Report on the Development of the Canadian banking industry since the 1970s

Development of the Canadian banking industry since the 1970s

1           Introduction of Development of the Canadian banking industry since the 1970s

The overriding tendencies in the financing behaviour in the economy of Canada in the 1960s and early 1970s in relation to the GDP were mainly based on declining the indebtedness of the government sector a rising indented of the household sector. Through the 1970s, the rise in inflation was mainly due to nominal interest rates and uncertainty. The non-financial business was dependent on increasing short term financing and bank loans. From the mid of 1970s till mid-1990s the share of the marketable debt was an issue that increased financial conditions. In the mid-1990s the highly dominant trend was the decline in the debt of the government and extending offset of the growing capital market financials due to the corporate sector (Mishkin & Serletis, 2020). Considering the present proportion of the financial conditions with the capital market sources, banking business sector in Canada is still similar to the third years ago. Despite some increase in the reliance by the corporate sector of Canada and foreign sources of fund s the support is in view of domestic capital markets. Canadian banking and government collectively defined an efficient regulatory system with the fiscal discipline for the development of the corporate capital market. The Canadian capital market requires increasing deployment in the trend of increasing innovation and risk assessment in the Canadian banking industry (Engert, Fung, Nott, & Selody, 2020).

1.1         Rationale of Development of the Canadian banking industry since the 1970s

The present work determines the financing patterns for lenders and borrower from financial and non-financial considerations of government, corporations, and households. The key aspect of the work is to examine relative changes in the financial market and financial institutions that are the Canadian banking industry. The research is under the mechanism of lender and borrower supply funds with ultimate changes over time. The research identifies the challenges, changing the behaviour of banks, cause of concern of corporate borrowers, and market conditions (Engert, Fung, Nott, & Selody, 2020). The report answers the following rationale,

1.      What are the main developments and implications since the 1970s? In the Canadian banking industry?

2.      What are the legal and regulatory obstacles for the efficiency of the financial market?

3.      What factors impact on the size and financial market role in the financial market?

1.2         Goals of Development of the Canadian banking industry since the 1970s

The present work focuses on the changing pattern of the Canadian banking industry for lending and borrowing in Canada since the 1970s. The research considers the relative roles of financial markets and financial institutions. The development analysis also considers the impact of the transferring resources for borrowers from lenders under different perceptions. The present work also provides a long term view on the development of the Canadian banking industry over forty years by drawing view on data. The work enables to consider a broader perspective on the main factors that change the financial environment in Canada. The results will help in improving strategies and to overcome challenges that the financial sector is facing.    

1.3         A brief summary of other sections of Development of the Canadian banking industry since the 1970s

Section 1 of the report provides a summarized introduction of research backgrounds and goals of the work. Section 2 demonstrates the methodology used in the report along with the mechanism of data driving process. Section 3 is related to the analysis that can be further categorized as theoretical prediction and empirical validation with actual data set for financial structure and financial regulation. Section 4 concludes the report with a summary of results extracted from the data analysis.

2           Methodology of Development of the Canadian banking industry since the 1970s
2.1         Theory of Development of the Canadian banking industry since the 1970s

The financing patterns are accessed and followed for the past forty years. The data obtained in the report consists of strategies, rules and regulations, loans, bonds, short term papers, credit market obligations, and mortgages. The report excludes equity capitals of the corporation. 

2.2         Data of Development of the Canadian banking industry since the 1970s

The statistical data obtained in the report and further undergone through various processes. The data obtained here use complete information about debt, borrow, financial statements, and sources of external funds.

3           Analysis of Development of the Canadian banking industry since the 1970s
3.1         Analysis of the financial structure 

The financial intermediaries can be further categorized into three conditions including depository institutions, contractual savings institutions, and investment intermediaries. The intermediation role dates back hundreds of years but with the time it has been changed. The significant changes are observed in services, instrumentation, and nature of entities. The increased changes in the external factors and underpinning of efficient and effective intermediation are under the formulation of the finance and efficient intermediation for law and finance view. The financial market consists of bonds, stocks, and contracts of banks. In external financing, the stocks are not considered as important sources (Calmès, 2004). Debt and equity securities are not considered in the primary way to finance business operations. Indirect financing is more effective as compared to direct financing in the banking industry. A broad overview of the financing patterns is considered for the time range of over forty years. The economic analysis of financial structures is efficient and effective in explanation of underdevelopment financial system and show economic growth and development.

