A few things that have happened in the financial world since the current limit on CDIC deposit insurance was set at $100,000 in 2005:
- Inflation turned a $100 purchase back then into $150 today.
- The national average house price increased by more than two and a half times.
- The level of the benchmark stock index in Canada, the S&P/TSX Composite, more or less doubled.
- High interest rates added billions to the amount of money people have in bank accounts and guaranteed investment certificates.
- A major U.S. bank collapsed.
- Deposit insurance in the United States increased to $US250,000.
Canada Deposit Insurance Corp. does strong work maintaining the stability of the Canadian banking system in conjunction with regulators, and it offers comprehensive coverage. Pretty much every kind of deposit account you can think of is eligible for protection by CDIC, including the still relatively new first home savings account.
But, as shown in a new study from financial think tank Global Risk Institute, the $100,000 status quo is outdated. “One hundred thousand dollars is not a lot of money nowadays, to be honest,” said Rita Achrekar, co-author of the report with Gerard McDonald.
The report suggests increasing basic federal deposit insurance coverage to $250,000 per account, with banks able to offer extra coverage on a voluntary basis.
“We have the big five or six banks in Canada, and then you have the small- and mid-sized banks,” Ms. Achrekar said. “I think it would be advantageous from a competitive positioning point of view for the smaller and medium size banks to consider a higher limit.”
CDIC is a federal Crown corporation funded by member banks. Increased coverage would cost the banks more, which is an obvious impediment. CDIC coverage was reviewed about a decade ago and the $100,000 limit was left untouched. Subsequent improvements were made in other areas, notably through the addition of coverage for foreign currency deposits and guaranteed investment certificates with terms of more than five years.
The last CDIC rescue came in 1996 for Security Home Mortgage Corp. Among the 43 failures CDIC has handled since its formation in 1967 are 29 trust companies and 11 mortgage companies. Outright bank failures are rare in Canada.
Not so in the United States, where they are marking the first anniversary of the demise of Silicon Valley Bank. The U.S. version of CDIC, the Federal Deposit Insurance Corp., paid out roughly US$20-billion to resolve that collapse.
The Global Risk Institute report says the failure of Silicon Valley Bank highlights a new risk for the banking system – social media. The report notes a review of SVB’s demise by some U.S. economists that found social media exposure contributed to a run on the bank rather than simply describing what was happening. With 24-hour banking available online and via mobile apps, a bank run can happen in a flash.
If a member fails, the Global Risk Institute report says CDIC has $8.1-billion ready to go. “The CDIC also has a legislative capacity to borrow up to $32-billion from the federal government, and its obligations are explicitly guaranteed by them,” the report says.
Credit unions offer their own provincial deposit insurance plans, with unlimited coverage in the four western provinces, a limit of $100,000 in Quebec and a ceiling of $250,000 elsewhere for the most part. Ontario has a $250,000 limit on non-registered accounts and unlimited coverage for registered accounts.
The Global Risk Institute report does not see deposit insurance coverage for credit unions the same way as the federally backed CDIC. “We note that many of the provincial DIFs [deposit insurance funds] lack access to committed provincial funding and do not have explicit guarantees from the provincial government,” the report says.
We need some kind of limit on CDIC coverage – our system works best if there’s at least a little onus on people to select a sound bank, and banks may not want to pay the premiums required for unlimited insurance.
Also, the current $100,000 limit for CDIC is livable in that one person can get full coverage for deposits held in each of multiple types of accounts, say a regular account, a tax-free savings account and a registered retirement savings plan. A quick note on coverage – that’s $100,000 in combined principal and interest per eligible account.
But an aging population will increasingly rely on term deposits and savings accounts for some of their savings and investments. Dividing deposits between banks to stay within the CDIC limit gets harder as you age, especially when that limit reflects the world as it was two decades ago.
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