Module 1

Canadian Financial
System
Outline
 Financial System in Canada
 Financial Markets
 Financial Intermediaries and Financial
Institutions
 Financial Instruments
 Regulatory Bodies
 Dynamic Trends of Financial Markets and
Institutions
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Financial System in Canada
Financial Markets and Institutions

 Financial system includes three elements:

 Financial markets, financial institutions and
financial instruments
 Financial markets and institutions are the
primary channels of allocating capital in our
society.
 Proper capital allocation leads to growth in

 economic efficiency and opportunity and

 wealth and income

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Financial System in Canada
Financial Markets and Institutions

 What is a Financial Market?

 Any marketplace where the trading of
securities occurs (Investopedia, 2023).
 Examples of Financial Markets:
 Stock market
 Bond market
 FX market
 Derivatives market
 Commodities market
Financial Markets
 Financial markets are part of financial systems through which
funds flow.
 Each market is created to satisfy specific purposes for market
participants.
 Financial markets can be distinguished along different
dimensions:
 Primary versus secondary markets

 Money versus capital markets

 Retail versus wholesale markets

 Public versus private markets

 Spot versus forward markets

 Debt versus equity markets

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Financial Markets
Primary Versus Secondary Markets

 Primary markets
 Markets where users of funds (e.g., IBM,
corporations) raise funds by issuing new financial
instruments (e.g., stocks and bonds).
 Securities can be sold only once in a primary market.
 Secondary markets
 Markets where all subsequent transactions take place
with existing financial instruments traded among
investors (e.g., Toronto Stock Exchange, NASDAQ)

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Financial Markets
Money Versus Capital Markets

 Money markets
 Markets that trade debt securities with maturities of
one year or less (e.g., certificates of deposit and
Treasury bills).
 little or no risk of capital loss, but low return
 Capital markets
 Markets that trade debt (bonds) and equity (stock)
instruments with maturities of more than one year.
 substantial risk of capital loss, but higher promised
return

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Financial Markets
Retail Versus Wholesale Financial Markets

 Retail financial markets

 Retail financial markets provide services such as day-
to-day banking, savings and credit facilities to
individuals, families and small businesses.
 Wholesale financial markets
 Wholesale financial markets support larger
organizations such as large companies, public sector
organizations, governments and financial institutions
like pensions funds.

© 2014 International Regulatory Strategy Group

Financial Markets
Retail Versus Wholesale Financial Markets

(IRSG, 2014)

© 2014 International Regulatory Strategy Group

Financial Markets
Public Versus Private Financial Markets

The core difference between private markets and public markets

is in how market participants, both buyers and sellers, access
the market to invest and to raise capital.

 Public financial markets

 Anyone can purchase shares in a company which is listed
on the market (TSX, FTSE 100, S&P 500). Regulation is
much tighter in public markets.
 Private financial markets
 The private market is the home of private equity and
private debt. Private equity is defined as capital investment
into businesses and companies that are not on the public
market.
© 2023 Connection Capital
Financial Markets
Spot Versus Forward Markets

 Spot markets
 A spot market is where spot commodities or other
assets like currencies are traded for immediate
delivery for cash. The term comes from the phrase “0n
the spot”.
 Forward markets
 A forward market is used for future delivery or
settlement and involves the trading of forward or
futures contracts.

© 2021 Investopedia
Financial Intermediaries and
Financial Institutions
 Financial intermediaries raise money from investors and provide
financing for individuals, corporations or other organizations.
 E.g., mutual funds, pension funds.
 Financial intermediaries serve as go-betweens for savers and
borrowers.
 engage in process of indirect finance
 pool and invest savings (i.e., borrow $1 and lend $1)
 needed because of transaction costs, different needs and
asymmetric information: higher information and search costs
for bilateral loans

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Financial Intermediaries and
Financial Institutions
 Financial institutions facilitate the flow of funds (pool and
invest savings) and also perform many other services
(e.g., maturity and time intermediation)
 Financial institutions are distinguished by the following:
 whether they accept insured deposits (depository
versus non-depository financial institutions)
 whether they receive contractual payments from
customers
 whether they deal with investment activities

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Financial Intermediaries and
Financial Institutions
Non-Intermediated Flows of Funds

 Flow of funds in a world without financial

institutions/intermediaries:
You borrow $1,000 from your dad
IOU or Financial
Claims
(equity and debt
instruments)
Users of Funds Suppliers of
Funds
Cash
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Financial Intermediaries and
Financial Institutions
Intermediated Flows of Funds

 Flow of funds in a world with financial

institutions/intermediaries:
Intermediated Financing

FIs
Users of Funds Suppliers of Funds
(brokers)

Cash FIs
(asset Cash
Financial Claims transformers) Financial Claims
(equity and debt securities) (deposits and insurance policies)
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Financial Intermediaries and
Financial Institutions
Special Functions

 Brokerage function
 Act as an agent for investors.
 Examples: RBC Dominion Securities,
CIBC World Markets
 Reduce costs through economies of scale
 Encourage higher rate of savings
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Financial Intermediaries and
Financial Institutions
Special Functions

 Asset transformer
 Purchase primary securities by selling financial claims to
households.
 These secondary securities often more marketable and
desirable.
 Secondary claims issued by FIs have less price risk.
 FIs are cost-effective in diversifying risks.
 If assets are less than perfectly correlated with each other,
FIs are able to reduce the fluctuation in the principal value
of the portfolio
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Financial Intermediaries and
Financial Institutions
Depository Versus Non-Depository FIs

 Depository institutions
 commercial banks, savings associations, credit
unions
 Non-depository institutions
 Credit type: finance companies
 Contractual type: insurance companies, pension
funds
 Investment type: securities firms and investment
banks, mutual funds
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Financial Intermediaries and
Financial Institutions
Benefits to Suppliers of Funds

 Reduce monitoring costs

 Increase liquidity and lower price risk
 Reduce transaction costs
 Provide maturity intermediation
 Provide denomination intermediation

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Financial Intermediaries and
Financial Institutions
Benefits to Overall Economy

 Conduit through which the Bank of Canada

conducts monetary policy
 Provide efficient credit allocation
 Allow for intergenerational wealth transfers
 Provide payment services

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Regulatory Bodies
 FIs are heavily regulated to protect society at
large from market failures.
 Regulations impose a burden on FIs; Canadian
regulatory changes were deregulatory in nature.
 Regulators attempt to maximize social welfare
while minimizing the burden imposed by
regulation.

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Dynamic Trends of Financial
Markets and Institutions
 The pool of savings from foreign investors is increasing,
and investors are looking to diversify globally now more
than ever before.
 Information on foreign markets and investments is
becoming readily accessible, and deregulation across
the globe is allowing even greater access to foreign
markets.
 International mutual funds allow diversified foreign
investment with low transactions costs.
 Global capital flows are larger than ever.

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