Class 9: Canadian Financial Institutions: The Last 50 Years

1. Class 9: Canadian Financial Institutions: The Last 50 Years

2. FINAL EXAM FALL 2013 You have 3 hours to complete the final. Cumulative, cases can be from the start of the year / all slides and cases. It is closed book. Exam is 9am on Dec 18th

3. Final 2013 MC 3) In order to improve the overall quality of Canadian wines, the Canadian Vintners and Canadian Grape Growers launched what appellation control process? • a) The Vintners Quality Alliance (VQA) • b) The Ontario Appellation Control System (OACS) • c) Domains Origin Controlee • d) None of the above

4. Final 2013 MC 11) In 1997 John Cleghorn went to a Christmas party where he met with Matthew Barrett. They disappeared for 20 minutes together and agreed to something. It was to • a) merge TD and Canada Trust. • b) merge RBC and Dominion Securities • c) advocate that the government end the rules enforcing the separation of the Four Pillars • d) merge BMO and RBC • e) jointly wind down Confederation Life

5. Final 2013 MC 19) The decision to create General Motors Canada emerged from which of the following circumstances below. • a) Concerns about the renewal of a contact to build Buicks • b) The purchase of the McLaughlin Automobile Company by GM for $5m • c) A decision against building a Canadian- only automobile • d) All of the above

6. Final 2013 19) The decision to create General Motors Canada emerged from which of the following circumstances below. • a) Concerns about the renewal of a contact to build Buicks • b) The purchase of the McLaughlin Automobile Company by GM for $5m • c) A decision against building a Canadian- only automobile • d) All of the above

7. Final 2013 MC 20) What was the major concern regarding bank mergers in the RBC Case • a) They will focus too much on being competitive globally • b) They will be able to manipulate the exchange rate for the Canadian dollar • c) There will be takeovers by foreign banks • d) There will be a shortage of qualified financial professionals to meet the increased demand of larger banks • e) The amount of risk to Canada’s economy will increase with very large Canadian banks that are too big to fail

8. Final 2013 SA • 1. Identify three factors that enabled the Ontario Wine Industry to survive following the introduction of Free Trade with the US in 1989. (5 marks) • 2. As your case describes, the railroads faced significant economic and structural challenges, and new competition only made these worse. Describe two of problems faced by the railroads and how the Government of Canada attempted to solve them. (5 marks) • 3. Identify two economic and two non-economic reasons why the Government of Canada would intervene in a protectionist manner to protect the Canadian mining industry. (5 marks)

9. Final 2013 SA • 4. Explain how differences between the Canadian and US banking system make bank failures and financial crises (like the sub-prime mortgage crisis) less likely in Canada. (5 marks) • 5. Protectionism refers to government policies that shield domestic production and producers from foreign competition. Identify and briefly describe from your course material two (2) examples when the Government of Canada has adopted protectionist policies. (5 marks)

10. Final 2013 SA2 Section 2 –Complete 1 of 2 1. Canada has a long history of dependence of resource extraction as a foundation for our overall economy. • (a) What are the possible downsides or risks in having an economy which is dependent upon oil extraction, and • (b) Describe how a global rise in the price of one of Canada’s leading resource exports could negatively impact a non-resource sector of our economy. (10 marks)

11. Final 2013 SA2 Section 2 –Complete 1 of 2 2. In the 1980 Michael Wilson, Canada’s then Finance Minister embarked on a series of changes to the Canadian financial services industry and its structure. These changes lead to a market response by both Confederation life and the Canadian financial sector as a whole. • (a) What were those changes, and (b) what changes in the industry’s competitive structure lead to the Canadian government to come to the conclusion that those changes were necessary? (10 marks)

12. Final 2013 LG Essay CASE QUESTIONS [50 MARKS] http://www.theglobeandmail.com/report-on-business/economy/rd-innovation-should-be-on-a-list-conference-board-urges/article10752987/ • Using the “Porter Diamond” model, explain what factor conditions Canada possesses that can drive its competitiveness. What factor conditions does Canada need to improve upon to increase its competitiveness and sustain its prosperity? [10 marks] 2. Use the “Stern Diamond of sustainable growth” model to explain the role that all four elements of the model can play to improve Canada’s innovation record and sustain its economic growth. [20 marks]

