact that now it is not enough to just invests in the country as other institutions continue to venture to foreign banks in order to increase their market base. All these factors have in the long run led to improved performance of Canadian institutions in the country and abroad.

Introduction

Banking system in Canada started in the mid seventeenth century. Canada as a colony of France suffered from policies of mercantilist. Mercantilist policy had provisions that encouraged administrators of colonies to move resources to their mother countries. These policies simply led to siphoning of wealth from the colonies by colonizers. Most economic systems had largely depended on precious metals as their financial systems foundations. It was also the time when most countries in the world were adapting to gold standard monetary system, hence Canada lacked enough gold or silver. The mercantilist policy therefore led to adequate unit of exchange since money became simply worthless, hence causing a complete collapse of the monetary system in 1690. The government responded by issuing promissory notes. These notes were given to French traders who started to print their own notes leading to informal banking system. However, the French were replaced by the British in Canada and the former embarked on more changes in the banking system and other monetary policies.

In the early eighteenth century, the bank of Montreal was issued with a charter and it became the first official bank. It was also granted the rights of issuing promissory notes, hence acting as a central bank of Canada. The government also chartered other banks in the subsequent years. However, each bank functioned independently printing its own notes, which brought other complication to the economy. One of the problems was inflation, which skyrocketed as each bank injected its currency in the economy. This prompted the government to take control of the banking sector by introducing various laws. The authorities started by withdrawing printing of currency mandate from the banks and restored those powers entirely in the government. All different currencies, which were in circulation, were replaced with one single currency across the country – the Canadian dollar. The banks continued to work independently until 1930s when Bank of Canada was opened as equivalent, hence becoming the official central bank in response to economic challenges caused by the great depression.

Trust companies started emerging with the first being established in 1864 in Ontario.  The company by name of Huron and Erie was later changed to Canada Trust Inc. However, the first formal trust company was incorporated in 1882; with encouragement from the government, the number rose to 14 by 1900s. The aim was to have different financial entities from the bank in order to avoid conflict of interest. The primary aim of trust companies was to hold and manage assets on behalf of individuals or institutions. However, these trust companies experienced tremendous growth and they started offering some services that had been previously solely offered by banks.

Conversely, in 1980s, some trust companies engaged in unscrupulous businesses that led most of them to run bankrupt while others were acquired by banks and other institutions. Since 1954, there have been systematic amendments, which have continued to re-define the roles of chartered banks. These laws have been made to enable the financial institutions of Canada to be competitive internally and on the global scale. Some of these amendments have made banks to establish their trust services or acquire existing ones. On the other hand, most trust companies have acquired most rights of banking such as offering of loans.

Functioning

Some of the charted banks main functions include collecting deposits from the general population. These deposits can be fixed, current, recurring, or saving. Firstly, fixed deposits are savings that are deposited for a long term and they yield a higher interest. Secondly, current accounts are often set specifically for business class where individuals deposit and withdraw at will. These accounts are charged with operation costs by the banks. The aim of these accounts is primarily to make it convenient for business community to carry their business safely. Thirdly, recurring deals occur with small traders or employed people who have regular income. They make agreements with bank about period of maturity and they normally attract considerable interest rates. Finally, savings are specifically set to encourage savings from the public and yield some interest, though it is not high. Savers are also allowed to withdraw under certain circumstances, which are normally negotiated with the banks.

Moreover, the bank grants advance loans to public and other business institutions. These loans are used in investments or other purposes. The banks therefore act as an agent of providing capital for individuals and business communities. The advances are mostly given to employed people who may need money urgently before their salaries are due. These loans also act as the revenue generating instruments for banks. In order to get profits banks usually lend money at a higher rate than they give interest and the difference acts as profit. Some of the bank loans and advances include loans to purchase bill of exchanges. Loans deal with payments, which are based on installments and spread over a certain period of time. Overdrafts are basically a scenario where the clients are allowed to withdraw more than what they have and they are then charged an interest on the overdraft. Finally, cash credit happens when the client has an agreement with the bank about the amount of money they should withdraw as credit. If they exceed the agreed credit amount, then they are charged a certain percentage.

Other functions of banks are not usually directly connected to convectional banking and they are therefore known as secondly functions of the bank. The banks usually perform various tasks on behalf of their customers, hence acting as agencies. Some of the functions include periodic collectors where the commercial banks are granted rights to collect money on behalf of their clients. These monies include salaries when employers deposit their workers’ salaries to the banks. They also receive pensions from trust companies and pensioners withdraw directly from the banks. The firms also deposits dividends of their shareholder in the banks.

The banks also perform portfolio duties on behalf of their clients. Portfolio generally deals with selling and purchasing of shares or debentures. They are principle agents in collection of cheques and bills of exchange money. Finally, they transfer funds from individuals or institutions through direct deposits from one account to another. They also move money from one region to another. Banks also perform the following functions on behalf of their customers; they also act like executors, advisers, and administrators. Other functions include general utility when they deal with preparing of project reports on behalf of their clients, issue of letters of credit, which is crucial when dealing with import trade, underwriting of various shares, with foreign exchange, locker facility of valuable things like gold or documents, and social welfare programs, which mainly deal with giving back to the community.

On the other hand, the primary function of a trust company is usually to manage resources on behalf of individuals or institutions. They mainly handle resources of business nature and they manage them on behalf of the owners who they are legally accountable to. This works in such a way that they are given inclusive rights of handling the business and consequently deal with the following functions: collecting of dividends, leases, interests, and rents, executing contracts on behalf of the owners, and paying taxes. Some of the dealings include managing pension schemes and mutual funds. The accumulated profit is usually reinvested in the business or they diversify and invest in other projects. This acts to broaden their profits base and also to make the business safe from collapsing in case one business fails. One of the business areas they have heavily invested in is real estate where they are involved in individual and corporations mortgagees. They also invest from time to time in government bonds and securities due to their lucrative returns. These investments are paramount in order to deal with inflations and also to generate interest for pensioners and other stakeholders.

They also pay dividends to the owners according to speculated rules in their agreement. They offer continuity of the business even after the demise of the owner. This is simply because they are institutions, hence continuity of them running the business under their custody is always guaranteed. They offer expertise in the business in question, which the owners might not generally have at their disposal. This can be attributed to the fact that they hire professionals in running the business activities. The professionalism makes sure that these businesses are well managed. The fact that these trust companies are closely monitored by the government to make sure there is accountability and constant auditing by independent bodies makes sure there are checks and balance and protection of clients and their properties from abuse by these companies. Trust companies also issue loan, deposit of trust, cash, and offer checks. In recent years, they have ventured in territories that were previously considered as bank territories. The banks have also ventured into the trust companies business by opening subsidies, buying shares, or by acquisition.