1.3.1 Banks and Credit Unions

Introduction

In the Canadian securities landscape, banks and credit unions stand as integral components beyond the traditional roles played by investment dealers. This article delves into the crucial part these financial institutions play in the broader capital market frameworks, focusing on their contributions through savings mechanisms and loan provisions.

Role in Capital Markets

Banks

Banks are central nodes in the architecture of capital markets. They offer a variety of financial services and contribute significantly through:

• Facilitating Liquidity: Banks ensure liquidity within the market by converting assets into cash or credits easily. This liquidity is crucial for the smooth functioning of financial markets and facilitating economic stability.

• Capital Formation: By pooling savings and investments, banks channel these funds into productive enterprises, fostering economic growth and corporate financing.

• Risk Management: Banks provide hedging against various risks through derivative contracts, foreign exchange instruments, and insurance policies, aiding investors and companies in managing financial risks.

Credit Unions

Credit unions are cooperative financial institutions that democratize financial access. They contribute to capital markets by focusing on:

• Community Reinvestment: Unlike banks, credit unions operate on a not-for-profit basis, reinvesting profits back into local community projects, thereby fostering local development and empowering members within specific geographic or professional communities.

• Financial Inclusion: They offer competitive savings rates, loans, and other financial products tailored for their members, enhancing access to capital for those who might be underserved by traditional banks.

Functions: Savings and Loans

Savings

Both banks and credit unions provide various savings vehicles crucial for individual financial planning and capital accumulation:

1. Personal and Business Savings Accounts: These accounts offer a safe place for individuals and businesses to deposit funds, earning interest over time.
2. Term Deposits and GICs (Guaranteed Investment Certificates): These are suggestive options for low-risk investors seeking guaranteed returns over a fixed period.
3. Tax-Free Savings Accounts (TFSA): These accounts allow Canadians to grow and withdraw investments without tax implications, encouraging savings for a variety of financial goals.

Loans

Extending credit is another pivotal function of banks and credit unions, playing a vital role in capital market sustainability:

1. Personal Loans and Mortgages: Essential for consumer financing, these products support everything from home purchases to personal investments.
2. Business Loans and Credit Facilities: They are tailored to the financial needs of businesses, ranging from small business lines of credit to large corporate loans.
3. Student and Vehicle Loans: Designed to assist specific life circumstances, these loans help people manage significant life investments.

Mermaid Diagram: Role in Savings and Loans

    graph TD;
	    A[Banks and Credit Unions] --> B(Savings Vehicles);
	    A --> C(Loan Services);
	    B --> D[Personal & Business Savings Accounts];
	    B --> E[Term Deposits & GICs];
	    B --> F[Tax-Free Savings Accounts];
	    C --> G[Personal Loans & Mortgages];
	    C --> H[Business Loans & Credit Facilities];
	    C --> I[Student and Vehicle Loans];

Glossary

• Capital Markets: Markets that exist for raising capital or funding for business enterprises, typically through securities markets.
• Liquidity: The ease with which an asset or security can be converted into ready cash without affecting its market price.
• Derivative Contracts: Financial instruments whose value is derived from the value of an underlying asset.
• Financial Inclusion: Access to affordable financial services for all, particularly the disadvantaged and low-income segments of society.

Additional Resources

• Investment Industry Regulatory Organization of Canada (IIROC)
• The Office of the Superintendent of Financial Institutions (OSFI)
• Canada Deposit Insurance Corporation (CDIC)

Summary

By understanding the functions and contributions of banks and credit unions beyond traditional roles in the Canadian securities industry, one can appreciate their indispensable impacts on financial stability, community economic development, and investment facilitation. Through their savings and lending services, these institutions not only support individuals and businesses but also underpin the robust financial structure necessary for dynamic capital markets in Canada.