What's the catch with high GIC rates from Manitoba credit unions?

[CanadianCapitalist]

Alterna, an Ontario credit union, offers 1.9% on a 3-year.

On balance, I think I'd be willing to take on CUDGC credit exposure for 3 years for an extra 80bps a year.

Fair enough. I think we are talking about remote possibilities anyway because you have multiple layers of cushions: the equity of the banks/credit unions themselves, then the backstop provided by deposit insurance and then the chance that the Government will not step in.

A correction though. Deposit guarantee for Manitoba Credit Unions seems to be provided by Deposit Guarantee Corporation of Manitoba now. Also, Ontario credit union deposits are guaranteed by DICO a different deposit insurer.

http://depositguarantee.mb.ca/home/

[NorthernRaven]

A static comparison of CDIC to DGCM (the new name for Manitoba's CUDGC) is somewhat misleading. On a practical level, failure of any of Canada's biggest banks is highly improbable, so the current ex-ante fund is big enough to plug most likely holes. However, given recent events, CDIC is raising their target to a 100 bps fund, so their premiums are likely to increase over the next few years. But in any case, they have a $17 billion line of credit with Treasury, equivalent to something like 280 bps (!). Whether or not there is some sort of implicit legal obligation for Canada to back CDIC beyond this as an agent of the Crown is unclear, but fairly moot given that credit line.

If one sticks with CDIC on Canadian Capitalist's "explicit backing" measurement, that's perfectly reasonable - one isn't so much evaluating actual risk as much as defined recovery resources. But beyond that, there's a lot of nonsense tossed around about Manitoba CUs and their rates. The first thing to remember is that credit unions are cooperatives, where the shareholders and customers are the same group. So better rates to customers is to some extent simply money that might have been paid out as patronage or dividends. A bank, on the other hand, pays out a separate group of shareholders, who would not appreciate their dividend reduced to support higher rates. This isn't the whole story, but if you want to look at this seriously you need to compare how Manitoba CUs look at the end of the day - percentages of revenue as retained earnings, capital buffers, etc. Manitoba CUs don't seem terribly exotic when looked at like this.

Similarly with rates, it isn't like bonds where higher rates generally reflect higher risk. To a great extent it is much more like retail pricing. Big banks, like established stores with lots of customers, may be able to charge higher prices (or give lower interest rates), either because their customers are unlikely to go elsewhere for relatively small savings, or because they provide many other useful services as well. Other stores may sacrifice some profit to offer better prices, or work at reducing their costs to the same end. But it is not "riskier" to buy a Tassimo coffee maker for $100 at Walmart than for $150 at Pricey Goodies, Inc. Banks that want to divert business away from the Big5 need to establish some reason for consumers to choose them; one way is to offer better rates. It is always possible that any particular high rate reflects an unhealthy desire for high-cost deposits, but certainly for Canada there doesn't seem to be be any indication of that.

If one is actually evaluating a provincial credit union system as large as Manitoba's, it is fine to hypothesize some sort of unknown disaster, but you then have to ask just what that might entail. Manitoba CUs by some measures approach 40-50% penetration there, so any collapse affects the entire province, and it becomes pretty hard to argue a scenario where it isn't much better (and cheaper) for Manitoba to support them, rather than let the CU sector collapse entirely. Working down, it is also very hard to come up with a scenario where the DGCM fails without having customers at "healthy" CUs fleeing away to CDIC banks, and in any case hard to see indications of what would bring down the Manitoba CU system.

[VJ99]

thanks for the insightful comments, NR.
vj

[NorthernRaven]

Like others, I was curious as to those Manitoba rates awhile back, so I did a little research and info collection. If you look at the bottom line numbers the large Manitoba CUs seem to fall into the basic Canadian range. A couple are leaders in "efficiency" (a measure of revenue vs costs), and are probably returning part of these operating cost savings via better rates. It would be interesting to know just what triggered Manitoba's rather unique rate environment - unfortunately I can't find any good long-term time series on GIC spreads against the CDIC top end, so I don't know how exceptional the recent bulge is, but Assiniboine has been running their online Outlook division for over 10 years, so it isn't new.

As to why Manitoba, CUs are generally restricted to offering financial services to "members", usually local/provincial residents. If there are some big credit unions in Ontario or BC that might be interested in playing in the national online high-interest marketplace, their regulators may be less willing than Manitoba to allow non-resident signups. If financial reporters weren't so lazy it would make a good research piece - they'd have the clout to get candid overviews from industry analysts and so on. The Manitoba regulators are notably less helpful than those in Ontario and Saskatchewan that I've exchanged emails with, and a private citizen isn't going to get any helpful answers from them.

None of this is to say that Manitoba's financial sector might not collapse tomorrow, but we might also get hit by an asteroid. The credit union sector is (I imagine) relatively conservative, Canada is fairly cautious banking wise, and the recent years will have the regulators ears perked up. Nor is it likely that Manitoba has some sort of Irish/Spanish style property bubble that no-one has noticed. I'd be as interested as anyone (I've got some funds in a HISA at a Manitoba CU) if it were otherwise, but the loons with a simplistic "those higher rates mean higher risk" wail make me grit my teeth...

[fatcat]

great points all raven
the manitoba credit union meme just never stops
it's right up there with the "is ally bank cdic insured" meme which also never stops
i think i get 2% on my money at maxa and 1.8% at ally bank

it's possible that manitoba cu's could go under and not be saved by the feds but in any situation where that would occur, i think there would plenty of other nightmare's occurring that would also be eating through our cash

i don't see it as very likely

as to why the manitoba cu's offer more money, i think it's as simple as the fact that it has evolved into a brand, they are now known to pay a little more and that brings in more customers