Estimated reading time: 4 minutes
On March 10, 2023, the FDIC in the US took over Silicon Valley Bank (SVB), and announced that Deposits insured by Deposit Insurance would be made available and that non-insured balances > $250,000 would be frozen and potentially put at risk. By March 13, 2023, the FDIC, worried about contagion to other banks had backtracked, and made all deposits available.
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Deposit Insurance Wake-Up Call
On March 10, 2023, the FDIC in the US took over Silicon Valley Bank (SVB), and announced that Deposits insured by Deposit Insurance would be made available and that non-insured balances > $250,000 would be frozen and potentially put at risk. Over the weekend depositors at Signature Bank (~110 USD in deposits) began to withdraw funds, and it was seized by the FDIC. By March 13, 2023 the FDIC, worried about contagion from SVB to other banks had backtracked, and made all uninsured deposits at SVB available, as the FDIC was working on finalizing a deal to sell the assets to a buyer. This was possible because the SVB deposit base was relatively small, and was (so far) limited to this one institution. It was simply a good-ol’fashioned bank run, with depositors getting spooked about loans issued to a tech-heavy base that lead to the collapse, not the complicated 2008 CDO crisis. What should be the lesson for Canadian depositors at the “Big 5” and other Banks in terms of Insured Deposits?
First, the Deposit Insurance maximum amount is real and needs to be heeded. In the US, the FDIC insurance maximum is $250,000 (USD), whereas in Canadian the CDIC insurance maximum is $100,000 (CDN), whereas some Provincial Insurances (i.e. DICO) maximum is $250,000 (CDN). And remember that this maximum is calculated PER FINANCIAL INSTITUION – if you are making GIC deposits at the same Financial Institution that your Bank account balances are with, there is a very real possibility that a significant portion of your deposits are uninsured (and therefore subject to higher risk / seizure in the event of a default).
Diversification of Bank Deposits
The second lesson, should be to evaluate the risk profile of all of your deposits. Many Canadians, including Condo Corporations view deposits at the “Big 5” Banks as risk-free, and entirely Canadian, without a second thought. The reality? Hardly.
While not quite as large as any of the “Big 5” Canadian Banks, SVB is approximately 1/3 the size of the smallest “Big 5” Bank, by deposits. This should shatter the illusion of the impenetrable fortress of security projected by the “Big Banks”. Are Canadian Banks better regulated and better capitalized? Yes. Are they risk-free and completely immune from contagion from the US or domestically? No.
With limited ability to grow in domestic Canadian markets, Canadian Banks have looked south of the border for higher growth. Some have been more aggressive than others, for example TD Bank’s deposit base is now approximately 50% US domiciled. TD Bank acquired Bank North, Commerce Bank, South Financial and the pending purchase of First Horizon. Let us imagine, for a minute, if instead of SVB collapsing, it was one of these US subsidiary Banks. One could easily imagine a contagion from there to TD’s Canadian Bank and spreading to the Other “Big 5” Banks with US exposure, and then throughout the Canadian Banking system.
Similar to the FDIC in the US, if the CDIC were faced with a relatively small one-off Bank collapse, they may decide to honor all uninsured deposits, to prevent contagion to other banks. If that was a “Big 5” Bank’s deposits, I doubt it would be financially, or politically possible.
CDIC / DICO Deposit Insurance Limits are Real
Is there a pending Canadian Banking Collapse? No – At least as of the date and time of this writing. Is the “Big 5” Bank impenetrable fortress an illusion? Yes. Look at your deposits by Financial Institution. If your deposits are >$100,000 at a CDIC insured bank (after adding up ALL bank account balances and GICs at that Financial Institution), maybe it is time to re-evaluate. Spread the deposit base to multiple Financial Institutions to ensure fully CDIC insured.
At Lambda this is part of our standard business practices.