Melanie Paradis: Our deposit insurance limits are way too low
Melanie Paradis: Our deposit insurance limits are way too low
Canadian bank accounts have $100,000 in coverage. Americans have $250,000. We haven't raised our level since 2005.
By: Melanie Paradis
The recent bank failures in the U.S. and Switzerland remind us of the important role governments play in keeping your hard-earned money safe. And sometimes not.
Over the weekend, the Bank of Canada joined five other central banks in a coordinated effort to calm financial markets. This involved pushing more liquidity into our financial systems. On Monday, the federal government sent Deputy Prime Minister Chrystia Freeland out to signal calm to the market by pre-positioning next week’s federal budget, promising it “will exercise fiscal restraint.” She also said the government is monitoring the banking situation daily and that “Canadians can and should be confident that at a time of global uncertainty, there is no better place to be [than] Canada.”
According to credit-rating agency DBRS, the Big Six Canadian banks lost $57 billion (or 9.2 per cent) of market capitalization over the past two weeks. And while the credit-rating agency continues to be confident Canadian banks will navigate current market turbulence, they are closely monitoring liquidity positions and exposure. And they noted “credit default spreads in the banking sector have been widening and the volatility will likely result in higher funding costs that adversely impact profitability.” That’s a problem.
Just hours after Freeland’s media event, Canada’s top banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), issued an advisory reinforcing that the existing creditor hierarchy would remain in place in the event “a deposit-taking bank reaches the point of non-viability” in Canada. This is the process by which a bank “bail-in” would occur — by converting certain bonds into equity instead of taxpayers bailing out a bank.
In the case of Credit Suisse, which is a bank that has existed longer than Canada has been a country, UBS’s buy-out of shareholders wiped out certain bond holders, because those banks had language in their terms to allow that. To enable the sale of Credit Suisse, including overriding merger laws on shareholder votes, the Swiss government invoked an article of its constitution allowing it to “counter existing or imminent threats of serious disruption to public order or internal or external security.” The Swiss cabinet met Saturday night, and after discussions that I imagine must have included phrases like “secure banking is kind of our thing, guys,” immediately began preparing emergency measures. Read this tour-de-force by Financial Times for the full story — forget West Wing, it sounds like an episode of 24 if the thing they blew up at the end was a bank.
While the Swiss have seized control over their banking once again, America is rattled. There is intense demand for cash across the American banking sector. Last week alone, the Federal Home Loan Bank System issued $304 billion USD in debt and lenders took a further $165 billion USD from the Federal Reserve.
On Monday, the White House was amplifying President Biden’s calls for stronger rules to prevent future crises, including measures that would allow the Federal Deposit Insurance Corporation (FDIC) to tighten regulations for larger banks. Importantly, the White House set fire to the feet of a deeply divided Congress, saying lawmakers must approve those changes.
Meanwhile, what is being done in Canada to protect your money? Over the past week, we have heard calls from all quarters to increase our deposit insurance. The Canadian Deposit Insurance Corporation was created in 1967 to safeguard your bank deposits. At the time, it secured the first $20,000 you deposited. In 1983, this was increased to $60,000. And in 2005, Minister Ralph Goodale increased it to $100,000. No one has touched it since.
Inflation alone tells us it should be at least $170,000, based on $20,000 in 1967, or $147,000, if we began counting after the last increase almost 20 years ago. In either case, it has lagged badly In the U.S., for comparison’s sake, the FDIC covers $250,000. That’s about $340,000 Canadian. We absolutely need to increase what’s covered here.
Deposit insurance applies to your RRSP, RESP, TFSA, and regular banking accounts. We are talking about your entire life savings here. You want that to be protected. Even if you have zero savings today, you want a system that safeguards other people’s savings in a crisis. Why? Because that money is what’s backing your mortgage, your business loan, and your employer’s payroll. If depositors do not have faith that when they go to the bank and ask for their money, they will get it, then they won’t put their money in the bank. If they don’t put their money in the bank, there is no credit.
(If you’re curious about the rules, Naimul Karim at Postmedia helpfully did a full explainer just a few days ago.)
Currently, the CDIC covers about $1 trillion worth of deposits in Canadian bank accounts. That sounds awesome. But here’s the thing. They’ve only got about $7 billion in cash and investments and can only borrow about $30 billion. I understand that sounds like a lot of money, but it’s only 3.7 per cent of a trillion. We need to increase that too.
To secure liquidity and avoid bank runs in the event the crisis spreads here, we need to ensure Canadians continue to feel safe keeping their hard-earned money in the bank. Increasing deposit insurance is a good way to do that.
The Canadian banking system was saved from the worst effects of the 2008/9 financial crisis, thanks to former finance ministers Paul Martin and Jim Flaherty. Martin forced banks to keep their deposit and lending businesses boring, and safely separate from their more lucrative, but riskier, subsidiary businesses. And Flaherty protected homeowners by requiring higher down payments and prevented lenders from excess. Both ministers reinforced the foundation of Canada’s safe banking system, for which we should be very grateful. If Minister Freeland hopes to join the ranks of Martin and Flaherty, this may be her moment.
Melanie Paradis is the president of Texture Communications.
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