Regulatory Changes and Financial Structure: The Case of Canada

The author documents some stylized facts about the Canadian financial structure. He explores these empirical facts in the context of Canadian financial legislation and finds that, over the 1990s, Canadian businesses became more heavily dependent on financial markets as their primary source of external funding. Data display a trend towards a more "market-oriented" financial system. The analysis suggests that this new trend started after the 1980 amendments to banking legislation and was considerably accentuated after the 1992 amendments. The author constructs a new series for the off-balance-sheet activities of Canadian banks that converts the non-interest income of banks into a credit equivalent. Combined with other evidence, this credit-equivalent series suggests a healthy growth trend in banking activity. Financial institutions are broadening their business lines and participating more actively in the arrangement of market financing. Regarding direct finance, the data indicate that Canadian firms issue a substantial share of their bonds in the U.S. bond market, and an increasing share of their stocks in the U.S. stock market. The author conjectures that there is some form of incompleteness in the Canadian markets. A noticeable fraction of Canadian issuances in the United States involves riskier firms for which U.S. markets seem more mature.