# CDIC - do we really need it?



## investordude (Dec 14, 2012)

Hi guys.

Wanted to get everyone;s thoughts on what they think about "Canada Deposit Insurance Corporation" which insures your deposits from $1 to $100,000 at any CDIC member. My question is, what are the chances the big banks (RBC, TD, Scotia) actually failing? 

I can see this being important when depositing your money at banks like HSBC or some credit unions, but the big Canadian Banks are strong, I don't see them failing.


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## MoreMiles (Apr 20, 2011)

There are lots of recent discussion on the strength or perceived strength of our banking system. And about how our government has changed laws in March 2013 to avoid responsibility in case of a catastrophic bank failure.

My question is, do we really need CDIC it covers so little anyway. People's nest eggs can still be almost wiped out with $100k. By the way, that limit was enough to buy a house when it was introduced. It has not changed / increased for many years, despite inflation. That limit is only enough to buy a parking space these days. So little so silly.


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## AltaRed (Jun 8, 2009)

If one looks at the long list of failed institutions in the last 30 years, one should be happy that CDIC was around to bail out depositors. Lots of supposedly strong names, especially in the Trust Company sector, have disappeared. The RE bust in the '80s is a classic example, and an RE bust could happen again. Many depositors would have been wiped out. 

$100k is still lots of coverage. For married folk, one can easily have $300k at every institution (self, spouse and joint accounts), and there are literally dozens of CDIC insured institutions (at least 3 at each of the big banks alone - bank, mortgage company, trust company).


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## blin10 (Jun 27, 2011)

never say never, but if worst comes to worst, I see government coming up with bail out packages like states did...


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## andrewf (Mar 1, 2010)

investordude said:


> Hi guys.
> 
> Wanted to get everyone;s thoughts on what they think about "Canada Deposit Insurance Corporation" which insures your deposits from $1 to $100,000 at any CDIC member. My question is, what are the chances the big banks (RBC, TD, Scotia) actually failing?
> 
> I can see this being important when depositing your money at banks like HSBC or some credit unions, but the big Canadian Banks are strong, I don't see them failing.


The existence of CDIC contributes to the stability of the big banks. Without deposit insurance, they would have higher borrowing costs and higher capital requirements, and they would still be vulnerable to bank runs.


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## AltaRed (Jun 8, 2009)

blin10 said:


> never say never, but if worst comes to worst, I see government coming up with bail out packages like states did...


Probably, for the big 5, but not likely for the dozens of other institutions that people have money deposited in.


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## liquidfinance (Jan 28, 2011)

HSBC? The size of RBC and TD combined?

It can hardly be compared with the smaller institutions. It just has a relatively small presence in Canada.


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## AltaRed (Jun 8, 2009)

liquidfinance said:


> HSBC? The size of RBC and TD combined?
> 
> It can hardly be compared with the smaller institutions. It just has a relatively small presence in Canada.


However there are 2 important points: 1) the size of assets in Canada which is all a depositor or any other creditor can count on, and 2) Ottawa is not going to save a limited affiliate of a foreign multi-national. HSBC could easily abandon an affiliate in an individual country if it gets into trouble and let it crash. That said, the HSBC mothership may do something to mitigate reputational damage. 

I don't give HSBC any more credibility than I would ICICI bank, Can Tire Bank, etc. when it comes to backing up its deposits by itself, or with the backstop of Ottawa.


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## HaroldCrump (Jun 10, 2009)

The only way to get rid of the CDIC is to raise the reserve ratio to 100%.
Completely separate deposit banking from commercial lending.


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## liquidfinance (Jan 28, 2011)

HaroldCrump said:


> The only way to get rid of the CDIC is to raise the reserve ratio to 100%.
> Completely separate deposit banking from commercial lending.


I haven't followed it but I believe this is something the British government is pushing for. Not sure on the reserve ratio aspect but certainly the separation of Investment and retail banking. 

AltaRed:

I see your points ref HSBC. I certainly think the risk of any of the big Canadian banks failing is slim andi'm currently not in any danger of being over the limit anyway. I'm sure Ottawa would find a way to prop them up. Maybe at the expense of the shareholders such as the way was with Lloyds and RBS or Northern Rock which was fully nationalised http://en.wikipedia.org/wiki/Nationalisation_of_Northern_Rock

Would Ottawa go the same way here?


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## HaroldCrump (Jun 10, 2009)

liquidfinance said:


> I haven't followed it but I believe this is something the British government is pushing for. Not sure on the reserve ratio aspect but certainly the separation of Investment and retail banking.


