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



## VJ99 (Apr 24, 2012)

Some Manitoba credit unions offer really good GIC rates. 
Here's the full list of offerings from across Canada:
https://www.cannex.com/canada/english/products_term.htm

Achieva Financial and AcceleRate Financial, both from Manitoba, offer 2.70% on a 3 year GIC.
Plus, the GICs are fully insured against default of the credit union.
In Ontario, insurance is for the first $100k only. 

So with a Manitoba credit union GIC you can get higher return and less risk?
How does that make sense? What am I missing?

Can someone please explain.
Thanks, 
Vikash


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## jet powder (May 29, 2012)

archerETF

If more risk means higher long term gains the investment would not be high risk.

The credit unions should be able to beat the rates the banks offer because they are none profit & the banks are making a lot of money the costumers never see.

The credit unions you mentioned are not bricks & mortar but an online division of which is cheaper to run look @ the year end reports (or whatever they are called) I think you have to go to the site for the bricks & mortar to get the numbers. There is a lot of extra money involved running the bricks & mortar ( A lot of people will use both)

When the economy is strong people feel more confident so more likely to take out a loan because they think they can pay it back. I think the Manitoba economy is more stable then Ontario. 

I feel more confident having my money in the Manitoba credit unions then the banks. Iam not really good @ reading financial statements but when I looked over the holdings for Westoba (maxa) I liked them better then the banks.

Holding money in Swiss annuities (which is not locked in forever) is perhaps the safest place to hold money. Safer then a safety deposite box because it is ileagal to take money out of circulation ( though some do it & the banks know they do)



Precieved risk is just as important as actual risk affecting the price investors pay. In 2007 did investors think the risk was low that the market would decline x amount ? I kinda think they did or else they would not have been so heavily invested


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## CanadianCapitalist (Mar 31, 2009)

IMO, there is a quite a bit of difference between deposit guarantees offered by CDIC and CUDGC. CDIC guarantee is as bullet proof as you can get because in a worst case scenario, the Government of Canada is sure to step in and make good on deposits. Can anyone have the same confidence in CUDGC guarantees?


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## jet powder (May 29, 2012)

Will the goverment really make good on all of its promises ? The goverment destroys the money world, are they all of a sudden going to save it ? Thinking that your money is insured only makes the banks act more reckless. Money is not deposited in a bank for safe keeping but lent to the bank. @ some point the T party type people could grow in numbers & they will be sick of all the bailouts.

But hey what do I know,I cant even spell.


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## fatcat (Nov 11, 2009)

CanadianCapitalist said:


> IMO, there is a quite a bit of difference between deposit guarantees offered by CDIC and CUDGC. CDIC guarantee is as bullet proof as you can get because in a worst case scenario, the Government of Canada is sure to step in and make good on deposits. Can anyone have the same confidence in CUDGC guarantees?


great question cc ... i would say yes and thus have some money parked at maxa, westoba's online arm ... i don't see a scenario where 1) manitoba is going to go under and 2) i don't see the feds standing by and watching manitoba declare bankruptcy ... deals would get done ... on the other hand, any scenario that involved manitoba going under would probably be engulfing the whole nation and in that case yes, i guess the cdic would be where you want to be ... but, as we see in europe, maybe national guarantees of your money aren't worth as much as they used to be


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## CanadianCapitalist (Mar 31, 2009)

fatcat said:


> i would say yes... but, as we see in europe, maybe national guarantees of your money aren't worth as much as they used to be


The problem is CUDGC does not have an explicit backstop by the govt. of Manitoba. And in fairness, CDIC does not have the explicit backing of the Govt. of Canada either. However, CDIC guarantee is so central to the Canadian banking system that the Feds will be forced to step in in the event that there is even a doubt about the guarantee. I don't think we can have the same level of confidence in a provincial credit union guarantee. 

Also, the point has been raised elsewhere as to why it is just Manitoba credit unions that are able to offer such juicy rates. Since the cash portion should be as risk free as possible, my personal opinion is that it is not worth reaching for that extra yield.


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## jet powder (May 29, 2012)

Canadian Capitalist

Thanks for the great site much appriciated.