 Considering the external funds, the relative relation of bank loans, nonbank loans, bonds and stock for Canada, United States, Germany and Japan is shown in figure 1. The small fraction of the external financing shows that stock market is 12% in the Canadian business of 1970 to 2000 period. The primary way of business is to issue equity securities and marketable debt. The stocks and bonds in combined are 27% of total market shares and securities. 25% of the external funds are utilized in financial activities. In the business, the primary source of funds are loans, pension funds and bank charges that are more than 70% in Canada. Collateral is a property that pledges to guarantee payment that lender is not able to pay back. The majority of household debt consists of the collateralized loan (Freedman & Engert, 2003).

The collateral is considered as an important factor. The important feature of financial markets is information costs and substantial transactions. In the economic analysis, the impact of transaction costs is high on the structure of the financial system. In the financial intermediaries, the financial structure is essential to reduce the transaction cost and allow the borrowers to benefit the financial markets. Financial intermediaries are used to developing the expertise and find application in the lowering of transaction costs. The low transaction enables liquidity services to the customers. The presence of lemon problems in banking sector keeps the market securities for instance bond market and stock markets that are effective in the channelling funds for borrowers and savers.

Figure 1:Sources of External funds and comparison of the United States, Canada, Germany, and japan

3.1.1        Major borrowing patterns  of Development of the Canadian banking industry since the 1970s

Figure 2 below provides outstanding debt of domestic nonfinancial sector of Canadian banking such as government enterprise, unincorporated business, non-financial private corporations and nominal GDP. The data in figure 2 indicate that debt of person and unincorporated business increased the GDP with time. For Canadian banking industry mortgage credit and consumer credit, both contributed to the increasing share of household debt, mortgage credit and rapid rate of growth. The first half of the 1980s shows the sustained period in which debt grew. The extremely high-interest rates in the 1970s and 1980s were associated with inflation. Steep recession and decline were observed in housing prices. In the mid-1970s, the debt of the government sector was declined with GDP.

 The ratio of debt to GDP increased 40% in the 1970s and 90% in 1990s but fell back to 70 per cent in 1002 due to balanced budget and surpluses. The outstanding debt increased 44 to 49 per cent in 1960s and fluctuated to 54 to 64 per cent. The loans, marketable debt, and mortgages notably decreased through 1960 to 1970s. It reflects a decline in the importance of borrowing by households. The third major group of corporate sector use both financial institutions and market as sources of funds. The bank loans increased with inflation rates over time. The corporations principally financed short term bank deposits after the 1980s. The further analysis of behaviour fo non-financial business sector is conducted by using the data of the Canadian banking sector. The data coverage considers the securities issued by the non-financial business. 

Figure 2: Outstanding Debt of Domestic Non-Financial

3.1.2        By type of instrument of Development of the Canadian banking industry since the 1970s

Figure 3 represents the composition of external financing on the basis of statistical data obtained. The graphical representation shows that debentures and bonds both decreased from 20 per cent. In the 1970s the decrease was 15 per cent. Reaching to 2002, the decrease reached 27 per cent. The trends demonstrate the proportion of finance from capital market sources is under a similar trend since a long period.  The lemon problems are directly related to the asymmetric information and go away with the absence of asymmetric information. Similarly, the securities can distinguish good firms from bad and provides funds for the most productive investment opportunities. The alternative solution for the adverse selection issues in the financial market is the reduction of asymmetric information and it vanishes with supplying funds to the individuals. In Canada, the companies, for instance, poor and standard companies gather information from balance sheet positions, financial intermediaries and activities. 

Since the 1970s, based on data analysis, corporations increased sharply the usage of loans from banks. The main reason was increasing rates of inflation in this period. In these situations, the corporations principally finance themselves by using loans from the chartered banks. The lenders shifted from short term instrumentation to the short term bank deposits. Returning to the overall analysis, it is evident that since the 1980s the share of the marketable debt was increased with an increasing number of bond issues. The tendency was then accentuated by decreasing the rate of household borrowing. In the 1990s, the stable shares of credit finance were considered. The increasing share of bonds and debentures was issued by the tended corporations.

Figure 3: Non-Financial Business Sector

3.1.3        Borrowing by the financial sector of Development of the Canadian banking industry since the 1970s

Figure 4 below shows that financial entities are increased with increasing credit market for domestic non-financial borrowers.

3.1.4        Government regulations of Development of the Canadian banking industry since the 1970s

The prevention from serving enough information reduce the issues of asymmetric information and leads to adverse selection. Form political aspects, the government releasing positive and negative information can induce impact on the customers. In Canada, government rules exist to fulfil the conditions of selling securities in the independent audits (Mishkin & Serletis, 2020). 

