The financial industry

Canadians use the financial industry almost every day of their lives to write cheques, buy groceries using debit cards and invest in their retirement.

One of the industry’s most important functions is to provide Canadians with a way to save for the future. Through their savings in 1999, Canadian households had accumulated almost $1.4 trillion in financial assets, not including investments in real estate and other tangible assets. Some of these savings are invested in bonds, in shares of companies listed on stock exchanges, or directly in small business ventures. The bulk of our savings, however, is channelled through financial institutions such as banks, insurance companies and mutual funds.

The financial system facilitates the saving and investment process throughout the entire economy. For example, savers put away small sums of money in secure deposits that earn interest. Financial institutions, in turn, pool these savings and invest the money in loans, bonds and company shares. As a result, the individual accounts of every Canadian saver may be indirectly financing a mortgage on a new house or providing capital to a new high-tech venture.

	Bay Street, downtown Toronto Photo: François Lavoie

Over the past decade, declining interest rates and expanding alternatives to bank accounts and term deposits have changed the way Canadians save. In 1990, 33% of all financial assets held by individuals was in the form of currency and deposits in financial institutions; by 2002, this had decreased to 25%.

The portion of savings placed in Canada Bonds decreased by almost half during this period. Investment in life insurance and pension plans in 1990 represented 32% of total financial assets, while 18% of household investments were in stocks. In 2002, investment in life insurance and pension plans reached 40% of total financial assets and the holding of shares accounted for 27%. Pension plan assets in particular have been growing to finance the retirement needs of the baby boom generation.

Though they provide many other services such as insurance and financial advice, turning savings into investments is the main function of Canada's 3,000 financial institutions. In the past, these institutions represented the 'four pillars' of the Canadian financial sector: banks, trust companies, insurance companies and investment dealers.

Until deregulation in 1987, financial institutions—allowed to operate in only one of these 'pillars'—operated at arm's length from one another. Deregulation, along with increased global competition, led to a major restructuring of the industry. Institutions are now larger and cover a wider spectrum of services.

Under pressure to grow in order to meet competition effectively, many insurance and trust companies have consolidated, and significant cross-ownership is evident throughout the sector. Banks now own all major trust companies and most investment dealers.

With this convergence of financial institutions, one-stop shopping for financial services is now possible for Canadians. Banks and other institutions now cover everything from investment counselling to financial planning and estate and trust services.

This broadening of services is reflected in the revenues of Canada's financial institutions. Financial institutions earn income from both net interest income (gross interest revenues less interest paid to depositors) and non-interest income.

In 1996, deposit-accepting intermediaries (chartered banks, trust companies, caisses populaires and credit unions) earned 36% of their income from non-interest sources, such as fees for facilitating financing arrangements, commissions on investment operations and transaction fees.

By 2000, these institutions generated half their revenues from non-interest income before that share dropped back to 47% or $24.2 billion in 2001. Growth in non-interest revenue was fastest in electronic financial services and in institutional finance. Both of these areas almost doubled in size from 1996 to 2001, growing to $2.7 billion and $1.9 billion respectively.

The financial sector has been an early adopter of Internet and e‑commerce technologies. In 2002, a full 79% of all financial and insurance institutions used the Internet and 43% operated their own website. Credit intermediaries and related industries were the most connected, with 96% having an Internet connection, followed by insurance carriers and related activities (90%).