Iam not an expert @ reading financial statements & you are most likely better then Iam @ it so you are most likely a better judge. The real estate in Manitoba is in less of a bubble then most of the rest of Canada if there is a bubble & the quality of the bonds held @ Westoba looks to me on average are higher rated then that which the banks are holding. I think it was something like 60% A+


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## HaroldCrump (Jun 10, 2009)

The day the Canadian govt. refuses to backstop CDIC will be a sad day indeed.
I suspect your GIC at the Royal Bank of Canada, etc. will be the least of your worries at that time.
You will more likely be busy counting how many cans of tuna and how many bullets you have left.

As for why and how the province of Manitoba is able to promise such wonderful guarantees, when the times are good everyone promises the sky.
Look into the history of the Savings and Loans crisis in the US to get a sense of how things can fall apart.


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## jet powder (May 29, 2012)

Hey, Harold

I always enjoy your posts

There is quite a bit of fear out there I herd the price of long term storage food has doubled in the last year or 2. ( the goverment is even starving people around the world by thinking we can cause global warming, So the solution is to burn our food & maybe create a few jobs fixing lawn mowers that are plugged with ethonal.

I cant afford it but for safety reasons anyone that can afford to buy property in a few safe countries should do so while the going is good. 

I kinda think I would rather holding digital currency (bitcoin) then gold or maybe junk silver coins for barter. ( On gold seek radio a guy was @ a beach & tried to sell a real gold coin valued I think for something like a 1000 dollars & could not sell it to anyone for 5 bucks,( Everyone thought it was fake) I wonder how fast it would have gone @ a border crossing but in a situation like that I would not worry about getting five bucks.

The goverment thinks its some type of god & can even destroy & create energy. There is only x amount of energy in anything. They think they can create energy in the economy by creating jobs in the puplic sector but when jobs are created in the puplic sector it takes jobs away from the efficient private sector. ( whos going to pay those taxes)

When the masses have confidence in the private sector they buy stock, When they have confidence in the goverment they buy goverment bonds. To me the charts are comfirming the baby boomers are finished thier spending & the debt will be deleveraging. ( Everyone thought the fed could over power mother nature & the markets between 2007 - 2009 should make them wonder I think a little more then they are now @ how powerfull the fed really is)


The dow is putting in the largest jaws of death pattern that I can see going back to 1896

The 30 year bond in the United States looks like it is rising in a diagonal triangle. ( its 30 year cycle is about due I doubt if the bonds will do a Lindsy). 

The cycle people must have loved the clasic Lindsy top in 2007. @ important tops cycles invert. The stock market 4 year cycle bottoming in years ending in a 2 will often run longer then usual & if they dont bottom in the year ending in 6 crash in October of the year ending in 7.


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## VJ99 (Apr 24, 2012)

Thanks, CC. I appreciate that credit quality for CDIC and CUDGC may differ. But I wonder if that alone explains the spread. Alterna, an Ontario credit union, offers 1.9% on a 3-year. That's 0.80% less than the Manitoba offers. 

I did a quick comparison of the financials for the two insurers:

Premiums / Insured Deposits CUDGC= 8.8bps CDIC= 4.2bps
Ex Ante Ratio CUDGC= 99bps CDIC= 37bps
Ex Ante Funding = [Retained Earnings + Loss Provisions] / insured deposits

Based on this info, CUDGC looks stronger than CDIC, though CDIC is certainly better diversified in its risks. I also spoke with CUDGC's CFO - a very amiable fellow named Joe Nowicky - who said CUDGC has been around 40 years and the last time it had to make a significant payout was 1987. Maybe they are overdue? But if so, I reckon Manitoba real estate markets will need to fall by at least 20% before the insurer takes a hit.

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


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## CanadianCapitalist (Mar 31, 2009)

archerETF said:


> 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/


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## NorthernRaven (Aug 4, 2010)

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.


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## VJ99 (Apr 24, 2012)

thanks for the insightful comments, NR.
vj


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## NorthernRaven (Aug 4, 2010)

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...


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## fatcat (Nov 11, 2009)

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


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