3.1.5        Collateral and net worth of Development of the Canadian banking industry since the 1970s

The adverse selection lines with the working of financial markets for the borrowers who lose the loan payments. The concept of adverse selection is to define the financial intermediaries with financing the corporations. In addition, the concept of moral hazards can also be utilized to define the final fact. The debt contracts are often complicated in the banking sectors, but substantial restrictions are imposed on the behaviour of borrower.

3.1.6        Restrictive covenant of Development of the Canadian banking industry since the 1970s

The moral hazard affects the choice between the contracts of equity and debt. One way for stockholder was to reduce the issues of a particular time. In the banking sector, there are four types of restrictive covenants that are listed below,

1.      Covenant to discourage undesirable behaviour.

2.      Covenant to encourage desirable behaviour.

3.      Covenant to keep collateral valuable.

4.      Covenant to provide information

Considering the four financial intermediaries the financial structure indicates the behaviour of borrowers. The important financial factors for the Canadian banking industry are listed below, 

1.      Transaction cost freezes the direct involvement of savers and borrowers in the financial market.

2.      Asymmetric information faces two issues including moral hazard and adverse selection.

3.      The adverse selection interferes efficient functioning in the financial markets.

4.      Moral hazard and the principal-agent problem can define the debt contract. Tools used to reduce principle age that indicates the monitoring, financial intermediation, and increasing government regulations. 

3.2         Analysis of Financial regulation of Development of the Canadian banking industry since the 1970s

The section discusses financial regulation analysis in the Canadian banking sector and identifies reasons related to the government safety net in financial markets and types of financial regulations that reduce the asymmetric information issues. In the recent working paper of Canadian banking, industries identified that issues are not intermediaries versus market but instead of that issues are between environment and functioning intermediaries. In recent years, increased interest in emerging economics was observed as effective and efficient intermediation. In this perspective, the emphasis is on the regulatory system. The data published by the bank shows the estimated number of private lenders and securities issued by nonfinancial businesses. The economic analysis and financial regulation are defined to explain the crisis worldwide in banking (Itools-coutils. fcac-acfc. gc. ca, 2020). 

3.2.1        Banking asymmetric information of Development of the Canadian banking industry since the 1970s

Banking asymmetric analysis depends on the asymmetric information, insolvency, liquidity and insolvency crisis, the role of deposit insurance and methods to handle failed banks.

3.2.1.1       Assets of Development of the Canadian banking industry since the 1970s

Figure 4 below provides a consolidated monthly balance sheet of all Canadian banking industry for assets.

Figure 4: current consolidated monthly balance sheet of all Canadian banking industry for assets

Source https://ws2.osfi-bsif.gc.ca/webapps/Temp/ce987518-9cb9-4402-8fd6-d21e3c117132financialdata.aspx

3.2.1.2       Liability  of Development of the Canadian banking industry since the 1970s

Figure 5 below provides a consolidated monthly balance sheet of all Canadian banking industry for liabilities.

Figure 5:consolidated monthly balance sheet of all Canadian banking industry for liabilities

3.2.2        Asymmetric information  of Development of the Canadian banking industry since the 1970s

The regulatory system is reformed in the banking sector to prevent future issues. The financial crisis induces impact on the financial system with the concept of asymmetric information, moral hazard, and adverse selection and government pursue financial regulation. Based on the Canadian capital market, it will continue to exist and grow. It is important to consider what factors would help the Canadian markets to grow and flourish (Osfi- basis. gc. ca, 2020). The important factors that would help the Canadian system are listed below,

1.      The efficient regulatory system improves the growth and development of the Canadian banking industry.

2.      Continuing fiscal discipline in the Canadian government has large fiscal deficits and fiscal consolidation will encourage participation in future.

3.      The increasing trend of innovation and risk assessment in the capital market of Canada will continue to grow.  

3.2.3        Role of deposit insurance of Development of the Canadian banking industry since the 1970s

In 1967, the deposit insurance corporation (CDIC) of Canada started and depositors consider the value of deposits. Depositors often lack the information regarding the quality of bank assets, and it leads to bank panic. The simultaneous failure of bank leads to a sharp decline and result in harmful consequences for the Canadian economy. Comparing with the previous years, in recent years government deposit insurance has been increased. The deposit insurance is not only linked with the government safety net. The Canadian banks are not only financial intermediaries that face a systematic threat to the improvement process of the financial system. In the case of financial crises, the government provides essential support to the central bank and troubled institutions, for instance, the bank of Canada. 

