Chartered Banks

A chartered bank is a privately owned, profit-seeking firm that serves individuals, nonbusiness organizations, and businesses as a financial intermediary. Chartered banks are the largest and most important financial institutions in Canada — Financial Pillar #1.

How It Appears Per Course

ADMN 201

Structure

• As of March 2021, Canadian chartered banks held $4.34 trillion in assets
• Schedule I banks — Canadian-owned; no single interest can control more than 10% of voting shares
• Schedule II banks — may be domestically owned but don’t meet the 10% limit, or are foreign-controlled (e.g., HSBC Bank Canada)
• The Big Six — RBC, TD, Bank of Nova Scotia, Bank of Montreal, CIBC, National Bank — act in concert with respect to the prime rate; the five largest account for ~90% of total bank assets

Services Offered

• Chequing and savings accounts
• Loans (short- and long-term)
• Financial advice, brokerage, electronic funds transfer
• Pension and trust services

Bank Loans

• Banks prefer short-term loans to finance inventories and accounts receivable
• Secured loan — backed by collateral (e.g., accounts receivable); if the borrower defaults, the bank sells the collateral
• Unsecured loan — backed only by the borrower’s promise; only the most creditworthy borrowers qualify
• Prime rate of interest — the lowest rate charged to borrowers; changes with demand/supply of loanable funds and Bank of Canada policy

Banks as Creators of Money Banks create money through deposit expansion. When a bank takes in a deposit, it keeps a portion in reserve and lends the rest. The borrower deposits those funds elsewhere, and the cycle repeats, multiplying the original deposit many times over.

Example (with 10% reserve requirement): A $100deposit\to bankkeeps$10, lends $90\to recipientdeposits$90 elsewhere → that bank keeps $9,lends$81 → … → original $100canresultinupto$1,000 in new deposits across the system.

Canada dropped the formal reserve requirement more than two decades ago, meaning banks can theoretically create even more money — but prudence limits this in practice.

Trends Reshaping Chartered Banks

• Deregulation — banks can now own securities dealers, sell mutual funds, and issue commercial paper, blurring the line between banks and investment firms
• Changes in consumer demand — electronic banks (e.g., Tangerine) pay higher interest with no branch costs; traditional banks are adopting AI, chatbots, and mobile payment options
• Changes in international banking — foreign banks can now operate in Canada; mergers have been blocked by government to protect competition

Cross-Course Connections

Money — chartered banks hold M-1 demand deposits and expand the money supply through lending
BankOfCanada — Bank of Canada regulates chartered banks and sets the bank rate
ShortTermFinancing — bank loans are the main source of short-term business financing
LongTermFinancing — banks also provide long-term loans and hold bonds
AlternateBanks — trust companies and credit unions operate alongside chartered banks

Key Points for Exam/Study

• Chartered banks = Financial Pillar #1; largest financial institutions in Canada
• Schedule I = Canadian-owned (max 10% single-interest voting); Schedule II = foreign/doesn’t meet limit
• Prime rate = lowest rate charged to borrowers; Big Six act in concert
• Deposit expansion: each deposit → reserve kept + rest lent → multiplier effect on money supply
• No formal reserve requirement in Canada since ~2000s; banks still self-limit for risk reasons
• Deregulation has allowed banks to offer investment products, blurring the four-pillar boundaries

Open Questions

• What is the current prime rate, and how has it changed since the COVID-19 rate cuts?

flowchart LR
    A["$100 Deposit"] --> B["Bank keeps $10 reserve\nLends $90"]
    B --> C["Borrower deposits $90\nat another bank"]
    C --> D["Bank keeps $9 reserve\nLends $81"]
    D --> E["Process continues..."]
    E --> F["Original $100 →\nup to $1,000 in\nnew deposits"]