The last time the federal government increased CDIC coverage on Canadian-dollar deposit accounts was 20 years ago.Sean Kilpatrick/The Canadian Press
John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
Between 1982 and 1985, the Canadian Deposit Insurance Corporation paid out $3.177-billion in claims to cover depositor losses. Ten poorly managed and badly regulated trust companies were the cause. By 1993, CDIC had recovered more than two-thirds of those funds when the liquidators were finished. The final cost to CDIC was $827-million.
This loss put a dent in the Department of Finance’s perception of deposit insurance. It was supposed to boost competition by levelling the playing field for smaller banks and financial institutions. Instead, some smaller institutions leveraged deposit insurance to attract deposits from unwitting customers that they then used to fund high-risk ventures. This boosted instability, not just competition.
But those days are long gone, and financial regulation is different today. Ottawa needs to let the past go.
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The quickest way to boost competition in Canada’s banking system is now on the table: Increasing the dollar value of deposits guaranteed by the CDIC in cases of failure is under consideration in Ottawa.
The more coverage CDIC offers, the easier it is to move beyond the Big Six banks for deposit accounts, chequing accounts, investment deposits – such as guaranteed investment certificates – and other CDIC-covered deposit categories and products. This in turn incentivizes Canada’s Big Six to offer more competitive interest rates, reduce fees and improve service standards.
Yet, the federal government is squandering an easy opportunity to boost competition with a timid proposal to insure consumer deposits up to $150,000 (versus the current amount, $100,000) for each eligible deposit product at member institutions, which include chartered banks, federally regulated credit unions, and loan and trust companies.
Curiously, the Department of Finance is proposing that CDIC increase coverage for business deposit accounts to $500,000. Businesses will welcome this, but it creates a politically flawed, two-tier deposit insurance system.
Such an approach puts any future federal government dealing with a bank failure in the invidious position of having CDIC business payouts exceed by more than three times consumer payouts.
The likely outcome would see Ottawa cough up taxpayer money to make whole consumer deposits exceeding the $150,000 ceiling, defeating the purpose of CDIC.
The last time Ottawa increased CDIC coverage on Canadian-dollar deposit accounts was 20 years ago. Now the federal government is playing catch-up with the annual rate of inflation (2.18 per cent) since CDIC coverage was last raised to $100,000 in 2005. In real value of money terms, CDIC coverage dropped by almost 54 per cent over the past two decades.
With the expansion of savings products covered by CDIC in recent years, such as the First Home Savings Account, one might assume the effective CDIC coverage has widened. And yet, the Department of Finance’s own study found that CDIC-eligible deposits fell to 36 per cent in 2024 from 58 per cent in 2005.
This advantages the Big Six banks at the expense of smaller financial players. Canadians are more likely to trust uninsured personal and business deposits to larger, older institutions.
Following the failure of two finance companies in 1965 and 1966 that generated heavy losses, and a run on the Montreal City and District Savings Bank (known today as Laurentian Bank) in 1967, the federal government founded CDIC to restore confidence in the financial system while “enhancing the competitive position of … smaller banks.”
Deposit insurance was the antidote to the understandable bias toward larger banks. CDIC’s initial deposit insurance coverage in 1967 was $20,000, the equivalent of $181,000 in today’s dollars – 20 per cent higher than what Ottawa is now proposing.
Competition would be enhanced by ensuring “the safety and soundness of those depositors who are usually not in a position to judge for themselves the financial soundness of the institution holding their deposits.” It is an approach with advocates in other parts of Canada as well as the United States.
Provinces regulate their financial deposit-taking institutions and have provincial versions of CDIC. In Manitoba, British Columbia, Saskatchewan, and Alberta, deposit insurance is unlimited. In Prince Edward Island, it is unlimited for deposits in registered and tax-free accounts.
Ontario offers a mix of unlimited coverage and $250,000 in deposit insurance depending on the deposit product. In New Brunswick, as well as Newfoundland and Labrador, provincially regulated deposit-taking institutions offer $250,000 per nine common deposit product categories.
In the U.S., the Federal Deposit Insurance Corporation offers US$250,000 (roughly $340,000) in deposit insurance for each of 14 deposit product categories.
Revised CDIC coverage aligned with provincial and U.S. norms will better encourage competition in our banking system. It could be problematic, though, if the Department of Finance has real concerns about the state of some of our smaller financial institutions.
Proposing such a modest increase to $150,000 raises the question: Does it?