There’s a fine line between easing people’s minds about the risks to their bank deposits and lulling them into complacency.
A week ago, our biggest banking worry was whether we were getting enough interest on our savings or guaranteed investment certificates. Then came the collapse of two U.S. banks and concerns about a much bigger global bank, Credit Suisse CSGKF. It’s not alarmist for Canadian depositors to wonder how safe their bank deposits are – it’s common sense.
The simple answer is that Canadian banks are safe. We have a vigilant banking regulator in the form of an independent federal government agency called the Office of the Superintendent of Financial Institutions, and protection for deposits through a federal Crown corporation called Canada Deposit Insurance Corp.
Here’s where we get to the risk of complacency. CDIC has handled 43 bank failures since its creation in 1967. And while no insured depositor has lost money under CDIC protection, the limit to coverage is currently a not especially generous $100,000 in combined principal and interest per eligible account.
Recent developments in global banking argue for a strict adherence to that limit, no matter which bank you deal with. It’s a pain to spread your savings deposits and GICs among banks to stay under the CDIC limit, but worthwhile because it reduces the risk of losing money to infinitesimal levels.
The collapse of Silicon Valley Bank and Signature Bank seems to contradict this. The U.S. Federal Deposit Insurance Corp. covers up to US$250,000 per eligible deposit, much superior to CDIC. But a lot of deposits at SVB and Signature exceeded this limit and thus were not covered. To maintain confidence in the banking system and prevent a run on other banks, U.S. federal regulators announced that all SVB and Signature deposits would be protected.
Backing uninsured deposits is something you do to maintain calm at a delicate time for the economy. Inflation is a problem, interest rates are high and there’s concern about a recession ahead. The last thing the United States and other countries need right now is an eruption of worry about the financial system. We had that in 2008-09 and it was traumatic.
The problem with making sure everyone gets paid in full in a bank collapse is that people lose their sense of urgency about following deposit insurance limits. Don’t give in to that.
If you buy a one-year GIC with a 5-per-cent return, invest a maximum $95,200 in round numbers. That way, both principal and interest will come in below the CDIC limit. You can also get full CDIC protection for different eligible accounts at the same bank – an account in one name, a joint account, a tax-free savings account, a registered retirement savings plan account and so on.
For help spreading GIC money around to stay within deposit insurance limits, try a deposit broker. They have access to multiple GIC issuers and can work with you to maximize rates and safety.
Credit unions have their own provincial deposit insurance plans, most with either unlimited coverage or a $250,000 limit. I wrote something on the safety of credit-union deposits in Manitoba – a hub for CUs operating online banks with a national reach – during the height of the pandemic and you can read it here.
CDIC says on its website that it protects more than $1-trillion in Canadian deposits, but the agency’s 2022 annual report shows cash and investments of $7.3-billion. There’s a somewhat complicated reason why this gap isn’t the concern it appears to be.
If a Canadian bank fails, depositors can be protected through a “bail-in” process where investors holding certain kinds of bank debt have those securities converted into stock. This process would help solidify a struggling bank’s finances and protect deposits.
Earlier this week, The Globe and Mail reported that OSFI banking regulators had taken steps to begin daily check-ins with banks to monitor their financial situation. We have an early-warning system in place to detect the kind of stresses that led to the collapse of SVB and Signature.
Beyond regulatory supervision, we have a strong deposit insurance plan in Canada. Yes, we could use an upgrade from the $100,000 maximum on coverage. The ceiling was last raised, from $60,000, in 2005.
But with scary headlines about global banks piling up, CDIC is your best stress reducer. Are you fully protected? Find out right now.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
Rob Carrick