It’s time to double or triple bank deposit insurance

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The recently averted international banking crisis renewed a call to increase government bank deposit insurance, even though Canada has a very sound banking system. We did not mirror the recent failures of Silicon Valley Bank (SVB) (US$209 billion in assets) and Signature Bank (US$110 billion), which spread to Switzerland with the collapse of Credit Suisse (about $800 billion) and its takeover by UBS. Indeed, Canada has not had a bank failure since 1996, in contrast to 465 failures in the U.S. between 2008 and 2012.

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Banks are conservatively regulated in Canada by the federal Bank Act and supervised by the Office of the Superintendent of Financial Institutions. The six major chartered banks are strongly capitalized, liquid, diversified in sources of capital and assets and operate in an oligopolistic marketplace. They also have twice the proportion of safer residential mortgages and less than a sixth the proportion of riskier commercial real estate lending than U.S. banks. Furthermore, they are required to issue non-viable contingent capital or bail-in bonds (called Contingent Convertibles or CoCo bonds elsewhere), which are converted into common stock by regulators if a bank fails to meet certain financial criteria. The result is to reduce debt and increase equity, thereby decreasing the likelihood of failure and/or a run on deposits.

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Nevertheless, there are strong arguments for increasing the guarantee provided by the Canada Deposit Insurance Corporation (CDIC), a federal crown corporation established in 1967. Since 2005, savings and chequing accounts, Guaranteed Investment Certificates (GICs) and foreign currency are covered per category of account for up to $100,000, which is equivalent to $146,000, inflation adjusted to today, for a current total for $968 billion at 85 institutions.

Provincial deposit insurance plans guarantee deposits of provincial financial institutions including credit unions, caisses populaires and provincially regulated trust and loan companies. The amounts they cover differ widely, but all are equal to or in most cases higher than the CDIC because the provinces want to promote consumer confidence in their institutions. Quebec has a $100,000 cap. In Ontario, it is $250,000 for unregistered accounts and unlimited for registered accounts. P.E.I. backstops $125,000 for uninsured accounts and is unlimited for registered accounts. In New Brunswick and Newfoundland and Labrador it is $250,000 for both. In British Columbia, Alberta, Saskatchewan and Manitoba deposits are insured without limit. The privately owned Canadian Investor Protection Fund (CIPF) covers up to $1 million of investor assets held by an insolvent investment dealer or mutual fund dealer. To state the obvious, this uneven treatment across the country is far from ideal.

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The European Union covers €100,000 or $147,000 Cdn. In the U.S., the Federal Deposit Insurance Corporation (FDIC) insures $250,000 or roughly $338,000 Cdn. Furthermore, Global Systemically Important Banks (G-SIBs), including RBC and TD, are considered too big to fail, so depositors are fully protected. After the government decided to backstop SVB deposits, Secretary of the Treasury Janet Yellen first promised to guarantee all deposits at regional banks, then backed off. That resulted in an erosion of regional banks’ deposit bases and a substantial hit to their stock prices. Now, consideration is being given to increasing the cap, with Sen. Elizabeth Warren floating a high of $10 million in order to support small and medium-size businesses that are serviced by regional banks. On the other side of the debate are legislators who worry about the moral hazard of increasing current amounts. However, common stock holders of SVB took a massive hit and senior management lost their jobs.

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More than 99 per cent of adult Canadians have an account with a financial institution they expect will safeguard their money. It is unreasonable to expect the average depositor to analyze their banks’ financial viability, although they naturally have greater confidence in the big six chartered banks that are designated as domestic systemically important banks (D-SIBs). According to the Canadian Bankers Association, more than 40 banks provide financial services to consumers. Most are competitively disadvantaged in attracting and retaining deposits compared to banks deemed too big to fail.

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The $772-million premium paid for CDIC insurance last year was borne by the banking community. However, doubling or tripling the insurance cap would result in a proportionally much smaller increase in premiums, since most deposits are well below $100,000. The fact that the large banks can readily afford the cost does not by itself justify an increase, but it does make it feasible. Rather, an increase is merited since many domestic and foreign jurisdictions are more protective; it would enhance public confidence in the banking system; the average Canadian and small businesses deserve the additional protection; and regional banks would be less disadvantaged. Incidentally, it would be a popular move for a government whose political fortunes are seriously on the skids.

Joe Oliver was minister of natural resources and minister of finance in the government of prime minister Stephen Harper.