The designated funds are delivered directly to the troubled institutions. In 1992, the financial restructuring process increased and become a major reform that governs the federally regulated financial institution. Later on, it was implemented to respond to the factors that affect development in the entire financial services industry. In the 1980s the trust companies were experiencing increasing demand for the savings and short-term deposits due to variation in interest rate volatility and inflation. The companies were concerned about the demand for a mortgage, demographic factors, inflation rate, and increasing volatility rate. Since the 1970s there have been several variations in Canadian financial regulation. The development motivated fundamental influences. There are at least three economic factors for financial restructuring in Canada. The economic factors for the financial restructuring of Canada are listed below,

1.      Demographics

2.      Variability of interest rates and inflation

3.      Information revolution and technology

The increasing efficiency of data process due to the development of information technology facilitated the usage of new instruments in financial service functions. The risk exposure due to financial services is now reduced with the improvement of technology. The technological revolution since the 1970s provides new development of product and instrument and induced impact on the accessibility and availability of information that influences the financial activities of businesses and household.  Figure 6 below shows the development of the industry with the passage of time after the 1970s. The technological development enabled to access the data about the investment and business.

Figure 6: pricing and time relation

3.2.4        Methods to handle a failed bank

There are different ways to deal with the failed banking system. The most prominent methods are payoff method, purchase and assumption method, and government bailout method. In the payoff method, the liquidation is considered for selling all assets, taxes, depositors, shareholders, and government taxes. The pay to advantage closes in the bad bank. In the case of purchase and assumption method, the best mechanism is to find the willing merger, a partner who will purchase the liabilities. In this situation, the government offer low-interest rates without joining the CDIC.in government bailout method debt is converted to the equity.  

3.2.5        Safety net of Development of the Canadian banking industry since the 1970s

The central bank is one of the major lenders of the resort. The issues are moral hazard and adverse selection. In the moral hazard, depositors do not impose the discipline of the marketplace and the financial institution have a higher level of incentives to take the risk. In case of circumstances, the risk-takers opt for banking and depositors find it simple to monitor the situation. In the regulatory process, deposit insurance is the safest method that encourages institutions to gamble with the deposit money.

3.2.6        Types of financial regulation of Development of the Canadian banking industry since the 1970s

There are two main types of financial regulation including restrictions on asset holdings and capital requirements. The restriction on asset holding prohibit the holding of common stock and promote the diversification of assets. The capital requirement can be further categorized as leverage ratio and risk-based capital requirement.          

4           Conclusion of Development of the Canadian banking industry since the 1970s

The present work is based on analysis of development in the Canadian banking sectors. The report considered data from the 1970s to evaluate the development and growth of the banking sector. The results of analysis answer the question "what are the implications and strategies developed by the Canadian banking sector for the analysis of the stock market and bond issues and corporation work?". Based on the analysis, it can be concluded that the banking industry of Canada improved rapidly in the past few years. The percentage of Canadian based firms has increased modestly with nearly 15 per cent. The downward trend is observed for a number of firms relying on banking. In a nutshell, despite the increased reliance on foreign sources, the fund's requirement increased.    

5           References of Development of the Canadian banking industry since the 1970s

Calmès, C. (2004). Regulatory Changes and Financial Structure: The Case of Canada. Retrieved from www.banqueducanada.ca: https://www.banqueducanada.ca/wp-content/uploads/2010/02/wp04-26.pdf

Engert, W., Fung, B. S., Nott, L., & Selody, J. (2020). Restructuring the Canadian financial system: Retrieved from www.bis.org: https://www.bis.org/publ/confp07g.pdf

Freedman, C., & Engert, W. (2003). Financial Developments in Canada: Past Trends and Future Challenges. Retrieved from www.bankofcanada.ca: https://www.bankofcanada.ca/wp-content/uploads/2010/06/engerte.pdf

Itools-ioutils. fcac-acfc. gc. ca. (2020). Canadian Financial Literacy Database. Retrieved from itools-ioutils.fcac-acfc.gc.ca: https://itools-ioutils.fcac-acfc.gc.ca/RDCV-BRVC/sear-rech-eng.aspx?f0=2&f4=4&WT.mc_id=CFLD-Topic-FinPlan&f0=2&f4=4&WT.mc_id=CFLD-Topic-FinPlan

Mishkin, F. S., & Serletis, A. (2020). The economics of money, banking and financial markets. Pearson Canada Inc.

Osfi- bsif. gc. ca. (2020). Financial Data for Banks. Retrieved from www.osfi-bsif.gc.ca: https://www.osfi-bsif.gc.ca/Eng/wt-ow/Pages/FINDAT.aspx