14. Final 2013 3. First choose two (2) of the cases below. Please explain whether or not the issues discussed in the above article were also a problem in each case you have chosen. Please use details from each chosen case. [20 marks] • The Story of Massey-Harris (“The Massey Case”) The Creation of the CNR (“The CNR Case”) • The Canadian Automobile Industry (“The Auto Case”) • Canada’s Black Gold: From the Leduc Discovery to the National Energy Program • (“The Black Gold Case”)

15. 2012 Exam (some MC’s) Short Answer & MC’s (50 marks)  What is the difference between monetary policy and fiscal policy? (5sts)  Describe two actions that a central bank can take to deal with inflation. (5 pts)

16. SA / Exam What actions did the Niagara grape growers (led by Inniskilin) take to help the Canadian wine industry grow and prosper? [5 marks] Give three reasons why Confederation Life failed. [5 marks]

17. Reported by Julian Beltrame, The Canadian Press • Posted Apr 5, 2012 2:57pm OTTAWA - The recent run-up of oil prices is not bringing the usual benefits for the economy and an enduring or pronounced spike will hurt consumers, Bank of Canada governor Mark Carney told The Canadian Press. Carney said the current escalation in oil prices means consumers in the East are paying more for fuel and energy producers in the West are earning less than would be expected. And he is increasingly concerned about the possible impact of the increase on the economy even though Canada exports crude and producers realize greater profits from higher prices. "As a whole, higher oil prices are a net positive for the Canadian economy," Carney said during an interview. "(But) we're getting at the moment a little less of a positive uplift from higher oil prices than we would normally. And we're getting that drag on consumption from higher gas prices." Ontario drivers paid an average of $1.36 a litre for regular gas this week, and with summer driving season approaching, some analysts anticipate the number could peak at $1.60. That takes money out of consumer pockets, leaving less disposable income for activities such as travel or purchases that help spur economic growth, said Carney. The corollary is that Canadian producers in the West are also not realizing as much as would be expected because Canada imports more expensive North Sea oil while selling at the lower-priced West Texas Intermediate (WTI) rate and often below. WTI was hovering at just over US$101 on Thursday. Brent crude from the North Sea is over US$122. In March, the average differential between the two was almost US$25. Refineries in Canada on average use about equal proportions of WTI and Brent, a former Bank of Canada study showed, and that mix is reflected in the price of gas at the pump. Carney said bank economists are crunching the numbers and will issue a calculation of the net impact of global oil on the Canadian economy in the next quarterly monetary policy report later this month. It is unclear at what point the net benefit to Canada as an oil exporter flips into a net loss due to the drag of prices on consumer spending and business input costs. As well, the Canadian dollar gets a boost from strong oil, making exports to the U.S. and other countries less competitive. The longer prices stay at elevated levels, however, the more damage the economy suffers, Carney said. "The issue is persistence on the consumption side, but the other issue is, 'OK, what are we actually realizing as the net oil price in Canada,' " he explained. CIBC economist Benjamin Tal said one dynamic is clear — the high price of oil is exacerbating the economic divide between East and West. "It works to widen the gap between the West and the rest of the country in a very significant way," he said. "Because Ontario is like the U.S., it is a consumer of oil.” The latest unemployment report from Statistics Canada drives home the point. Despite surprisingly strong job creation in March, Ontario and Quebec still reported unemployment rates of 7.4 and 7.9 per cent respectively for the month, while the rate was 4.8 in Saskatchewan and 5.3 in Alberta.

18. ESSAY (1 only 50 pts) What have been the positive impacts of oil on the Canadian economy through our history?[10 points] What are the possible downsides or risks in having an economy which is dependent upon oil extraction?[10 points]

19. ESSAY What mechanisms does Canada have to solve the problems that Carney identifies? What type of policies are these?[20 points] Given what you have learned about our history as a manufacturing and as an oil producing country, what do you think the government of Canada should do? [20 points]

20. Confederation Life When regulators seized Confederation Life in 1994 the company has $11b in assets and was the 4th largest insurance company in Canada. Previously, when we talk about the failure of large companies, we are told than an entity is “too big to fail”.

21. Too Big to Fail What does this term mean? Is means that the financial position of the company in the market is so large, that its collapse could bring down the entire financial system Recent examples, Lehman Brothers, LTCM, Fannie May and Freddie Mac.

22. Breaking the Bank

23. Readings for This Section • Focus on pages 205-212 only. • They cover capital market and Financing Economic Activity • Case as well.

