# Guarantees of GIC's bought through a discount broker?



## stephenheath (Apr 3, 2009)

My discount broker has added the ability to buy high interest GIC's from other institutions directly, and the rates are much better than what I've been getting at the big 5 while setting up my GIC ladder (which is the fixed income part of my savings, I personally don't like bonds).

I know when I buy the GIC directly from the big 5, it's CDIC insured (up to the $100k limit), but if I buy it through a discount broker (and the issuer is CDIC insured), is the actual GIC still insured through CDIC (assuming < $100k at that issuer total)? Secondly, if the discount broker happens to go under, is the GIC covered by CIPF?

I just want to be sure that in either circumstance, the GIC issuer going under or the discount broker going under, we'd get the principal back, otherwise I'm going to leave the GIC's at the big 5 and consider the rate differential guarantee insurance


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## CanadianCapitalist (Mar 31, 2009)

I believe investors will be covered in both cases. When the issuer of the GIC goes bankrupt, the CDIC insurance kicks in. If the broker goes under, typically the assets in brokerage accounts are held in trust, so every investment should be safe even before the CPIF guarantees kicks in. Anyone else wants to weigh in?

As far as GICs are concerned, I'll go with the one with the highest interest rate.


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## stephenheath (Apr 3, 2009)

I'd like to go with the ones with the highest rate, that's why I'm interested in using this new service... the broker-accessible GIC's are on average .25%-.55% higher than what the big banks are offering (and I'm assuming that spread will increase when we get back to thd old days of higher interest). I'm just not prepared to trade off the guarantees against default for that little extra return.


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## lb71 (Apr 3, 2009)

Some institutions may not be covered by CDIC, but through a provincial association. For example, Achieva Financial, which offers some of the higher GICs rates in the country, offers protection through the Credit Union Deposit Guarantee Corporation of Manitoba, which does not have any limits on deposits.


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## Maltese (Apr 22, 2009)

For many years I used a broker to purchase GICs at higher rates than offered by the big banks. A few times the banking institutions who held my GICs went under and I received my interest plus principle back from CDIC.

Now thanks to the internet I'm able to find rates myself and then buy directly from the institution. In January 2008when the banks were offering about 3.5% for a 5 year GIC, I was able to get 5.35% for a 7 year GIC from a credit union. The funds are guaranteed with no limit by the Credit Union Deposit Guarantee Corporation of Manitoba.

I hope this helps.


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## CanadianCapitalist (Mar 31, 2009)

I'm a bit wary of the guarantees by the Credit Unions. I feel that the guarantees are just not as strong as a CDIC guarantee, which is backed by the Government of Canada. Anyone else feel the same way?


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## stephenheath (Apr 3, 2009)

The CIPF isn't guaranteed by the government either but we buy stocks, and if I understand them, the credit union guarantee is basically the same thing... contributions from the members... that said, there are some CDIC insured members offering the same rates as the Manitoba credit unions, so personally I'd go with the stronger CDIC coverage all else being equal.

I talked to Qtrade, and they indicated that the CDIC coverage would still apply even if they bought it on my behalf, and it would count towards my $100,000 limit not theirs. They didn't quite answer exactly that the CIPF would cover my GIC's the same way they would cover my stocks if something happened to Qtrade, but I can't really imagine that it wouldn't.


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## CanadianCapitalist (Mar 31, 2009)

stephenheath said:


> The CIPF isn't guaranteed by the government either but we buy stocks, and if I understand them, the credit union guarantee is basically the same thing...


True, but client accounts at a brokerage are held in-trust. They belong to the clients, not the broker and even if a broker goes under, it is very likely that there isn't even a shortfall for CIPF to cover.

GICs are not like that. The financial institution has an obligation to pay interest and the principal back but if the institution goes under, I'm not sure where deposit holders stand w.r.t other creditors. It is likely that deposit insurance may have to kick in to make good on deposits. I'm confident of CDIC guarantees but credit union guarantees are not in the same league.


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## Maltese (Apr 22, 2009)

stephenheath said:


> there are some CDIC insured members offering the same rates as the Manitoba credit unions, so personally I'd go with the stronger CDIC coverage all else being equal.
> 
> I'm curious about which CDIC members offer comparable rates to credit unions. Right now some of the local credit unions have 5 year GICs at 4%.


