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Prime Bank Rate Canada – The Most Important Determinant

July02
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Canada –Brief Introduction

With a stable prime bank rate canada is world’s third largest economy in market exchange rates. And just like many other developed nations, the Canadian economy, too, is dominated by the service industry. International business makes up a considerable chunk of Canada’s economy, especially its natural resources. The largest trading partner of Canada is the United States, which accounts for about 76% of exports and 65% of imports.

Canada – Stalwart Of Banking Industry

Banking in Canada is considered the most efficient in the world. According to the 2008 World Economic Forum report, Canada’s banking system was the safest.Canadian banks boast 8,000 branches, more than 18,000 automated teller machines (ATMs). Canada has the highest density of banking technology, such as debit cards, Internet banking, and telephone banking. Moreover, this country has the highest per capita income in the world. According to a survey conducted by the World Economic Forum, Canada topped the list of the best banking systems. According to the Department of Finance, only two small-sized regional banks failed in the mid-1980s. The sturdy banking system manages the prime bank rate Canada so well that there were no bank failures during the Great Depression of 1923.

Canadian Banks – Offer Wide Range Of Services

Most domestic Canadian banks offer a range of services related to investment, banking, and finance. It is really easy for them, thanks to their extensive distribution networks across the country. These Canadian banks are also active in other parts of the world, such as the United States, Asia, Latin America, Caribbean, and others. Canada also allows many international banks to operate in its territory through branches, subsidiaries, or representative offices. Most foreign banks specialize in investment and corporate banking. All these banks constitute more than $2.9 trillion worth of assets. These banks serve millions of customers. Clients include individuals, small and medium-sized enterprises, big enterprises, nonprofit organization, institutional investors, and the government itself. Canada has high capital reserves and strict regulatory environment.  Compared with the United States, the reserves of Tier I banks of Canada are much higher. And the prime bank rate canadais also stable. This is the reason why Canada remained insulated from the adverse effect of the US subprime crisis

Three Schedules

After The Bank Act of 1991, banks operating in Canada were classified into three categories or schedules. Schedule I banks include those that are not subsidiaries of foreign banks but were allowed to accept deposits. RBC, CIBC, and Scotia Bank are some of them. Schedule II banks include those that are subsidiaries of foreign banks but are allowed to accept deposits. ING Bank of Canada, Citibank Canada, and AMEX Bank of Canada fall in this category. Schedule III banks are those foreign banks that own branches in Canada. Some of them are Bank of America, Deutsche Bank AG, and Credit Suisse. Now with a prime bank rate canada boasts an extremely stable and well-developed banking system. Canadian Banks play a major role in the country’s economy. The impact is deep on society. Canadian banks top the list of employers, employing more than 200,000 people. Canadian banks are the top tax payers also.

Prime Rate – Too Significant To Ignore

One most important term in banking is prime rate. It is a very significant concept in the banking industry. Thus it is imperative to understand this concept. Prime rate, also known as Prime Lending Rate, refers to the interest rate used by banks. Many variable interest rates can be taken as a percentage above or below prime rate. Usually a bank’s best customers include large corporations or individuals with good credit record. The prime lending rate is determined by the federal funds rate, which is actually the rate at which banks lend to each other. The prime rate is important for retail customers as well. The prime bank rate canada lays a direct impact on the lending rates, which, in turn, affect domains, such as mortgage, small business and personal loans, thus keeping the financial stability of Canada intact.

Banks generally charge a lower rate of interest from their best customers. Banks charge a higher rate from the customers with a poor credit record, because such people have a high possibility of defaulting bank loans. The prime rate is not constant but fluctuating, as banks keep changing it from time to time. This rate is generally kept the same for all major banks. The lending rate concept is also very useful to finance companies. Credit card companies use it as an economic indicator for determining the interest rate on its variable rate credit cards. Interest rates are related to the prime lending rates. Federal funds also affect the prime lending rates. Rates vary according to the availability of funds in banks and credit demand in the market.

The prime bank rate canada is a very important determinant of its financial stability. It impacts various domains, such as mortgage industry, credit card companies, loans, and common public. Thus banks pay special attention to it and try to keep it within limits. The great crisis in the $United States, known as the subprime crisis world over, happened due to lending at subprime rates. Banks granted loans to borrowers who had a bad credit history. This way millions of customers defaulted bank loans. The results were disastrous. The entire US economy was on the verge of collapse, and the effects were far deeper than anyone had ever imagined. But prime bank rate canada was managed very well. Thus it was safe from all these disastrous consequences. Its prime bank rate canada has helped the country remain steady even when the world was on the brink of a recession.

Thus prime rate is very important, as it can even contribute to the collapse of the entire economy.

Conclusion

The prime rate is also determined by the Wall Street Journal. It surveys the top 30 leading banks to check their offered prime rate. When 75% of the banks change their rates, a new prime rate is established. Prime rates fluctuate in coordination with short-term interest rates. These short-term rates are foxed by the Federal Reserve Board. The prime bank rate canada is managed well. Thus the stability of the Canadian economy is maintained even during times of crisis.

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