9.3 Banking in Canada Today

In Canada today, and in other industrial countries, the mainstream banking system is made up of a central bank and a number of commercial banks and other deposit-taking institutions called near banks. Table 8.2 illustrates the structure of the banking industry in Canada. The industry is defined broadly to include deposit-taking institutions, not just those that operate under the federal Bank Act.

Table 8.2 The Canadian banking system in 2017
Banking Institution Number
Central Bank:

The Bank of Canada

Number of Chartered Banks:

Schedule I domestic banks


Schedule II foreign banks subsidiaries


Schedule III foreign bank branches

Total 64
Source: Canadian Bankers’ Association. http://www.cba.ca/memberbanks

Banks are financial intermediaries. They borrow money from the public, crediting them with a deposit. The deposit is a liability of the bank. It is money owed to depositors. The money raised from depositors provides the funds to support the bank loans made to businesses, households, and governments.

Financial intermediary: a business that specializes in bringing borrowers and lenders together.

Banks are not the only financial intermediaries. Trust companies, credit unions, caisses populaires, insurance companies, securities dealers, mutual fund companies, and independent financial advisors all play a role in this industry. But banks hold more than 70 percent of the assets in the financial services sector, and the six largest Canadian banks account for over 90 percent of the assets of the banking industry. Trust companies, credit unions, and caisses populaires also accept deposits that are used as money, but those deposits are a small fraction of the total of deposit money. As a result, bank deposits are the focus of our discussion of money in Canada.

The Bank of Canada is Canada’s central bank. It is the source of the bank notes used to make payments and held as cash reserves by commercial banks. Established by the government in 1935, it has the responsibility to regulate the national money supply and support the operation of financial markets. The Bank’s power to meet these responsibilities comes from its monopoly on the issuance of bank notes.

Bank of Canada: Canada’s central bank.

The Bank of Canada also is the provider of:

  • Banking services for the commercial banks in the system
  • Banking services for the federal government
  • Lender-of-last-resort facilities in times of liquidity crises and reserve shortfalls

Commercial banks hold some of their reserves as deposits in the Bank of Canada, and make payments among themselves using their Bank of Canada deposits. These interbank payments arise from wire transfers, direct deposits, pre-authorized debits, bill payments, point-of-sale debits, and online payments made by bank customers. For example, cheques written by customers at one bank, say Scotiabank, but paid to and deposited by customers of the Royal Bank result in transfers of deposits between these banks. To settle these transfers, Scotiabank must pay the Royal Bank. Funds held by Scotiabank on deposit in the Bank of Canada are used for this purpose. They are called “settlement balances.” In 2016, Payments Canada, which coordinates this clearing of interbank transactions, handled more than 7.4 trillion transactions including 600 million cheques and 4.5 billion point-of-sale debits.

The government holds some deposits in the Bank of Canada. Government receipts, like income taxes paid to the Receiver General, are deposited in government accounts in the Bank of Canada. Government payments like Old Age Security, Employment Insurance benefits, bond interest, and income tax refunds are paid with government cheques or transfers drawn on its Bank of Canada account. Government funds over and above those needed to make regular payments are held on deposit in the commercial banks, and earn interest income for the government.

The key difference between a central bank and the commercial banks in the banking system is the profit motive. Central banks do not pursue profits. Their operations focus on the management of the cash reserves available to the public and the banks. The supply of cash reserves affects the behaviour of other banks and financial markets more generally. This is the monetary policy role of the central bank. We will examine it in detail in Chapter 10.

Commercial banks, on the other hand, are profit-oriented businesses. They operate, as we will see shortly, to maximize the profit they earn for their owners. To this end, they offer banking services to the public. Using the notes and deposits issued by the Bank of Canada as reserves, they issue bank deposits to their customers—which are widely used as the medium of exchange—and they make loans to finance purchases made by businesses and households.

To illustrate the business of these banks, Table 8.3 shows the consolidated balance sheet of Canadian chartered banks in December 2016. In the table we see that the banks held small cash balances as reserves against their deposit liabilities. Their other Canadian assets were mainly loans to households and businesses, including mortgage loans, and their holdings of financial securities. Because cash and many of their financial securities have high liquidity, banks can make long-term loans and still have cash and funds available if depositors withdraw their money.

Liquidity: the cost, speed, and certainty with which asset values can be converted into cash.

Table 8.3 Balance sheet of Canadian chartered banks, December 2016
Assets billions Liabilities billions
$ $
Canadian dollars: Canadian dollars:



Personal deposits


Government of Canada securities


Non-personal deposits


Corporate securities


Government deposits


Personal and business loans


Advances from Bank of Canada




Other liabilities


Foreign currency assets


Foreign currency liabilities


Other assets

Total assets 5,221.7 Total liabilities and shareholders’ equity 5,221.7
Source: Bank of Canada, Banking and Financial Statistics, December 2016, Tables C3 and C4 and author’s calculations. Figures have been rounded to one decimal place.

However, many loans to businesses and households are quite illiquid. The bank cannot easily get its money back in a hurry. This is not really a cause for concern when people and businesses have confidence in the banks and make widespread use of bank deposits as money. Payments and receipts are both in bank deposit form, which are cleared quickly and efficiently through the cheque-clearing and transfer facilities. Banks need only small cash balances to cover the net clearings and net public demand for cash. In Table 8.3, the banks are holding only $33.5 billion against deposit liabilities of $1,775.4 billion.

Canadian banks also carry on important international banking operations, as do banks in many other countries. We see this business recorded on the balance sheet as foreign currency assets and liabilities. The foreign currency assets are mainly loans to customers and holdings of foreign financial securities. Foreign currency deposits of customers are the main foreign currency liabilities. These foreign currency operations are similar to the banks’ domestic currency operations. The banks provide loan financing to customers needing foreign currency to make payments in other countries, and they provide deposit facilities for customers using foreign currency for international transactions.

Competition and co-operation are important to the efficient operation of the banking system. Banks compete among themselves for customer deposits and customer loans. Some of the competition for deposits is based on the location, convenience, and quality of bank branches, some on the offers of service packages including personal financial advice and wealth management, and some on the interest rates offered on deposit balances. If you watch TV, you are probably aware that some small banks like President’s Choice Financial and Tangerine Bank offer you a relatively high interest rate and will make no service charges if you would put some of your funds on deposit with them. Success in attracting deposits is very important to size and growth of a bank’s business.

Credit-worthy customers willing to borrow funds are equally important to a bank’s operations. Interest income earned on customer loans is the major source of bank revenue. As a result, banks compete in the personal and business loan markets, using both the terms of loans and the interest rates charged on loans to attract borrowers. The market for mortgage funds is one of the most competitive areas of bank operations. Mortgage rates and terms are advertised widely in the media and in displays in bank offices and even in supermarkets.

Despite this competition for deposits and loans, the banking system depends on the co-operation among banks that makes deposits the medium of exchange. Co-operation in the cheque-clearing system and the debit card Interac system are two important examples of banks working jointly to provide the payments system. A cheque book or a debit card is not very useful if it can make payments only to other people or businesses that do business with the same bank you use. Joint interests in VISA and MASTERCARD are a second important part of inter-bank co-operation that makes these cards widely acceptable as a source of credit.

There are also important areas of bank co-operation on the lending side of their operations. It often happens that businesses and industries have projects that need more financing than any one bank can or wants to provide. However, several banks might agree to provide funding jointly, increasing their lending capacity and spreading the risks associated with the project among them.

These dimensions of competition and co-operation among banks, and their contribution to the efficient functioning of the money and financial sector of the economy, appear regularly in the debate over bank mergers in Canada.


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