Dynamics of Canadian Deposit-Taking Instutitions: A Markovian Approach

The Canadian financial system includes several types of financial institutions Of these, four main groups act as deposit-taking institutions. These are chartered banks (CBs), trust companies (TCs), mortgage loan companies (MLs) and caisses popularies and credit unions (CUs). These four institutions hold domestic liabilities which are fairly close substitutes. In addition to the institutions mentioned above, there are foreign banks operating in Canada through representative offices and subsidiaries. However, reliable data on their operations are not available. These institutions are therefore excluded from our analysis. The Quebec Savings Bank and provincial savings institutions in the provinces of Ontario and Alberta are also excluded because of their regional nature and relative unimportance. Of the four main groups of deposit-taking institutions, only CBs are subject to the Bank Act. The first Bank Act in Canada was introduced in I87I. Subsequently, revisions have been enacted on approximately a ten-year basis, presumablyl to coincide with the life of bank charters. The most recent revision was in I967. In May I978 the Federal Government introduced the new revised Act into Parliament. In this paper, we propose to examine certain questions relating to Bank Act revisions, particularly as they relate to the period I962-74. Specifically: (i) We shall examine the question of whether the Act should be revised automatically on a ten-year basis; and (ii) the impacts on Canadian deposittaking institutions of the I967 revisions will be analysed. It has been fashionable [8] to discuss the relative performances of financial institutions in terms of growth rates and their underlying determinants. A natural extension of such an analysis is to consider the end-result of these growth processes. That is, it is interesting to consider the equilibrium market shares of financial institutions which will emerge as the result of differential growth rates. In principle, a general equilibrium approach to the modelling of deposittaking institutions is capable of handling the analysis suggested above. However, a complete econometric model of the Canadian financial system