24. Financial and Capital Markets (p.205) • Is the process or organizing, mobilizing and converting the savings of individuals and organizations to meet the financial needs of other individuals or organizations; government included.

25. Financial and Capital Markets (p.205) • Governments both regulate and participate in capital markets. They attempt to promoter stability in the marketplace, shape legal frameworks and promote economic activity.

27. History Confederation Life was founded in 1871 by a Scottish immigrant. In 1985 under the guidance of a new CEO Pat burns, he challenged the management of Confederation Life to become more entrepreneurial. Destination – Financial Services This sometimes ends in pain as with expansion, comes risk

28. History In 1987, the Government of Canada changes the rules to allow anyone to acquire securities dealers and brokerage houses. The merger game was afoot.

29. Reaction from CL Confederation Life reacted to the increased competition from the banks ,buying 10% on Midland and 100% of Halifax Trust

30. Reaction from CL “We are not who you think we are. We are not afraid of the competition. We are ready to take on the world – which by the way includes the big banks.” Pat Burns Jan 1990

31. Overextended at the Wrong Time The recession of the 1990’s was a bad one. When they hit, loans do bad and people don’t buy life insurance. That left Confederation Life undercapitalized.

32. Liquidity • Access to capital and financial asserts is critical to financial institutions. Liquidity is the ability of a business or investors to obtain sufficient cash or equivalents in a timely manner to meet financial obligations.

33. Undercapitalized Undercapitalization refers to any situation where a business cannot acquire the funds they need. Aka. Broke In 1992 CL was $1.5b short of its obligations

34. Outcome “Every time they’d turn over a rock, they would find a snake” The OCFI in 1994 decided to take control of CL under the Winding-Up Act. The sized the assets and liquidators disposed of the company. What is the OCFI?

35. Framework Legislation p. 207 • Framework legislation gives governments a vital role in mediating defining and limiting the justifications for financials institutions, • What can they do? What can’t they do? • Very tight prior to 1985.

36. RBC RBC is the Largest Bank in Canada with $429b in assets. The total sector is 1.7 trillion in size

37. RBC Mergers • In 1997 John Cleghorn the CEO of RBC went to a Christmas party where he met with the CEO of BMO. • Then and there they decided to merge “eggnog agreement”

38. Why? • Merger fever had gripped financial institutions south of the border. The big Canadian banks decided that in order to remain competitive they needed to be in the game as well.

39. RBC’s Routes to Expansion • Internal growth • Acquisition • Alliance (Merger) • RBC Choose merger.

40. Acquisitions • Is a tool that companies use to grow, but not always to grow profitably. • Why? Implementation often fails. • Government

41. RBC’s Key Issues in Acquisitions • Pre-acquisition Planning • Post-acquisition Integration

42. Key Issues in Acquisitions Pre-acquisition Planning (Strategic Motives) • Industry restructuring • Increased market power • Access to new markets • Economies of scale and scope • Acquisition of new skills • Diversification

43. What Was RBC’s? Pre-acquisition Planning (Strategic Motives) • Industry restructuring • Increased market power • Access to new markets • Economies of scale and scope • Acquisition of new skills • Diversification

44. Key Issues in Acquisitions Pre-acquisition Planning (Financial Motives) • Buying a bargain • Tax Advantages • Financial advantages (tax laws, acheive a listing, cash flow)

45. Key Issues in Acquisitions Pre-acquisition Planning (Strategic Issues) • Avoid ‘sprat catching’ or buying small companies as management will tend to ignore then and they will underperform. • The risk of failure increases as market share decreases • Avoid financially weak companies

46. RBC: Key Issues in Acquisitions Pre-acquisition Planning (Strategic Issues) • Avoid ‘sprat catching’ or buying small companies as management will tend to ignore then and they will underperform. BMO #5 • The risk of failure increases as market share decreases • Avoid financially weak companies

47. Key Issues in Acquisitions • Pre-Aquisition experience is only useful in so far as knowing what not to do based on your errors of the past.

48. Why Acquisitions? • Experience suggest that only 50% of acquisitions are a success. So why do they go ahead?

49. Why Acquisitions? • CEO Ego • Process Issues (non-strategic decision making) • Environmental Pressures (the pressure from bank mergers south of the border. John Cleghorn, RBC

50. Pre-acquisition Planning Selecting a target • Be strategic • Analyse your target • Expose incompatibilities. • Examine worth • Explore regulations, aka government