ADMN 201 — Ch14 Summary: Money and Banking
Learning Objectives Overview
| LO | Objective | Key Concept Page |
|---|---|---|
| 14.1 | Define money and identify its forms in Canada’s money supply | Money |
| 14.2 | Understand the financial institutions in the Canadian financial system | CharteredBanks |
| 14.3 | Explain the Bank of Canada’s functions and monetary policy tools | BankOfCanada |
| 14.4 | Explain alternate banks, specialized intermediaries, and investment dealers | AlternateBanks, SpecializedLendingIntermediaries |
| 14.5 | Discuss international banking and finance institutions and activities | InternationalBankingAndFinance |
LO 14.1 — What Is Money?
Money is anything generally accepted as payment. To function, it needs four characteristics: portable, divisible, durable, and stable. It serves three functions: medium of exchange, store of value, and unit of account.
Canada’s Money Supply:
- M-1 = currency + demand deposits (most liquid; ~$1.46T in March 2021)
- M-2 = M-1 + savings deposits + time deposits + money market mutual funds
Credit cards are a money substitute — not included in M-1 or M-2. Debit cards are in M-1 because they transfer money immediately.
LO 14.2 — The Canadian Financial System
Four financial pillars structure the Canadian financial sector:
- Chartered banks — largest; privately owned; main source of short-term business loans
- Alternate banks — trust companies + credit unions
- Specialized lending & savings intermediaries — life insurance, factors, VC firms, pension funds
- Investment dealers — securities industry
Chartered banks (Pillar #1) are the most important. The Big Six hold ~90% of all bank assets. Banks create money through deposit expansion: deposits → reserve kept + rest lent → cycle repeats → multiplier effect.
Bank loans: Secured (collateral-backed) vs. unsecured. Large creditworthy borrowers get the prime rate — the lowest lending rate.
LO 14.3 — The Bank of Canada
The Bank of Canada (formed 1935) is Canada’s central bank. It manages the money supply using two tools:
| Tool | Expansionary (↑ supply) | Restrictive (↓ supply) |
|---|---|---|
| Open market operations | Buy gov’t securities | Sell gov’t securities |
| Bank rate | Lower it | Raise it |
Bank rate = the rate charged to chartered banks for borrowing from the BoC; it anchors all other rates.
Chain reaction: BoC rate ↑ → chartered banks’ costs ↑ → consumer/business rates ↑ → borrowing/spending ↓ → inflation ↓
LO 14.4 — Alternate Banks & Specialized Intermediaries
Alternate Banks (Pillar #2):
- Trust companies — safeguard estates; serve as trustee, transfer agent, and registrar for corporations (declining in importance)
- Credit unions / caisses populaires — cooperative, member-owned; lend + accept deposits; Mouvement Desjardins is #1 in North America (7.5M members)
Specialized Intermediaries (Pillar #3):
- Life insurance companies — share risk via premiums; invest in mortgages/bonds; 2nd largest intermediary in Canada
- Factoring companies — buy AR at a discount; collect full face value
- Sales finance companies — finance instalment purchases; item = security
- Consumer finance companies — personal loans; often no collateral
- Venture capital firms — equity investment in high-potential firms; may demand 50%+ ownership + board seat
- Pension funds — accumulate contributions; invest; pay out to subscribers in the future
LO 14.5 — International Banking and Finance
International financial transactions flow through banks that convert currencies between countries. If trade is balanced, no actual currency needs to move — inflows and outflows cancel. Imbalances require actual currency flows.
Currency valuation: The Law of One Price holds that identical goods should cost the same everywhere. The Big Mac Index makes this concrete. Countries may devalue their currency to boost exports.
Key international institutions:
- World Bank — funds development (roads, schools, hospitals) in underdeveloped countries
- IMF — 190 nations; promotes stable exchange rates; provides short-term loans; ~$1T available (2021)
No single worldwide banking authority exists — the system relies on bilateral and multilateral agreements.
Concept Map
mindmap root((Ch14: Money & Banking)) LO 14.1 Money 4 Characteristics 3 Functions M-1 vs M-2 Credit ≠ Money LO 14.2 Financial System 4 Pillars Chartered Banks Deposit Expansion Prime Rate LO 14.3 Bank of Canada Formed 1935 Bank Rate Open Market Ops Expansionary vs Restrictive LO 14.4 Alternate & Specialized Trust Companies Credit Unions Life Insurance Factoring / VC / Pension LO 14.5 International Payments Process Law of One Price World Bank IMF