Safe deposits?

What’s really covered by Canadian deposit insurance?

Are your bank deposits safe? Will deposit insurance protect you if a Canadian bank runs into trouble? It’s a question many people are asking, given the recent run of high-profile bank failures in the U.S. and Europe.

Anxieties about the health of the global banking system have rattled markets in the past few weeks. Silicon Valley Bank and Signature Bank, both smaller regional banks in the U.S., failed and were effectively shut down by U.S. regulators. Bank deposits were guaranteed by a quickly-cobbled-together consortium of U.S. federal agencies, including the Federal Reserve Board. First Republic, another U.S. regional bank is also facing collapse, and a bailout is still in limbo. Switzerland-based bank Credit Suisse ran into liquidity problems over a week ago, and a major shareholder refused to inject any further capital. UBS, another large Swiss bank, agreed to rescue Credit Suisse by acquiring it. And just this past Friday, German banking giant Deutschebank, along with other big European banks, came under selling pressure over mounting concerns about the rising cost of insuring against default.

Bank indexes around the world have slumped as result. And in a knock-on effect impacting the financial sector generally, share prices of Canadian banks have also suffered. The S&P/TSX Banks Index has dropped about 10% since mid-February.

Canadian depositors, indeed bank depositors all over the world, are understandably concerned about the possibility of a banking “contagion” spreading, and whether current coverage by the Canada Deposit Insurance Corp. would be sufficient to insure depositors against loss.

In fact, many Canadian deposits do have reason to be concerned about coverage. According to a recent report from credit-rating agency DBRS Morningstar, about 65% of deposits at the Bix Six Canadian banks – Royal Bank of Canada, TD, BMO, CIBC, Scotiabank, and National Bank – are uninsured. And DBRS estimates that the U.S. subsidiaries of the Big Six hold between 30% and 70% uninsured deposits. At mid-size and small Canadian banks, DBRS says some 25% of deposits are uninsured.

So if things went wrong at Canadian banks, there could be very serious financial repercussions. The good news is that the big Canadian banks, which are very tightly regulated, are highly liquid and well capitalized. None of the Big Six has ever come close to failing or experienced a run on deposits.

The fact is, Canadian banks have a reputation for being among the most prudent in the world. They largely avoided the subprime mortgage crisis that very nearly brought down the banking systems in the U.S. and Europe in 2008. Smaller Canadian financial institutions are also typically financially sound, and failures have been few and far between.

Too big to fail?

That’s not to say absolutely that a deposit-taking institution, large or small, won’t ever get into trouble, but it’s been highly unlikely in Canada. The Office of the Superintendent of Financial Institutions has in fact deemed Canada’s six big banks as “systemically important” to the Canadian financial system (i.e., too big to fail), and has required them to bolster their common equity tier one capital to, in effect, “keep more money in the bank” as a cushion against hard times. In addition, the banks and financial institutions generally are subject to even more oversight and reporting requirements.

Over and above that, Canadian depositors are protected by the Canadian Deposit Insurance Corporation against the failure of a member institution. This insurance covers eligible deposits at CDIC member institutions up to $100,000 (principal and interest combined) per depositor. You don’t need to apply – your deposits are automatically covered.

Which deposits are protected?

Coverage includes deposits made in Canadian or foreign currency in savings and chequing accounts, term deposits (e.g., GICs up to five years’ maturity), debentures issued to evidence deposits by CDIC member institutions (other than banks), money orders and bank drafts issued by CDIC members, and cheques certified by CDIC members.

In addition, you can increase coverage, because the CDIC insures eligible deposits separately – savings in one name, joint savings, savings in trust, RRSPs, RRIFs, TFSAs, RESPs, and RDSPs are all covered separately. And as of April 1, this year, there will be separate coverage for up to $100,000 in eligible deposits held under First Home Savings Accounts (FHSAs)

What CDIC does not cover

Where many people are a little hazy on the rules is in understanding that CDIC insurance coverage does not extend to any other assets that may be held in your RRSP or other registered accounts, including stocks, options, ETFs, mutual funds, corporate and government bonds, notes and debentures, Treasury bills, Banker’s Acceptances, certain index-linked and traded principal protected notes, and mortgages. None of these is covered by CDIC insurance. Only eligible deposits are covered.

If you have eligible deposits at different institutions, you’re covered up to the maximum at each institution. And, of course, in the case of married couples, if each spouse holds eligible deposits in their own name, each is also covered up to the $100,000 maximum per institution – something that may be of interest to high net worth individuals.

Now, given the recent tremors running through the global banking system, the Canadian Bank and Trust Companies Association has called on the CDIC to double coverage to $200,000.

There’s a lot more to CDIC coverage than meets the eye. To find out more, visit the CDIC website, which includes a coverage calculator and a wealth of examples and illustrations. And, as always, if you have doubts about what’s covered – and whether your deposits are protected – talk to a qualified financial advisor.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances. Note: This article has been revised to reflect updated changes to CDIC coverage.