Chapter 12

1. Mishkin/Serletis The Economics of Money, Banking, and Financial Markets Fifth Canadian Edition Chapter 12 NONBANK FINANCE

2. 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.

3. 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.

4. First, let’s look at Insurance Companies.

5. 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

6. 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

7. 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.

8. *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.

9. Relative Shares of OSFI_Regulated Financial Intermediary Assets

10. 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

11. Pension Funds • Rapid growth: encouraged by tax policy • Bigger role in stock market • Problem of underfunding • Private plans • RPPs • Public plans • Social Security • CPP and QPP

12. Now let’s look at Investment Dealers-Companies as One Pillar of the Canadian financial system. • First review the Investment related concepts:

13. 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

14. Finance Companies • Minimal regulation by provinces • Rapid growth • Three types: • Sales finance companies: facilitate sales of their products by providing credit to the buyer (eg Toyota FC; GM FC, etc.) • Consumer finance companies (for those who are generally not qualified for bank loans) • Business finance companies (for leasing)

15. 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

16. 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-regulators-protect-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)

17. Mutual Funds • Sovereign wealth funds • Institutional Investors • Open-end vs. closed-end • Load vs no-load • Money Market Mutual Funds • Hedge Funds

18. 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/

19. 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”) • FHLMC (“Freddie Mac”)