Separation of investment banking for sure, yes.
That was the Glass–Steagall provision of the 1933 Act.

But what I was referring to is even more extreme - separation of general commercial lending, not just investment banking and securities activities - from deposit banking.
Essentially, all commercial business lending and even mortgages would be separate from deposit banking.

Deposits can only be "invested" by the bank in federal govt. bonds, nothing else.
It will be essentially as good as a 100% reserve ratio mandate.

This would prevent situations like the S&L Crisis, let alone the credit meltdown of 2008/9
http://en.wikipedia.org/wiki/Savings_and_loan_crisis

Separating all commercial lending (and investment banking) activities will allow the interest rates to reflect the true market risk associated with each type of lending or activity.

This is all academic, of course, none of these changes are likely to happen anytime soon.

Anyways, let us first start by dissolving the CMHC and then we can talk about dissolving CDIC.


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> Probably, for the big 5, but not likely for the dozens of other institutions that people have money deposited in.


By this, do you mean the other twenty-five domestic banks such as Canadian Western Bank, PCF, Manulife Bank, National Bank, ING, etc?


Cheers


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## MrMatt (Dec 21, 2011)

HaroldCrump said:


> Deposits can only be "invested" by the bank in federal govt. bonds, nothing else.
> It will be essentially as good as a 100% reserve ratio mandate.


This would make those accounts less profitable, which would result in the banks either not having them, heavily discouraging them, charging higher fees etc.

So we'll be exactly where we are today, except the real low risk options will be harder to get.


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## Rusty O'Toole (Feb 1, 2012)

I hope the CDIC imposes some conditions on the banks to qualify for insurance, charges them premiums, and audits their books. Without the insurance there would be no need for this regulation and oversight. In that case we might see more defaults and losses to customers.

How is an ordinary person supposed to know if a bank is solvent? Without insurance any financial storm could result in panic and bank runs which will kill even the strongest institution.

This is why the insurance was invented in the first place. It is sort of like good sanitation. The lack of cholera epidemics prove hygiene works, it does not prove that we no longer need it.


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## Karen (Jul 24, 2010)

> ...My question is, do we really need CDIC it covers so little anyway. People's nest eggs can still be almost wiped out with $100k. By the way, that limit was enough to buy a house when it was introduced. It has not changed / increased for many years, despite inflation. That limit is only enough to buy a parking space these days. So little so silly


It is not necessarily true that the CDIC covers only $100,000. I have about $800,000 in GICs at Scotiabank, and most of it is covered by CDIC. The RRSP investments are insured separately from my non-registered investments, and within each of those two categories the investments are distributed among several Scotiabank issuers and affiliates, including the Bank of Nova Scotia, Scotia Mortgage Corporation. National Trust Company, and Montreal Trust Company. Each of these is covered separately by CDIC for up to $100,000. I think the TFSA is covered separately, too, but I haven't asked about that specically.

I did have to ask the bank about this, and each time I re-invest a GIC I have to remind them or they will just automatically reinvest it with the same issuer it was with originally and sometimes that one is over the $100,000 limit.

I sometimes wonder whether the insurance would be worthless if the banks went under, due to the huge amount of money the CDIC would have to pay depositers, but I certainly want to make sure I'm covered to the extent possible, just in case.


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## lonewolf (Jun 12, 2012)

CDIC makes the banking system weaker not stronger. The herd is dumber then the dumbest person in it. The herd elects the goverment which almost always makes matters worse when they try to fix a problem. Without CDIC backing the banks would have to make sound investments to get loans (which some might call deposits)

I read that the Canadian banks were bailed out in 2008. If they were the perception the Canadian banks are solid perhaps is bogus. The banks are in the bussiness to make money, Credit unions which are member owned work to benifit all members as a team to build financial strength, not like banks that have a conflict of interest which is to make money for the owners from the money that is lent to them. My bet is on the credit unions holding up better then the banks in a financial melt down. I just dont see any incentive for the banks to care about its custumers. They are not in bussiness to care, they are in bussiness to make money.


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## james4beach (Nov 15, 2012)

investordude said:


> I can see this being important when depositing your money at banks like HSBC or some credit unions, but the big Canadian Banks are strong, I don't see them failing.


Could you write more about what you mean by "the big Canadian Banks are strong" ... what makes you believe they are 'strong' and unlikely to fail?

The Canadian banks were actually bailed out through substantial government support in 2008/2009, and some extraordinary measures. Given that, I am especially keen on CDIC insurance. I would not lend a single dollar to any Big Six bank without government insurance.