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## stephenheath (Apr 3, 2009)

I hadn't seen a Manitoba credit union at 4%... the ones I knew (Outlook, Acheiva) were offering 3.85% for 5 years. Yesterday was showing one matching it, today the best are two offering 3.8% for 5 years, NatCan Trust and National Bank. Upon researching it turns out National Bank owns NatCan Trust so really it's just the one institution, but either way both are listed as covered by CDIC.


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## lb71 (Apr 3, 2009)

CanadianCapitalist said:


> ... CDIC guarantee, which is backed by the Government of Canada.


Are you sure about that? CDIC is a crown corporation that insures deposits. Premiums are paid to CDIC, which builds up reserves in case of a bank failure. Now, if one of the big five were to fail, there would most like not be enough reserves to pay out, so there would be political pressure on Ottawa to make the payouts whole, but there is no guarantee the federal government would top them up. I would assume the provincial associations would work in a similar fashion.

(This is similar to the pension benefit guarantee fund in Ontario. With the recent issues with the car companies, the PBGF does not have enough money to cover the full amount of pensions, so there was talk of the Ontario government having to top up the fund in that case.)


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## lb71 (Apr 3, 2009)

On page 11 of the 2008 annual report of the Deposit Insurance Corporation of Ontario (CDIC for Ontario credit unions), a graph shows the funding levels of various provincial reserves. Ontario sits at 50 bps. BC, Alberta, Manitoba and Quebec sit in the 80-100 bps range. Saskatchewan is around 175 bps. On the other hand, CDIC sits at 35 bps (page 10) in 2008, below their target of 40-50 bps. (Ontario targets 61 bps).

Now, there has not been a federal failure since 1996, and in Ontario alone there have been 15 credit unions liquidated since 2006 (including 3 this year). So higher funding levels probably are necessary at the provincial level. However, these provincial corporations do not appear to have a problem covering their members.


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## mfd (Apr 3, 2009)

lb71 said:


> Now, if one of the big five were to fail,


I believe the number is closer to 14. So if any of the 14 largest banks were to fail there wouldn't be enough money in the CDIC to cover the failure. It's scary especially since most people wouldn't be able to name any banks outside of the big five with a few more able to name the 6th largest bank.


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## CanadianCapitalist (Mar 31, 2009)

lb71 said:


> Are you sure about that? CDIC is a crown corporation that insures deposits. Premiums are paid to CDIC, which builds up reserves in case of a bank failure. Now, if one of the big five were to fail, there would most like not be enough reserves to pay out, so there would be political pressure on Ottawa to make the payouts whole, but there is no guarantee the federal government would top them up. I would assume the provincial associations would work in a similar fashion.


Fair enough. The backing by the Government of Canada is implicit. The CDIC guarantee is one of the financial safety nets and if a situation ever develops in which the public is not confident that the CDIC safety net isn't strong enough, the Government would have no option but to make an explicit guarantee of deposits. The confidence in our banking system is so fundamental that the financial authorities would have no choice but to act.

Recall that when money market funds threatened to break the buck last fall, the US Treasury moved swiftly to guarantee these funds.


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## CanadianCapitalist (Mar 31, 2009)

mfd said:


> I believe the number is closer to 14. So if any of the 14 largest banks were to fail there wouldn't be enough money in the CDIC to cover the failure. It's scary especially since most people wouldn't be able to name any banks outside of the big five with a few more able to name the 6th largest bank.


I don't know why this should be scary. CDIC holds reserves that it believes is enough to cover deposit holders in the event of a bank failure. When a bank fails, it is equity holders who are likely entirely wiped out. CDIC only has to make good the difference between the bank's assets (the loans it made to consumers and businesses) and its liabilities (the bank accounts, GICs and other deposits). For all I know, 35 bps may be enough reserves to cover a few banks failing. 

All I'm saying is that a CDIC guarantee is better than any of the provincial guarantees.


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## Mike H. (Apr 15, 2009)

In Alberta, the Credit Union Deposit Guarantee Corporation guarantees 100% of deposits and accrued interest without limit. Unlike CDIC coverage, it also covers foreign currency deposits and deposits with maturities longer than 5 years.

The Alberta Government explicitly guarantees the obligations of the Guarantee Corporation. Other provinces may be different.

I have more faith in the Alberta Government's explicit guarantee than the Fed's implied guarantee of CDIC.


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