In the early days of Euro-dollar operations, in or , the interest differentials required to attract deposits from New York banks were substantial—of the order of 1 per cent or more. The differentials vary with the need of the chartered banks for funds and the rates of interest that they can earn on these funds.
These differentials attract U. At the end of , the Canadian withholding tax on dividends sent out of the country was increased from 5 per cent to 15 per cent; the Dominion corporation income tax rate, however, remained about 50 per cent 6 including social security tax and the income tax for corporations in the Provinces of Ontario and Quebec was after Dominion tax credit about 52 per cent.
On the assumption that all after-tax income was paid out in dividends, the effective tax rate would approach 59 per cent. This investment incentive was sharply curtailed in by a change in the U. The last sometimes requires paying rates of interest that result when available short-term outlets are taken into account in negligible profits or even losses. Like the banks in other countries, the chartered banks have working agreements or understandings with respect to the rate of interest paid on notice deposits.
If the banks wish to pay higher rates on some Canadian dollar deposits to some customers, one way to do this is to denominate the account in U. It should be recalled that there was some official Canadian comment on exchange rate policy and on the level of the Canadian exchange rate in December Some holders of Canadian dollar deposits considered these comments as foreshadowing changes in the rate. At the end of , the exchange rate with the U. A premium gradually developed in the next five months, which was 1.
Between June 1 and June 20, the Canadian dollar fell to parity. A major shift in exchange rate policy was announced in the Budget Message on June 20; it included a declaration of intention to intervene in the exchange market in order to force the rate down.
Immediately following the budget presentation, the Canadian dollar was at a discount of 3. The discount gradually increased to more than 4 per cent at the end of the year; by May , it was 9 per cent; and at the end of June, 8. In these circumstances, it would be unrealistic to suppose that there was not a protective movement by Canadians and others from Canadian dollars into U.
The U. There was a marked change in the pattern of investments in —62, as is evident from Table 3. Foreign currency assets, measured in U. These deposits represented funds placed in Euro-dollar markets, largely in London, but also in Paris and other continental centers, and increased the already important role of Canadian banks as suppliers in Euro-dollar markets.
It should be noted that these figures are not a complete measure of dollar funds invested in Europe by Canadian banks. They do not include funds swapped into sterling and loaned to local authorities and finance companies in the United Kingdom, nor do they include commercial loans made in U.
It is understood, however, that such amounts are small compared with deposits made with other banks. During , the interest rate on day dollar deposits in London averaged approximately 3. Rates paid in continental centers were certainly no lower. Maximum rates paid by U.
Direct expenses involved in these transactions must necessarily have been minor. Foreign currency mostly U. This proportion fell in the following months and reached 41 per cent at the end of To obtain and keep this volume of business, the Canadian banks have, according to general indications, shaded the rates charged by U. It also reflects the unwillingness of brokers and dealers to switch additional parts of their lines of credit with U.
These loans, largely denominated in U. The rates of interest charged on such loans are competitive with U. Chartered banks are said to charge the U. Even if their stated rates are the same as the prime rate, however, their effective rates would be lower since they do not require compensating balances. Holdings of foreign currency securities, which are overwhelmingly short-term U. As pointed out in Appendix II , these securities may be considered a liquidity reserve; together with Euro-dollar deposits and money placed in the federal funds market, 16 they are the most flexible assets of the chartered banks.
As such, they absorb the major part of the short-period or unpredicted changes in their assets or liabilities. The investment policy of the chartered banks may thus be characterized as maximizing profits within three conditions: maintaining foreign currency assets approximately equal to foreign currency liabilities; operating with a minimum of risk, including placing dollar deposits with first-rate names; and investing a substantial portion of foreign currency assets in highly liquid form in order to avoid calls upon their Canadian currency assets.
This policy results in keeping a substantial part of their foreign currency assets in short-dated securities, day-to-day and call loans to brokers, and federal funds.
Rates of interest on these assets are relatively low. It is unlikely that, on the average, they could exceed the average rates of interest paid by the chartered banks on time deposits.
On the other hand, this portion of the business makes it possible to engage in Euro-dollar operations with other banks and to make commercial loans, which do offer opportunities for substantial profits. There is general agreement, though no statistical proof, that the large increases in recent years in foreign currency assets and deposits identified in Canadian banking statistics as being in currencies other than Canadian are due to operations in U.
Unfortunately, there are no Canadian banking statistics on the distribution of these foreign currency assets and liabilities by currency, or by country or area of residence, or by any cross-classification of these criteria. Even if complete data were not published, it would be helpful if over-all or sample statistics were collected and made available for confidential analyses. The presence or the absence of such banking statistics for Canada and other countries made little difference when short-term capital movements were relatively small.
They have now become extremely important for understanding capital flows, interest arbitrage, the balance of payments, and movements of reserves. Banking statistics of this nature are presently compiled in considerable detail, though published in somewhat less detail, by the United States, Germany, and Italy.
It is to be hoped that Canada and other industrial countries, notably the United Kingdom, France, the Netherlands, and Switzerland, will move in this direction as rapidly as possible.
Department of Commerce for balance of payments purposes as an item that contributes to the balance of payments deficit, i. Nevertheless, it appears that in deposits of U. There has recently been much discussion of the different meanings that may be ascribed to the balance of payments deficit or surplus. Deposits with Canadian banks are made in U. Dollars used to acquire assets in other currencies largely sterling are minimal.
These assets often have a term of 3 months, but very rarely as long as one year. Moreover, the time-deposit arrangements of the Canadian chartered banks are flexible, and deposits can be withdrawn before the end of the agreed period with some adjustment of the agreed interest rate. The assets held by the Canadian banks as the counterpart of these deposit liabilities are of varying maturities, ranging from overnight money to commercial loans or participations for a period of 12 months or more.