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## Eclectic12 (Oct 20, 2010)

Karen said:


> ... I sometimes wonder whether the insurance would be worthless if the banks went under, due to the huge amount of money the CDIC would have to pay depositers, but I certainly want to make sure I'm covered to the extent possible, just in case.


With a big enough crisis and not enough assets - it could be an issue. But then again, for a crisis that big, there'd also likely be gov't intervention.


Cheers


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## Eclectic12 (Oct 20, 2010)

lonewolf said:


> CDIC makes the banking system weaker not stronger. The herd is dumber then the dumbest person in it. The herd elects the goverment which almost always makes matters worse when they try to fix a problem. Without CDIC backing the banks would have to make sound investments to get loans (which some might call deposits) ....


That's an interesting view, I'm not sure history bears it out.

This would imply that prior to 1967 when CDIC was created, the banks were making sound investments. Yet, there is a long history issues prior to 1967. Some of these include:
a) the Bank of Montreal taking over insolvent banks to keep the system running.
b) the Canadian gov't providing reserves in 1907 & 1914 to stop a financial crises.
c) the Finance Act of 1914 which made the Canadian gov't the lender of last resort.

In case that's not enough - provincial gov'ts were in on the action as the Quebec gov't provided $15 million in 1923 for the merger of the Bank Nationale with the Banque d’Hochelaga to avoid a bank failure.

http://socialdemocracy21stcentury.blogspot.ca/2012/09/why-did-canada-have-no-mass-banking.html


There seems to be a lot of issues prior to the CDIC being created.


Cheers


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## lonewolf (Jun 12, 2012)

Hi Electric

Thanks,

Both sound bussiness practice as well as confidence by the masses are major factors of when & if a bank fails. I think the price chart of Dow or increase in the money supply is perhaps the best digital recording of the mood of the masses. When the masses feel confident they borrow money to speculate, buy junk & things they dont need or what ever thinking they can pay it back the money.

When the confidence is near or @ a low the increase of a bank failure is more likely. Sound bussiness practices reduce the odds of a failure. The problem is over confidence before the crisses lead to creative thinking & the building of a house of cards which the size of is in direct porportion to the degree of confidence @ its peak


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## Eclectic12 (Oct 20, 2010)

lonewolf said:


> ... I think the price chart of Dow or increase in the money supply is perhaps the best digital recording of the mood of the masses.


With all the stimulus money as well as low interest in the US, is the this really a good gauge of the mood of the masses?




lonewolf said:


> ... Both sound bussiness practice as well as confidence by the masses are major factors of when & if a bank fails ...
> When the masses feel confident they borrow money to speculate, buy junk & things they dont need or what ever thinking they can pay it back the money.
> 
> When the confidence is near or @ a low the increase of a bank failure is more likely. Sound business practices reduce the odds of a failure.
> ...


Generally, I agree but I'm see the low confidence as an indicator and a small pressure towards a bank failure. If the sound business practices have been maintained, the low confidence should not last long as there should be robust numbers to show that there is reason for confidence. It's the combination of high consumer confidence to spend and relaxed business practices that is the danger, IMO.


Cheers


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## HaroldCrump (Jun 10, 2009)

MrMatt said:


> This would make those accounts less profitable, which would result in the banks either not having them, heavily discouraging them, charging higher fees etc.


Not necessarily.
The banks make money on the spread.
Their spread would remain the same.
What would change is that the savings account holders would get (even) lower interest on their deposits.

That will be the price for not having CDIC.
Lower interest rates, but the deposits will be just as secure (without CDIC).

Potentially, some of that could be offset by the banks not having to contribute to CDIC, but I am not sure if that'll make a material difference to the interest rates they offer on deposits.

But this will allow the commercial and mortgage lending to reflect the true loan risk, as well as put to rest fears of "bail ins".


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## andrewf (Mar 1, 2010)

HaroldCrump said:


> Not necessarily.
> The banks make money on the spread.
> Their spread would remain the same.
> What would change is that the savings account holders would get (even) lower interest on their deposits.
> ...


You could allow retail depositors to hold deposits at the central bank at the overnight rate. Then the only guaranteed deposit is a deposit at the central bank, and people should know that their accounts with retail banks are 100% at risk. Retail banks could continue to provide branch services and chequing accounts.

Of course, commercial banks would likely periodically fail/trigger runs. I'm not sure I see the case for government regulation of capital ratios so long as the resolution mechanisms are in place (the capital structure takes the hit--not taxpayers).


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## andrewf (Mar 1, 2010)

Also, if the reserve ratio is 100%, the return on savings is zero, because the bank can't make any loans on savings. It might even have to be negative after fees to help pay for the operation of the bank.

