Canada is widely considered to have one of the safest banking systems in the world.  The “Big 5” banks have proven to be safe and stable companies, both for depositors and stockholders, and neither have any worries about their money.

Related: How Baby Boomers Changed The Banking Industry

However, the 1980’s saw one of the biggest collapses in Canadian financial history.

Financial difficulties

Two Alberta financial institutions – the Northland Bank and Principal Group Ltd. – defaulted.  Through bad management and lending policies, together with somewhat shady practices, plus a recession, they ultimately left the savings of thousands of Canadians in jeopardy.

Both institutions invested heavily in oil, gas and real estate loans.  Following the collapse of the Alberta real estate market in the early 1980’s due in part to the drop in world oil prices, almost three quarters of the entire mortgage portfolio held by the Principal Group was in arrears, with 42% in foreclosure.

Related: How Technology Has Impacted Banking And Investing

Neither one could payout their term deposit and GIC maturities.

Depositors in jeopardy

Investors originally flocked to these financial institutions with their deposit money because they paid 1 – 2 percent higher interest than the major banks on term deposits and GICs.

It took 14 years before investors in Principal received their final payments.  Most of them were elderly people who had entrusted their entire retirement savings to them.  In the end they received about 90 cents for every dollar invested.  They received no compensation for any accrued or accumulated interest.

Related: Senior Discounts Vanishing From Our Banks

Buyers – and investors – beware

Bank depositors are (or should be) aware that their financial institutions are (or should be) members of depositor insurance plans.

Banks are members of CDIC (Canada Deposit Insurance Corporation).  Currently up to $100,000 in accounts such as savings, chequing, and GICs up to a 5-year maturity are covered.  Not covered are deposits such as foreign currency accounts and mutual funds.

Click here for more details on what’s covered and what’s not.

Credit Unions and Caisses Populaires are backed by their own provincial insurance plans that generally are the same as the federal plan, with some exceptions.  For example, there are no dollar limits on accounts in Alberta, Saskatchewan and Manitoba; and US Dollar accounts and GICs with longer than 5-year terms are covered in Saskatchewan.

Be informed – know what’s covered and what’s not.

Bottom Line

Could this happen today?  Maybe.  It’s more likely that an underperforming financial institution would be swallowed up by another bank.  The ailing Bank of British Columbia was bought by HSBC in the late 80’s, increasing its holdings considerably in Western Canada.  Most trust companies were absorbed into the major banks in the 1990’s.

Related: What’s Next For ING Direct? My Interview With Peter Aceto

Many investors can’t stand the thought of losing money.  They look for safe investments with high returns.  But there is some element, or probability, of risk in everything, especially over the long term.

We tend to become complacent, or just plain ignore risks to chase better returns.

How many of us could stand to wait for 14 years to regain our lost life savings?


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