Canada has not seen a bank failure since Security Home Mortgage Corporation, a Calgary-based company, went bankrupt in 1996, putting $42 million in bank deposits at risk. Two decades later we have another mortgage company, Home Capital Group, teetering on the brink of bankruptcy. Deposits at Home Capital were expected to fall to $192 million this week, down 90 percent from the roughly $2 billion it held at the end of March. To stay afloat the embattled company took out a $2 billion lifeline (at a punitive interest rate) and suspended its dividend.

It truly is a run on the bank, and clients of Home Capital, which includes subsidiaries Home Trust and Oaken Financial, are concerned about their deposits. Should they be? Perhaps not. Home Trust is a member of Canada Deposit Insurance Corporation (CDIC), which handled the Security Home Mortgage Corporation collapse in 1996 and restored client deposits within three weeks.

Related: How safe are your bank deposits?

But clients aren’t taking any chances. As Rob Carrick pointed out on Twitter, even GIC deposits are being redeemed early:

Readers of this blog have also voiced their concern over money tied up at Home Trust, with one reader writing to us by email:

“My mom currently holds some GIC’s with Home Trust (Home Capital). Given their current financial situation we are wondering if it would be prudent to redeem them early. We are aware that they are CDIC insured however no one has been able to advise us that if the worst case scenario happens to Home Capital would the GIC funds be tied up until CDIC sorts things out.”

We want our readers to make informed decisions about their money. With all the hysteria surrounding Home Capital and its viability, I reached out to CDIC and asked how their coverage works and what is protected in the event of a bank failure. Here’s what they had to say:

The Canada Deposit Insurance Corporation (CDIC) is the federal Crown corporation that protects the savings of Canadians in the event their bank fails. If you have eligible deposits held in Canadian dollars at a CDIC member institution, you are automatically protected. Some 80 financial institutions across Canada are members of the CDIC, including banks, federally regulated credit unions, as well as loan and trust companies and associations governed by the Cooperative Credit Associations Act that take deposits.

CDIC protects deposits in the case of a bank failure

How it CDIC works

CDIC automatically protects eligible deposits to a maximum of $100,000, including principal and interest, in each of seven deposit categories such as RRSPs, TFSAs, joint and trust accounts. Joint accounts are treated as one account, rather than separately for each depositor. Trusts are the opposite, where each beneficiary is eligible for up to $100,000 separately, provided certain disclosure rules are met. Eligible deposits include savings and chequing accounts and term deposits like GICs with a term to maturity of five years or less.

What’s not protected

But some things are not protected. What’s not covered includes securities and investments, like foreign currency or U.S. dollar accounts, stocks and bonds, mutual funds, and term deposits longer than five years.

How CDIC protects deposits if a bank fails

CDIC has a number of tools to assist or resolve a failing member institution. Which tool is used would depend on the circumstances of a particular situation. The size and complexity of the bank, its franchise value, as well as the current availability of any private sector buyer or other options, would be key considerations in deciding which tool to use.

The tools that CDIC could use include:

Liquidation and reimbursement of insured deposits:

In certain cases, a failed bank is closed and insured deposits are reimbursed to depositors. The assets of the failed bank are distributed to the bank’s depositors and other creditors through a court-supervised liquidation process.

In liquidation, the failed bank ceases to operate, all contracts are terminated and its critical financial services are no longer available, including access to accounts. CDIC automatically and rapidly reimburses insured deposits up to $100,000 (including interest) per insurance category. Depositors do not have to file a claim.

  • CDIC would aim to reimburse chequing and savings accounts, joint accounts and mortgage tax accounts within three business days.
  • Deposits in valid trusts are protected to $100,000 per beneficiary. CDIC would contact broker-trustees to inform them of its process to reimburse insured deposits. CDIC would remit payment to broker-trustees within seven business days of receiving wire transfer/payment information. Payment would be based on CDIC calculations and deposit information at the failed institution.
  • CDIC would hold registered deposits in RRSPs, RRIFs and TFSAs while it works with the Canada Revenue Agency to ensure they remain tax-sheltered. CDIC would contact these depositors directly to inform them of next steps.

This is a tool that would likely only be used in the case of small to medium-size banks, not domestic systemically important banks (D-SIBs).

Forced sale:

When a buyer exists, CDIC can take control of a failing bank for a short period of time to complete its sale, merger or restructuring. The sale would ensure that critical banking operations continue and insured deposits are protected. With the approval of the government, a forced sale would be used when shareholder consent of the transaction is not expected or the time to obtain consent would take too long.

Bridge bank:

A bridge bank is a tool that is available when an institution fails and there is no buyer or private-sector solution on the horizon. It is meant to “bridge” the gap between when an institution fails and when a buyer or private-sector solution can be found. CDIC can use this tool to transfer all or part of the failing bank’s business to a bridge bank, which is temporarily owned by CDIC.

Similar to a forced sale, the transfer would ensure that critical banking operations continue and insured deposits are protected. As owner, CDIC would likely appoint to the bridge bank a new board of directors and chief executive officer to handle the restructuring and to stabilize the bank. Once stable, the bridge bank would be sold to the private sector.

Financial assistance:

CDIC can provide financial assistance to its members, including loans, guarantees, deposits, or loss-sharing agreements or by acquiring shares. CDIC can provide this assistance on a stand-alone basis, to assist in a private transaction, or in combination with any of its other resolution tools.

Bail-in framework:

In 2016, Parliament introduced a bail-in regime to Canada’s bank resolution toolkit. Bail-in is an important tool that would allow CDIC, as the resolution authority for Canada’s D-SIBs, to ensure failing institutions remain open for Canadians, which helps protect our economy.

