Money and The Financial System: ©steve Allen/ Getty Images

Money and the
Financial System
Chapter 15
©Steve Allen/ Getty Images
© 2020 McGraw-Hill Education Limited

Learning Objectives
15-1 Define money, its functions, and its characteristics.
15-2 Describe various types of money.
15-3 Specify how the Bank of Canada manages the money supply
and regulates the Canadian banking system.
15-4 Compare and contrast chartered banks, trust companies, and
credit unions/caisses populaires.
15-5 Distinguish among nonbanking institutions such as insurance
companies, pension funds, mutual funds, and finance
companies.
15-6 Investigate the challenges ahead for the banking industry.
2
Money in the Financial System 1
Money (or currency)
• Anything generally accepted in exchange for
goods and services
• Paper money first issued in Canada in 1817
• Fiat money
3
Functions of Money
• Medium of exchange
• Measure of value
• Store of value
4
Characteristics of Money
• Acceptability
• Divisibility
• Portability
• Stability
• Durability
• Difficult to counterfeit
5
Difficult to Counterfeit
The Bank of Canada redesigns currency in order to stay

ahead of counterfeiters and protect the public.
6
© 2020 McGraw-Hill Education Limited ©Vstock LLC/Getty Images
Types of Money
• Paper money and coins
• Chequing account (demand deposit)
• Money stored in an account at a bank or other financial
institution that can be withdrawn without advance notice
• Savings account (time deposit)
• Accounts with funds that usually cannot be withdrawn without
advance notice and/or have limits on the number of
withdrawals per period
7
Types of Money continued
• Money Market Accounts
• Accounts that offer higher interest rates than standard bank
rates but with greater restrictions
• Certificates of Deposit (CDs)
• Savings accounts that guarantee a depositor a set interest rate
over a specified interval as long as the funds are not withdrawn
before the end of the period
8
• Credit cards
• Means to access to preapproved lines of credit granted by a
bank or finance company
• Advantages of credit cards include: convenience, easy access
to credit, and worldwide acceptance
• Reward cards are credit cards that carry a benefit to the user
• Bank Act Code of Conduct
9
Credit Cards
Credit cards have many advantages, including being able to buy

expensive items and pay them off a little at a time. However, this can
easily lead an individual to incur spiraling credit card debt that is hard
to pay off.
10
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• Debit card
• A card that looks like a credit card but works like a cheque
• Results in a direct, immediate, electronic payment from the
cardholder’s account to a merchant or third party
• “Near” money
• Travel’s cheques, money orders, cashier’s cheques
• Cryptocurrency
• Bitcoin
11
Credit Card Fraud
• More and more computer hackers have managed to
steal credit card information
• Make Internet purchases
• Make a card exactly the same as the stolen card
• Losses on credit card theft run into the billions

• Consumers are usually not liable for the losses provided they
took reasonable care to keep their account and PIN safe
12
The Canadian Financial System 1
The Bank of Canada
• Established in 1934
• Charged with promoting the economic and financial
welfare of Canada
• Major responsibilities:
• Conduct monetary policy
• Issue bank notes
• Promote safe and efficient financial systems
• Provide high quality funds management services
13
Monetary Policy
• The means by which the Bank controls the amount of
money available in the economy
• Aims to keep supply and demand in balance
• Imbalance could result in:
• Rapid price increases (inflation) because of too little money
• Economic recession and a slowdown of price increases
(disinflation) because of too little growth in the money supply
14
Table 15.2 Tools for Regulating the
Money Supply
Activity Effect on the Money Supply and the Economy
Buy government securities The money supply increases; economic activity increases.
Sell government securities The money supply decreases; economic activity slows down.
Raise bank rate Interest rates increase; the money supply decreases;
economic activity slows down.
Lower bank rate Interest rates decrease; the money supply increases;
economic activity increases.
Increase reserves Banks make fewer loans; the money supply declines;
economic activity slows down.
Decrease reserves Banks make more loans; the money supply increases;
economic activity increases.
Relax credit controls More people are encouraged to make major purchases,
increasing economic activity.
Restrict credit controls People are discouraged from making major purchases,
decreasing economic activity.
15
Open Market Operations
• Decisions to buy or sell Treasury bills (short-term debt
issued by the government) and other investments in
the open market
• Most commonly employed of all Bank operations;
performed almost daily
Desired Reserves
• Percentage of deposits that banking institutions must
hold in reserve
• Has a strong effect on economy
16
Bank Rate
• Rate of interest the Bank charges to loan money to
banking institution to meet reserve requirements
• Lowering bank rate encourages borrowing and
expands money supply and vice versa
Credit Controls
• Authority to establish and enforce credit rules for
financial institutions and some private investors
• Raising and lowering minimum down payment
amounts and payment periods, the Bank can stimulate
or discourage credit purchases of “big ticket” items
17
Currency
The Bank of Canada
• is the country’s sole bank note–issuing authority
• is responsible for designing, producing, and
distributing Canada’s bank notes
• supplies financial institutions with enough bank
notes to satisfy public demand
• destroys notes unfit for further circulation
18
The Financial System
The Bank of Canada
• promotes safe, sound, and efficient financial systems
• works with other agencies and market participants
• provides liquidity to the system
• gives policy advice to the federal government
• oversees major clearing and settlement systems,
• collaborates with other domestic and international
bodies involved in financial-stability issues
19
Funds Management
The Bank of Canada
• acts as the fiscal agent for the Government of
Canada
• manages the accounts of the Receiver General
• ensures that these accounts have enough cash
and invests any surpluses
• provide stable and low-cost funding to the
government
20
Royal Bank of Canada
The Royal Bank of Canada is a Canadian multinational

