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UBC Theses and Dissertations

Chartered bank ownership of common equities : implications for Canada Zelmer, Daniel Mark


The objective of this thesis is to examine the potential ramifications of allowing Canadian chartered A banks to invest in domestic common equities in excess of current regulations. The need for these investments has been born through attempts by companies to seek new common equity so that they may avoid financial catastrophe. However, as time goes on, it is a practice which can be expected to widen in popularity as chartered banks adjust to their new role as venture-capitalists. We begin our analysis by examining the impact of common equity investments on the financial performance of the chartered banks. Our approach is to conduct simulation studies of chartered bank performance using the Toronto Stock Exchange 300 index as a proxy for common equity behaviour. By adjusting bank financial statements to reflect assumed equity investment levels, we are able to demonstrate the probable impact on a bank's profitability, liquidity, and solvency. The above is followed by an examination of the potential impact of bank common equity holdings on the existing financial markets. In particular, we seek to examine the probable effect on the cost and availability of funds within the debt and equity markets. Finally, we strive to evaluate the public policy issues which are associated with bank common equity investments. These range from fears of potential power abuses derived from the corporate voting-power of common equity, to the impact on corporate bankruptcy costs. Our evaluation is based on a combination of traditional economic theory, along with drawing heavily from the West German experience where bank ownership of common equity has deep historical roots. In general, our findings indicate that chartered bank ownership of common equities should be encouraged subject to several limitations. These limitations are designed to ensure banking system financial stability, as well as to minimize any potential power abuses. In addition, any movement towards bank ownership of common equities should be accompanied by deregulation of traditional banking services so as to ensure minimal disruption to existing markets and services.

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