Deposit insurance needs a boost

By Gordon Pape, Editor and Publisher

The collapse of Silicon Valley Bank has heightened public awareness to the importance of deposit insurance – and how Canada’s system is lagging well behind.

In the US, depositors are protected against losses up to US$250,000. At current exchange rates, that’s equal to about C$345,000.

But our coverage is much less than that – only $100,000 per eligible account. Moreover, it has not been increased since 2005. Even with low inflation over most of the intervening years, the deposit insurance coverage should have increased by 46% in that time to keep pace with the CPI. That would have raised the coverage level to $146,000. That’s still a lot less than Americans enjoy, but it would be a significant improvement over where we are today.

Why are we lagging so far behind? For part of the answer, look at the structure of the Canada Deposit Insurance Corporation (CDIC). It’s a Crown Corporation, but it’s not financed by public money. Instead, the fund is created by premiums assessed to member institutions. So, the reality is that deposit insurance is paid for by the banks themselves.

That’s nice for taxpayers, who aren’t on the hook for bank failures, at least in theory. But there’s a conflict of interest at work here. Raising the insurance limits would mean bank premiums would have to increase to provide the funds for the additional coverage. If there’s no public demand for higher limits, why should the banks tax themselves more?

There have been a few calls to revisit the system in the wake of the SVB collapse. Anthony Quinn, Chief Community Officer for the Canadian Association of Retired Persons (CARP) said the limit should at least be doubled from the current level.

“The CDIC program offers depositors some peace of mind, but the threshold limit of $100K per account has not kept up with inflation nor the increase in total deposits held by Canadian banks,” he said.

If there were a failure, “many older savers would face substantial, unrecoverable losses. It would be much worse for Canadians compared to those experiencing it now in the USA, with our relatively low coverage limit”.

We tend to think of our banking system as being immune to what’s happening elsewhere because of the solidity of our Big Six banks – Royal, TD, Bank of Montreal, Bank of Nova Scotia, CIBC, and National Bank. Even during the financial crisis of 2008-09, none of them were in real danger, although the share prices were hit hard.

Indeed, these banks may really be “too big to fail”. But smaller financial institutions could be vulnerable. The last bank failure in Canada was as recently as 1996, when Calgary-based Security Home Mortgage Corporation suddenly closed its doors for good. That left 2,600 people scrambling to claim deposit insurance. Any amounts beyond the then-$60,000 limit was gone.

That’s quite rare, you may be thinking. Actually, it’s not. Since the CDIC was created in 1967, it has stepped in on 43 occasions to help depositors.

But with its current ceiling, the value of a CDIC bailout is diminishing every year in terms of purchasing power. It’s time for the government to take action.

“While the risk remains low for depositors in Canada, the banks are still making extraordinary profits (billions per quarter) and can surely afford to offer added protection to give their depositors peace of mind, should something unexpected happen,” Mr. Quinn concludes.

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