ABSTRACT
The microeconomic or allocative functions of finance include settlement of payments, pooling and financial intermediation, real asset allocation, intertemporal allocation, pricing of risk, risk allocation and mitigation of informational asymmetry. The chapter discusses of financial liberalization with a brief and selective history of the Canadian financial system. Historically, the Canadian financial system was based on four principal groups– the "four pillars"– each of which was distinct in terms of market function, legislative control and ownership. The four groups were the chartered banks, trust & loan companies, insurance companies and securities dealers. The 1967 Bank Act eliminated the 6 percent ceiling on the interest rate that banks charged on loans, a move that signalled a shift away from a regulatory approach of heavy handed rules toward more market-determined results. The challenge for policy is to oversee the development of financial institutions, markets and instruments that are consistent with a deep flow of appropriately-priced risk capital from financial investors to industrial investors.
