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Q&A: “Is my money safe in the bank? How about a credit union? Could we get a Cyprus-style bail-in?” (Canada)


There is no 100% guarantee

First, it's important to understand that there is no such thing as a 100% guarantee. Ultimately, government actions determine bank/deposit rules and there is no way to know what legislation will exist in the future. For instance, a country could repeal its deposit insurance, or change the eligibility criteria and parameters.

I'm not trying to scare you, I'm just saying: nothing is for certain.

For instance, outgoing Bank of Canada head Carney said that policy makers are working on a global bail-in strategy, but offered no guarantee that individual deposits would be protected. The Cyprus example is also very noteworthy. In the first plans outlined by the government, insured deposits would have also suffered losses. This is a great illustration of how deposit insurance (e.g. CDIC, FDIC) does not necessarily offer 100% safety. Cyprus later backed down from its first plan to take money from insured deposits, but all of these things are subject to government decisions. Laws can change.

That being said – deposit insurance is still a good thing and you would be crazy to put money in a bank without deposit insurance.

CDIC is the best deposit insurance in Canada

CDIC is the deposit insurance program run by the federal government. It is considered the best insurance because it's backed by the Government of Canada. Most deposits at the big banks, and some smaller banks, are CDIC insured. Generally speaking, chequing, savings, and GICs are covered up to $100,000. Deposits must be in Canadian dollars and GICs can't be more than 5 year terms. I strongly encourage you to double-check that your deposit is eligible for CDIC insurance.

In the case of a typical small bank failure, the CDIC (or another bank) will either transparently take over the accounts and everything will appear to function normally, or the CDIC will cut you a cheque and send you the money... perhaps later. One of the only realistic fears to have about this is how long it might take to get your money back.

Unfortunately though, in the case of a large bank failure, the CDIC's insurance reserves would not be sufficient to cover all losses. The CDIC's insurance fund is just 0.39% of insured deposits (this is ridiculously low and indicates that CDIC offers mostly psychological assurance, not real insurance). I am just speculating about what would happen in such a scenario. Likely, the CDIC would borrow more money from the federal government or the central bank would print more money. It wouldn't be a pleasant situation, and might take some time to get all your money back, but personally I still think the government will (eventually) cover the deposits ... up to $100,000.

Credit unions have deposit insurance, but it's probably weaker

Credit unions across the country generally have deposit insurance, too. For instance Ontario credit unions have coverage by the Deposit Insurance Corporation of Ontario (DICO), and other provinces have their own. Each of these deposit insurance corporations maintain an insurance pool to cover potential future losses. However, as far as I can tell, there is no explicit backing either by the provincial or federal governments. For instance Manitoba's guarantee corp states that “There is no legislated requirement for the Manitoba government to provide financial support to the Deposit Guarantee Corporation of Manitoba.”

So yes, credit unions also have deposit insurance, but it's not CDIC insurance and is not federally backed (and I don't think it's provincially backed either).

In reality though, it's hard to tell whether your money is safer at a big bank (under CDIC) or a credit union. Credit unions aren't as highly leveraged as big banks. They also tend to not engage in risky behaviours such as massive derivative positions. Certainly, both regular banks and credit unions can fail. However, in times of economic turmoil, I think that losses suffered by credit unions will be less than at big banks.

I think the best solution is to diversify, and spread your money between banks and credit unions. I lend money to both. I feel that deposits at Big Five banks (BMO, CIBC, Royal, Scotia, TD) are slightly safer due to the stronger CDIC insurance, ability to borrow from the central bank, and too-big-to-fail implicit backing.

Summing Up

Type of institution

Fundamental risk, ignoring other factors

Deposit insurance

Too big to fail

Recommend?

Big Five bank

High risk

CDIC

Yes

Yes

Smaller bank

High risk

CDIC

No

No

Credit union

Medium risk

Corp not backed by govt

No

Yes



- Perpetual Bull, perpetualbull@gmail.com