financial services company and the largest bank in Canada
by market capitalization. 21
© 2020 McGraw-Hill Education Limited ©Torontonian/Alamy Stock Photo
Banking Institutions 1
Banking Institutions
• Chartered Banks
• perform a variety of financial services
• rely mainly on chequing and savings accounts as their major
source of funds
• a bank can safely loan out a large percentage of its deposits
• Trust Companies
• like a bank, they operate through a network of branches
• a trust company can administer estates, trusts, pension plans,
and agency contracts, which banks cannot do
22
Banking Institutions (continued)
• Credit Unions and Caisses Populaires
• financial institution that is owned and controlled by its
depositors and operated democratically
• originally created to provide depositors with a short-term
source of funds for low-interest consumer loans
• today they offer a wide range of financial services
23
Insurance for Banking Institutions
• Canada Deposit Insurance Corporation (CDIC), is a
federal Crown corporation that insures individual bank
accounts up to a maximum of $100,000
• Deposits of credit unions and caisses populaires are
protected under provincial stabilization funds and
coverages ranges from $60,000 to unlimited coverage
24
Non-banking Institutions 1
Nonbanking Institutions
• Diversified firms
• Nonfinancial firms that help finance their customers’ purchases
of expensive equipment
• Insurance companies
• Businesses that protect their clients against financial losses
from certain specified risks
• Pension funds
• Managed investment pools set aside by individuals,
corporations, unions, and some nonprofits to provide
retirement income for members
25
Manulife
Manulife Financial is the largest insurance company in Canada, the

second largest in North America, and the world's fifth largest, based on
market capitalization.
26
© 2020 McGraw-Hill Education Limited ©chrisdorney/Shutterstock
• Mutual funds
• Pools individual investor dollars and invests them in large
numbers of well-diversified securities
• Money market fund
• Brokerage firms and Investment banks

• Buy and sell stocks, bonds, and other securities for their
customers and provide other financial services
• Most are part of financial conglomerates that provide many
different kinds of services, such as investment banking
27
Finance companies
• Offer short-term loans at substantially higher rates of interest
than banks
• Lender of last resort for companies and individuals with poor
credit ratings
28
Electronic Banking 1
Electronic funds transfer
• Any movement of funds by means of an electronic
terminal, telephone, computer, or magnetic tape
Automated banking machines
• Most familiar form of electronic banking; dispenses
cash, accepts deposits, and allows balance inquiries
and cash transfers from one account to another
29
Table 15.4 Bank Fact Sheet
Number of bank-owned ABMs in Canada 18,640
Number of online banking transactions completed 574 million
Number of transactions logged at bank-owned ABMs in 643 million

Canada
Amount six largest Canadian banks spent on technology in $84.5 billion

the last decade
Amount six largest Canadian banks have spent on $13.3 billion

technology in 2017.
Source "Fast Facts About the Canadian Banking System," Canadian Bankers Association, https://cba.ca/fast-facts-the-
canadian-banking-system (accessed February 21, 2019).
30
Electronic Banking 2
Online Banking
• Banking activities conducted on a computer at
home/work or through wireless devices such as cell
phones and tablets
• Computers and advanced telecommunications
technologies have revolutionized world commerce
31
Online Banking
Computers and handheld devices have made online banking extremely

convenient. However, hackers have stolen millions from banking
customers by tricking them into visiting websites and downloading
malicious software that gives hackers access to their passwords.
32
© 2020 McGraw-Hill Education Limited ©Kite_rin/Shutterstock
Future of Banking
• Advances in technology are challenging and changing
the banking industry
• During 2007 to 2008, the financial markets collapsed,
especially in the US
• Canada has one of the safest and soundest financial
sectors in the world
• Financial services may be an example of a natural
oligopoly
• Peer-to-peer lenders and other sources of funding by
Internet websites such as GoFundMe
• Budding use of virtual money
33

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Money and the

©Steve Allen/ Getty Images

© 2020 McGraw-Hill Education Limited

The Bank of Canada redesigns currency in order to stay

Credit cards have many advantages, including being able to buy

• Losses on credit card theft run into the billions

The Royal Bank of Canada is a Canadian multinational

Manulife Financial is the largest insurance company in Canada, the

• Brokerage firms and Investment banks

Number of online banking transactions completed 574 million

Number of transactions logged at bank-owned ABMs in 643 million

Amount six largest Canadian banks spent on technology in $84.5 billion

Amount six largest Canadian banks have spent on $13.3 billion

Computers and handheld devices have made online banking extremely

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