Provincial deposit insurance, Manitoba rates, etc | General comparisons | Discussion forum

I'm no banker, but the Manitoba rates did catch my attention, and I've done some work to try and figure them out. For brevity I'll present them as assumptions, and feel free to challenge them, but I've pulled figures from annual reports for most of the big Manitoba CUs and a few from other provinces, asked a couple of questions of regulators and such, so I'm not just winging this off the top of my head!

Manitoba credit unions loan portfolios aren't dramatically different from CUs in other provinces. Credit unions seem fairly bland as banking goes - they'd be making mortgage, commercial and agricultural loans, as would, say, a CU next door in Saskatchewan. Manitoba CUs' interest income as a percentage of loans seems to fall squarely in the general range of Canadian credit unions - no evidence they specialize in Florida swamp developers or other high-margin, high-risk loans, which of course would be worrying. Their "risk-weighted capital" numbers seem reasonable as well.

Manitoba credit unions pay out more as interest as a percentage of deposits (those GIC rates and such), so have a higher cost of funds. So they have normal revenue, but higher interest costs.

Manitoba credit unions are profitable, and reasonably capitalized. So the excess interest has to come from elsewhere.

Operating costs - A couple Manitoba credit unions (Crosstown [Accelerate] and Cambrian [Achieva]) seem to be at the top of the list for "efficiency" (a measure of operating costs against revenue). Lower costs (salary, branch, whatever) could provide part of the cost of the higher interest paid. Part of this is probably due to the non-resident online deposits the higher rates can attract, since this would be a lot cheaper than attracting deposits through branch banking.

Dividends - a bank pays out a chunk of its profits to shareholders as dividends. If it instead spent some of this money on higher GIC rates for customers, the shareholders would be unhappy. For a credit union, the shareholders are the customers, so they benefit either way. Credit unions often distribute a share of profits to members as dividends or "patronage refunds", etc. I suspect that at least some of the Manitoba CUs may do less of this, and instead funnel that money to customers as higher rates.

So in theory other credit unions could probably do something similar, if they sharpened their pencils and tweaked their ledgers as Manitoba seems to have done. I suspect the reason they don't is that credit unions are generally restricted to offering membership to residents of their own province - Manitoba presumably allows this. In any case there is little sense in setting up an online division and implicitly targeting Canada-wide deposits unless you have something like those Manitoba rates to interest people in considering some remote credit union.

So, provincial guarantee funds. Manitoba's is a bit over $160 million (as of the end of 2010), which represents about 1% of deposits, and is actually proportionally larger than most provinces. BC's is about 0.76%, Alberta's about 0.89%, and Ontario's is rather small at about 0.4%; those conservative Saskatchwanites have a fund of around 1.35%. Any of these funds are probably fine for helping little piddler credit unions merge or dissolve, or resolving difficulties in a larger one.

Some of the provinces (especially during the global financial mess) have provided a line of credit (a potential loan) for their guarantee corps. Ontario for instance backstops its small-ish fund with a $250 million line of credit, which takes the potential resources up to about 1.5% of deposits, and BC provides a $200 million line which with their fund would be about 1.25%. I suspect Manitoba feels there is enough confidence in DGCM to not require an explicit provincial line of credit in place (Saskatchewan with its even larger fund doesn't seem to have one either), but this is certainly not the same as saying they wouldn't do so if necessary. It is perfectly reasonable thing to wonder about, but the assumption that Manitoba would provide no additional assistance to the DGCM and allow it to fail runs into some pretty big associated consequences, at least in my opinion.

Manitoba's credit unions seem to have a direct payroll of around $150 million (3500 people), plus any indirect multipliers. That's a healthy amount of corporate taxes and employment, as well as profits retained in the province that would otherwise flow out to the big banks. This alone would provide the Manitoba government with a pretty good incentive to provide assistance to DGCM. Along with Saskatchewan, they've got the highest rate of credit union participation in the country (up to 45-50%) - credit unions must play a major role in the Manitoba lending scene, and a big percentage of Manitobans' savings would be with credit unions. I'd challenge anyone to come up with a scenario where the deposit guarantee fails, and there isn't a crisis of confidence, a massive flight from the credit unions to CDIC banks, and probably a complete collapse. It would take a pretty persuasive argument (or very extreme financial conditions) to claim the Manitoba government wouldn't provide some credit guarantees, or even take some actual losses, rather than have this happen.

DGCM's guarantee applies to residents and non-residents alike. Lawyers being what they are, I'd want to see a compelling argument before believing that there would be a way to inject funds into DGCM but pay out only Manitoba depositors. If DGCM were allowed to go bankrupt and Manitoba residents somehow repaid as a separate exercise by the government, you'd still have most of the crisis of confidence/CU collapse problems from above.

None of this is unique to Manitoba - it would apply anywhere you assume a sufficient meltdown and no additional government support.

Stan said:

This is not the government's responsibility to insure credit unions. It is the responsibility of the combined credit unions in Manitoba to come up with the funds to prop up a failed credit union. And if the combined credit unions do not have the funds to take care of a single failed credit union, then our problems are far worse than the failure of a single credit union.

Actually, the DGCM is ultimately responsible for the deposit guarantee. It is set up by legislation with this purpose clearly defined, acts as the regulator, etc, just like DICO in Ontario. If you feel that Ontario has a greater obligation to its system than Manitoba and Saskatchewan, you'll have to be clearer.

DGCM is specifically enabled to "enter into an agreement with [CDIC], the Government of Canada or Manitoba, or an agent [thereof] to extend [to DGCM]…loans or insurance…". If the DGCM fund were at Ontario levels, I suspect you'd probably see a similar line of credit put in place by Manitoba for awhile. Since they don't, it's a fair question, but you have to come up with a pretty convincing argument as to why any provincial government (and indeed, Canada) would be unwilling or unable to provide liquidity support to prevent their sector from collapsing.

If you have retirement funds in Manitoba credit unions, but are worried about losing the money, CUs may not be the place for you... 🙂 If one is worried about the Manitoba guarantee fund, you can usually find a couple CDIC institutions offering GIC rates similar to Manitoba at any given time (Peoples Trust and Oaken these days). Of course, something like Peoples might still go kablooey, and you'd have to wait through whatever CDIC resolution process happened.

I'm not sure how spreading funds amongst many CUs is an actual benefit. Presumably any particular CU that somehow goes insolvent (investing in Flin Flon swampland when the regulator wasn't looking?) gets cleaned up by the guarantee corp. If multiple CUs go kaput (how?), either things will work out, or Manitoba's economy has imploded and they (and the feds) have let their banking system collapse, which there's not really much precedent for. Again, if stuff like this has someone worried, just dump things in the big systemic banks like RBC.

Loonie said
Sonz, some of the info on the site you cited is inaccurate.
It claims that a person could have 100K insured in a savings account in addition to 100K in a GIC, at the same institution, and that both would be covered. This is not the case. Savings, chequing and GICs all come under one umbrella with CDIC, to a maximum of 100K altogether. If the money is in an RSP or TFSA, then it would count for another 100K. 

I think that's the point the page is trying to make, but are a bit unclear. They list $620K of stuff, and point out that there's only $320K of coverage because the savings and GIC are merged.