There is probably little difference between the average maturity of deposits and of their asset counterparts. In view of the balanced relationship of foreign currency assets and liabilities, and of current banking practices, it is virtually impossible to visualize sales by the chartered banks of dollar assets for other currencies without a parallel adjustment in their deposit liabilities.
The foreign currency assets of chartered banks keep in step with their foreign currency liabilities. Hence, there is some doubt whether it is appropriate to separate the two in an analysis of the U. Canadian chartered banks maintain statutory cash reserves of 8 per cent against their Canadian dollar deposit liabilities. Since the cash reserve ratio of the chartered banks has exceeded the statutory 8 per cent by only fractional amounts. It was 8. Furthermore, since the chartered banks have maintained, by voluntary agreement, liquid assets statutory cash reserves, day-to-day loans, and Treasury bills equal to at least 15 per cent of deposits.
It should be noted that standards of statutory cash reserves and liquid assets apply equally to all deposits in Canadian dollars: demand, savings, and notice. The liquid asset ratio has on the average exceeded the 15 per cent target by about two percentage points; it was No specific assets have been defined as reserves.
No requirement has been laid down stating whether reserves should be held in Canadian dollars or in foreign currencies. The net asset or liability position of Canadian banks in all foreign currencies is always small Appendix III. Foreign currency assets include claims on Canadian residents denominated in currencies other than Canadian; and foreign currency liabilities include deposits by Canadians denominated in currencies other than Canadian.
There is no published classification of these assets by maturity. Nevertheless, it is certain that, with respect to their foreign currency deposits, the Canadian banks exceeded by a wide margin the 15 per cent liquid asset ratio applicable to their deposit liabilities denominated in Canadian dollars. These requirements must be satisfied by deposits with the Federal Reserve System and by vault cash.
The competitive advantage, if any, derived from differences in reserve practices of Canadian chartered banks over New York City banks thus depends upon two elements: the classification of deposits and the foreign asset investment pattern of Canadian banks. A time deposit may be shifted from a U. The additional income-earning possibilities may thus be greater for Canadian banks on the assumption that they do not keep any reserves in nonincome-earning assets over U.
Against this differential must be considered the highly liquid asset position maintained by the chartered banks against these volatile deposits, a position which tends to reduce average earnings.
It is therefore difficult to conclude that Canadian agencies operating with U. The effect of these differences tends to be offset by differences in the foreign asset pattern of Canadian banks, dictated by the inherently less stable character of their foreign, especially U.
He was Director of Administration of the Fund until He is the author of Savings, Investment, and National Income and of a number of papers published in technical journals. The role of Canada as a foreign market for U. Altman, in Staff Papers , Vol. VIII —61 , pp. A number of points have here been corrected or clarified; and the discussion has been brought to date and made more comprehensive. In published reports, foreign currency assets and liabilities of the Canadian chartered banks are given in Canadian dollars.
Because of the variations in the exchange rate, the figures are restated in this paper in U. Therefore, all dollar figures quoted are U. These may be the head offices or designated Canadian branches. Quarterly data, —58, and monthly data, January June , are shown in Appendix I. Based on the increase in foreign currency deposits from or , adjusted for the rate of increase of Canadian dollar deposits. But this maximum does not take into account provincial income taxes of 11 per cent in Ontario and 12 per cent in Quebec.
In , the Dominion allowed a credit on this account of 9 per cent and 10 per cent, respectively, against its own income tax. Following is an example prepared by the U. Accordingly, under present law the corporation would be allowed full credit for all of its Canadian tax payments.
Similarly full credit would also be allowable if the investment income had been obtained from a different foreign country also imposing a 15 percent withholding tax provided that the overall limitation rather than the per-country limitation had been elected by the taxpayer. A larger income and investment would be required to average the tax rate payable in Canada from 59 per cent down to the 52 per cent which may be recovered in U.
Dividend payments by Canadian subsidiaries to U. Department of Commerce. At a higher tax rate, or at a lower interest rate, the ratio would be considerably greater.
Part of this would have been transferred when the withholding tax on dividends was 5 per cent prior to ; a large amount was probably transferred when the rate was raised to 15 per cent beginning in The advantages to U.
In recent years, the United States has changed its policies, first one way and then the other, with respect to the crediting against domestic income tax of foreign taxes on income earned abroad, and particularly on income from foreign portfolio investments.
For some years before , foreign tax credits were calculated on a country by country basis. An amendment to the Revenue Code made it possible to calculate tax credits for all foreign countries combined, i.
The purpose of this amendment and objections to it were described in Senate Report No. Thus, in and a U. Even if made in short-term securities, such investment became essentially long-term because of the U. Investment was encouraged by allowing foreign tax credits on a global rather than a country by country basis, and by allowing credits for all kinds of income combined rather than for different kinds of income separately.
Revenue Act of H. For the longer maturities, these rates were below the maxima paid by U. The distribution of deposits between Canadian and U. European banks generally charge rates even lower than those of Canadian banks. The differentials largely reflect the stability of these nominally short-term lines of credit. The loans of New York City banks, reflecting strong customer relationships, are the most stable and are rarely called; those of European banks are much more impersonal and may be called or not renewed if funds become tight.
Canadian agencies are always sellers of federal funds, i. Since they are not themselves members of the Federal Reserve System, they hold federal funds through correspondent banks or through domestic affiliates if any which are members.
When a U. For example, by Walter R. IX , pp. Canada Year Book , , pp. There is no classification of these totals by currency. They include sums denominated in U. For some years prior to October , the reserve requirement against time and savings deposits was 5 per cent. All Rights Reserved. Topics Business and Economics. Banks and Banking. Corporate Finance. Corporate Governance. Corporate Taxation.
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