Detailed guide on the chartered banks in Canada, their classifications, operations, and the regulatory framework within which they function, as set out by the Bank Act.
In Canada, the primary function of chartered banks is to accept and safeguard deposits from individuals and businesses. They then lend or transfer those funds to users in various forms, such as mortgages, car loans, business loans, and other lending instruments.
All chartered banks in Canada operate under the Bank Act and must function within its regulatory framework. The Bank Act is the federal legislation that sets out operating rules and restrictions for banks and is updated regularly, usually through five-year revision cycles.
Under the Bank Act, banks are designated as Schedule I, Schedule II, or Schedule III. Each designation has unique rules and regulations surrounding the banks’ activities. Most Canadian-owned banks are designated as Schedule I banks, whereas foreign-owned banks are either Schedule II or Schedule III banks.
Schedule I banks are banks that are not a subsidiary of a foreign bank and are considered domestic banks even if they have foreign shareholders. There are currently more than 30 domestic Schedule I banks operating in Canada.
Canada’s Big Six Banks dominate in asset size and have established an extensive network of retail branches and automated teller machines (ATMs) across the country. They are:
These banks have also expanded their international operations by acquiring or investing in foreign international financial institutions.
Stat: Medium-sized banks have shareholder equity between $2 billion and $12 billion.
Canadian banks offer a wide variety of consumer and commercial banking products and services, including mortgages, loans, accounts, and investments. Savings deposits are eligible for deposit insurance provided by the Canada Deposit Insurance Corporation (CDIC).
Banks also offer financial planning, cash management, and wealth management services—some directly and some through subsidiaries.
Within the banking groups, subsidiaries also handle services such as investment dealer activities, self-directed investing, and the sale of insurance products.
Example: A customer opens a self-directed investment account through an investment dealer subsidiary of their bank branch. The bank branch does not have access to the investment account information, and vice versa, due to information sharing limits known as firewalls.
One major source of income for banks is the activity of lending funds at an interest rate higher than the rate they pay on deposits or other borrowings. This difference, known as the interest rate spread, covers operational costs and provides a margin of profit for the bank.
Schedule II banks are incorporated and operate in Canada as federally-regulated foreign bank subsidiaries. They may accept deposits eligible for CDIC insurance and can engage in business similar to Schedule I banks.
Examples of Schedule II Banks:
Schedule II banks derive most of their revenue from retail banking and electronic financial services.
Schedule III banks are federally-regulated foreign bank branches authorized under the Bank Act to perform banking activities in Canada. They focus on corporate and institutional finance and investment banking.
Examples of Schedule III Banks:
The presence of foreign banks in Canada benefits domestic Schedule I banks by facilitating their international operations. Additionally, foreign-owned banks enable the investment of foreign capital in Canada, providing alternative borrowing sources for Canadian corporate borrowers.
Bank Act: Federal legislation setting out the operating rules and restrictions for banks in Canada.
Canada Deposit Insurance Corporation (CDIC): Federal Crown corporation that provides deposit insurance to depositors in Canadian banks.
Firewall: Barriers that inhibit information sharing across different business units within the same banking group.
Interest Rate Spread: The difference between the interest rate banks charge on loans and the interest rate they pay on deposits.
Q: What is a Schedule I bank? A: A Schedule I bank is a domestic bank that is not a subsidiary of a foreign bank.
Q: How often is the Bank Act updated? A: The Bank Act is typically updated every five years.
Q: Are deposits in Schedule II banks insured? A: Yes, deposits in Schedule II banks may be eligible for insurance provided by the CDIC.
Q: What is the primary income source for chartered banks? A: The primary source is the interest rate spread, which is the difference between the interest rate charged on loans and the interest paid on deposits.
Q: What are firewalls in banking? A: Firewalls are barriers preventing the sharing of customer information across different business units within the same banking group.
Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC® exam practice questions designed to reinforce the key concepts covered in our free Canadian Securities Course. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨
Good luck!
🚀 Launch Date: April 14th
🎉 Now On App Store!
📱 Available on iPhone and iPad
📚 Master the CSC® Exam with our top ranked iOS app! Packed with thousands of sample questions, it's your perfect study companion for acing the Canadian Securities Course Certification exams!
🎯 Achieve Your Professional Goals with ease. Try it now and take the first step towards success!
✨ Download Today! ✨