Deposit Insurance | General financial discussion | Discussion forum

lhsaid said

1- I'm a bit skeptical about what some CU call "100% guaranteed deposits", is this really true in all circumstances ? What if everything collapses, who is going to pay ?

It is true. The deposits are 100% guaranteed by both the CU and the deposit insurer.

Should it ever turn out that CU and the insurer run out of money, then that's it. No-one else is obligated to pay.

2- Wondering how did people managed their deposit limits in old days before all these virtual banks appeared. At the time, there was only a handful of banks and people are limited on the number of accounts they could have. Do people go over the limits (CIDIC) ?

The "old days" were never gone. Large employers and pension funds still go over CDIC limits all the time. Not really practical to get $5 million/month, for example, in payroll for employees or that much in pension payments to the retirees deposit insured. So, they don't bother.

Instead, they learn to assess the risk of debt. One of the things they use is debt ratings from firms like DBRS, Moody's, and S&P.

The difference being the Canadian government can print money and provinces cannot. Provinces will be bankrupt long before Ottawa runs out of money.

The reason there are insurance deposit corporations as separate agencies is to extract fees from member institutions to build cash reserves to bankroll failures as a buffer to relying on the Treasury directly, and to provide regulatory oversight over their members. CDIC insurance is more robust than any CU deposit insurance scheme by definition, but I agree that may well be semantics if the financial system gets to the point there are so many FI failures that the deposit insurance agencies run out of money to backstop deposits. These CU vs bank discussions tend to get to be like arguing about religion or politics with most people dug in on one side or the other.

Nobody has talked about making customers whole per se. We are just talking about insured limits. People with larger deposits should know those funds are always at risk.
The bigger headache, for governments, might be what to do about large corporate accounts where institutional diversification is not practical. This includes everything from large private corporations to pension plans.

As for the structure of CDIC, the federal government could have set it up differently than being funded by the banks if they had wanted the responsibility, but they did not. They could have imposed a special tax on them. They could have regulated it directly if they had chosen to do so. I suspect the more likely scenario is that the banks and the feds reached a deal as to how it would be set up. The banks would have lobbied hard against being directly overseen by government. That is likely why the Board of Directors of CDIC is equally divided between government and financial sectors.