Bail-in allows authorities to recapitalize a large Canadian bank by converting certain long-term debt to common shares while the institution remains open and operating. In the unlikely event of a failure, this would ensure losses are covered by the bank’s shareholders and certain investors, not taxpayers or depositors.

50 years of deposit protection

Since its creation by Parliament in 1967, CDIC has handled 43 failures, affecting more than 2 million depositors. No one has lost a single dollar under CDIC protection.

Print Friendly, PDF & Email

13 Comments

  1. Michael James on May 9, 2017 at 6:49 am

    It seems that after liquidation, CDIC acts quickly to make depositors whole. But what about the extended death spiral prior to liquidation? I’ve tried before to find out what kinds of delays depositors have faced in the past in accessing their funds (with no success). If delays of weeks or months are possible (even if these delays are not CDIC’s fault), depositors are being sensible when they pull out their funds now.

    • Echo on May 9, 2017 at 3:00 pm

      Hi Michael, a CDIC spokesperson said:

      “If Liquidation is chosen as the tool to resolve a failed institution, CDIC would begin the reimbursement of insured deposits immediately upon the announcement of the bank’s failure in accordance with the payment schedule set out in today’s post (so within 3 days of failure for chequing and savings accounts, joint accounts and mortgage tax accounts). CDIC would reimburse insured deposits before the liquidation process begins so depositors have their money as quickly as possible.”

      • Michael James on May 9, 2017 at 3:05 pm

        It’s hard to tell for sure, but that sounds like what will happen after liquidation. I’m wondering about the period before liquidation is declared. In past instances of liquidations, have depositors suffered extended periods without being able to access their deposits? This may not be CDIC’s concern, but it is a potential concern for depositors.

    • Mike K on May 28, 2017 at 9:17 am

      I pulled out half my saving out of the bank when I heard about Home Capital. I’m about to pull out the rest of my savings tomorrow. I don’t trust the banks under a dictator government of Justin Trudeau

  2. Stephen Weyman on May 9, 2017 at 6:59 am

    Lots of great information here, thanks Robb!

  3. RJackson on May 9, 2017 at 5:20 pm

    I think you should explain the “bank Bail in” better. I don’t think a lot of people are aware of it.

  4. Cathy Scott on May 10, 2017 at 9:05 am

    The CDIC link does not specifically mention GICs held within RESP accounts, but are we correct in assuming it would be covered like any other registered account?

    Great info, thanks!

  5. Richard on May 11, 2017 at 12:45 pm

    This situation doesn’t seem to make a whole lot of sense. I’m not sure why depositors are in a rush to withdraw their CDIC-insured savings, why the bank isn’t offering higher interest rates on deposits to retain them, and why the regulators aren’t taking more action to ensure normal operations or at least reassure the public about their commitment.

    Either way we don’t want to go back to having regular banks failing just because of some rumors or old news. Even if no depositors are losing money in the process it’s not a good outcome as this will reduce the competition and the options for both mortgage borrowers and savers.

  6. Cyndra MacDowall on May 12, 2017 at 10:15 pm

    Rob, This information is useful & what I’ve been looking for as I have savings in Oaken accounts. You are one of many who had encouraged Oaken high-interest savings in the past. I’m disappointed that you are only now posting this info. You contributed to ‘a run on the bank’ last week & appear to be participating in attention seeking for pointing out the dramatic potential bank failure. You, as many, point out the need to keep emotion in check around financial issues – in this instance you went with high anxiety. I’m disappointed.

    • Echo on May 13, 2017 at 9:16 am

      Hi Cyndra, I appreciate your comments but I hardly think this blog contributed to any hysteria over Home Capital. Read the Globe & Mail’s investigative piece on Home Capital and you’ll see that the big banks ordered their advisors to keep their clients’ cash within the CDIC limits at Home Capital. That started the massive drop in savings deposits. When that happened, the public panicked, which is when I started getting emails about the implications of Home Capital going bankrupt.

      http://www.theglobeandmail.com/report-on-business/home-capital-saga-real-estate/article34972594/

      We have written about CDIC protection in the past but they haven’t had to restore bank deposits in 21 years so I’m guessing nobody paid attention. Writing this piece now is clearly more relevant and timely.

      Finally, I don’t recall every specifically recommending Oaken Financial. I wrote about EQ Bank when it came on the scene with its 3% savings account (now 2.3%). To be clear, chasing these high interest rates is fine as long as the institution is a CDIC member and depositors stay within the coverage limits.

  7. brett on May 30, 2017 at 6:34 am

    Why the panic?

    I do not understand the issue as long as your deposits fall inside the CDIC deposit insurance parameters.

    We moved money into EQ Bank because their rate was 2.3 vs our previous 1.5

  8. George Luszczewski on June 6, 2017 at 12:40 pm

    I have read the above comments and still am not clear about how GICs that have not yet matured are handled by the CDIC. I understand that the principal and interest are insured up to a total of $100,000. It makes sense that interest stops accruing on the day the financial institution becomes insolvent. It is also clear that deposits (savings and chequing) are reimbursed by the CDIC within a few days. But what happens, for example, to a five year $80,000 GIC (with accrued interest of approximately $2,100) at Home Trust that still has two years remaining before it matures. Is it paid out by CDIC within 3 days, or is the wait longer?

  9. Daniel on November 9, 2017 at 3:49 pm

    How did CDIC respond to home capitals liquidity crises ?

Leave a Comment