Point being that 100% reserve ratios are very expensive. Why is this better than the status quo?


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> Also, if the reserve ratio is 100%, the return on savings is zero, because the bank can't make any loans on savings. It might even have to be negative after fees to help pay for the operation of the bank.


I was saying that to get rid of CDIC, deposit banking and commercial lending must be separated.
All commercial and mortgage lending will be split into a separate business entity, just like investment banking under Glass-Steagall.
Savings deposits can be invested only in GOC bonds, nothing else.



> Point being that 100% reserve ratios are very expensive. Why is this better than the status quo?


How else would you get rid of the CDIC and yet guarantee 100% of deposits?


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## andrewf (Mar 1, 2010)

Even government bonds don't satisfy 100% reserve ratio. Government bonds can decline in value, even if they aren't defaulted on.

As a thought experiment, sure, but what this serves to illustrate is that CDIC provides value. I would be open to discussing whether the current premiums are appropriate.


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## Robillard (Apr 11, 2009)

Banks are in the business of borrowing money from depositors and lending it out to individual and business borrowers. A "100% reserve ratio" means that banks don't lend out any amount that depositors put in the bank. Instead these reserves would probably have to be held as deposits with the Bank of Canada. This discussion of "reserves" in the sense of the "reserve ratio is not very useful. Canada has no mandated reserve ratio for banks. The reserve ratio has little to do with the level of liquid assets that a bank retains to satisfy withdrawals. And it has less to do with the amount of capital that a bank retains to cover losses on bad assets. 

CDIC mainly reinforces depositors' faith that their deposits can be redeemed up to the level of deposit insurance. Deposit insurance helps protect against bank runs. The main concern in this discussion is whether banks maintain enough liquidity to satisfy depositors' withdrawal requests, and whether deposit insurance creates a moral hazard situation letting banks keep less liquidity than they otherwise should. On this point, I think the benefit of maintaining depositor confidence in the banking system outweighs the moral hazard of banks keeping less liquidity. Moreover, although the OSFI guidance does not mandate hard levels of liquidity that must be maintained, OSFI does monitor the level of liquid assets on banks' balance sheets to try to ensure that prudent amounts are retained. Canadian banks generally take the risk OSFI admonishments seriously.


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## lonewolf (Jun 12, 2012)

Digital currency i.e., like the bitcoin is the way of the future. Problem is disaplined must be used & the rules must be adhered to which most likely never will happen for ever.


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## MrMatt (Dec 21, 2011)

> Point being that 100% reserve ratios are very expensive. Why is this better than the status quo?





> How else would you get rid of the CDIC and yet guarantee 100% of deposits?


If CDIC is cheaper than 100% reserve ratios, we should keep it.

I think CDIC is cheaper, which is why we have it, and why keeping it is a good idea.


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## Eclectic12 (Oct 20, 2010)

MrMatt said:


> If CDIC is cheaper than 100% reserve ratios, we should keep it.
> 
> I think CDIC is cheaper, which is why we have it, and why keeping it is a good idea.


In addition to it being cheaper - I suspect the gov't prefers to have CDIC reduce the number of times they have to legislate an intervention such as happened in 1907, 1914 and the Quebec gov't in 1923. I can recall tweaking legislation but not such as drastic intervention.

Cheers


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## lonewolf (Jun 12, 2012)

For every dollar deposited (which is actualy a loan) in the bank how many dollars is the bank allowed to loan out ? Does anyone know how many dollars are loaned out for every dollar invested by the differnt banks & or other financial instutions. In the states a while back was it not something like for every dolar the banks had loaned to them through deposits the banks had 27 dollars loaned out ?


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## MrMatt (Dec 21, 2011)

Less than one dollar can be loaned out.
When people get hung up on is that one dollar is deposited, part is loaned out, redeposited, loaned out and so on, so in total a single "real" dollar "becomes" more money, but people forget that they it is borrowed money.


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## HaroldCrump (Jun 10, 2009)

lonewolf said:


> For every dollar deposited (which is actualy a loan) in the bank how many dollars is the bank allowed to loan out ?


That is the Reserve Ratio in banking.



> Does anyone know how many dollars are loaned out for every dollar invested by the differnt banks & or other financial instutions.


Answer here 



> In the states a while back was it not something like for every dolar the banks had loaned to them through deposits the banks had 27 dollars loaned out ?


That is the Money Multiplier Effect


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## fraser (May 15, 2010)

I thought the reserve was 12 percent. But I would assume that there are also some capitalization rules as well.


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