copyright © 2014 pearson canada inc. chapter 12 nonbank finance mishkin/serletis the economics of...

Copyright © 2014 Pearson Canada Inc.

Chapter 12

NONBANK FINANCE

Mishkin/Serletis

The Economics of Money, Banking, and Financial Markets Fifth Canadian Edition

Copyright © 2014 Pearson Canada Inc. 12-2

Learning Objectives

1. Identify the difference between banks and nonbank financial institutions

2. Explain the regulation of nonbank financial institutions in the context of asymmetric information problems

3. Report how recent financial-sector legislation is expected to lead to larger and increasingly complex financial groups, engaging in a full gamut of financial activities


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


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


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.


*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.


Relative Shares of OSFI_Regulated Financial Intermediary Assets


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


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


Finance Companies

• Minimal regulation by provinces• Rapid growth• Three types:

1. Sales finance companies2. Consumer finance companies3. Business finance companiesThere are other formats, such asPayday Loan companies = Cash Advance CompaniesGeneral 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/


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)


Mutual Funds

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


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/


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”)

copyright © 2014 pearson canada inc. chapter 12 nonbank finance mishkin/serletis the economics of...

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