The article “Are your deposits at Canadian financial institutions safe?” was originally published in MoneySense on March 20, 2023 . Photo by Mizuno K from Pexels.
The failure of Silicon Valley Bank has highlighted risks in the U.S. banking system. Should Canadians with large deposits at financial institutions be worried?
“We live in Ontario, and in light of the current banking problems in the U.S., we are a bit concerned about our investments.
They are held at three different banks at the moment and are largely in GICs and high-interest savings accounts.
We are aware that up to $100,000 is insured through the CDIC (Canada Deposit Insurance Corporation) at each bank, but at the one bank where we have our TFSAs, we are over that amount.
What would you suggest we should do?” Mrs. B
The risks of exceeding deposit limits at Canadian banks
Silicon Valley Bank (SVB) failed in March and was taken over by the U.S. Federal Deposit Insurance Corporation. SVB’s customers were primarily venture-backed tech startups, but the bank was hardly a small player. It was the 16th-largest bank at the time it failed, and its failure was the second largest in U.S. history.
The two primary issues with SVB were questionable risk management and high uninsured deposits. The bank did not manage its interest rate risk well, having a lot of short-term deposits invested in long-term bonds. When interest rates rise, bond prices fall, so SVB got squeezed when rates jumped over the past year. In addition, nearly 94% of its deposits were uninsured, exceeding the $250,000 deposit insurance limit in the U.S. SVB had the second-highest uninsured deposit rate among large U.S. banks at the end of last year.
Should Canadians be worried about their deposits?
As a result, I can appreciate your concern about your deposits, Mrs. B. Bank failures tend to raise concerns about contagion, with a ripple effect throughout the rest of the banking system.
Here in Canada, our history of bank failures is a short one. Over the past hundred years, the only two banks that have failed were Northland Bank and Canadian Commercial Bank, both in 1985. Most of our bank deposits today are insured by the Canada Deposit Insurance Corporation (CDIC), which protects up to $100,000 of eligible deposits at member banks.
Eligible deposits include bank accounts, guaranteed investment certificates (GICs) and term deposits, and your total protection at each CDIC member is up to $100,000 for each of the following:
- Deposits held in your name (e.g., personal chequing and savings accounts)
- Deposits held in more than one person’s name (e.g., joint chequing and savings accounts)
- Deposits held in trust (for each beneficiary)
- Deposits held in a tax-free savings account (TFSA)
- Deposits held in a registered retirement savings plan (RRSP)
- Deposits held in a registered retirement income fund (RRIF)
- Deposits held in a registered education savings plan (RESP)
- Deposits held in a registered disability savings plan (RDSP)
As a result, the $100,000 can be magnified depending on the types of accounts you have. For example, if you have a savings account, a TFSA and an RRSP at the same member bank, you’re covered for up to $300,000 in deposits.
Some banks even have CDIC coverage for multiple issuers. The country’s largest bank, Royal Bank of Canada, currently has coverage for:
- Royal Bank of Canada
- Royal Bank Mortgage Corporation
- Royal Trust Company
- Royal Trust Corporation of Canada
- RBC Investor Services Trust
Each of these entities has its own CDIC coverage, so you may be able to have bank accounts, GICs or term deposits from different issuers within the same bank.
When is there a risk?
In your case, Mrs. B, since your TFSA has more than $100,000 in deposits with a single issuer, there may be a risk. Talk to your bank to see if it has multiple issuers that can provide better coverage. Otherwise, consider alternatives like transferring some of the TFSA deposit elsewhere or investing it differently.
If you take a withdrawal and intend to redeposit it, remember that you do not get the additional TFSA room back until January 1 of the following year. So, make sure you do not overcontribute.
What isn’t covered by CDIC?
CDIC does not cover mutual funds, stocks, bonds, exchange-traded funds (ETFs) or cryptocurrencies. But you may have coverage from the Canada Investor Protection Fund (CIPF), which provides limited protection for “property” held by a member institution on behalf of an eligible client in the event that member firm becomes insolvent. CIPF covers cash, GICs, mutual funds, stocks, bonds and ETFs held at its member firms. To be clear, CIPF does not cover a decline in the value of these investments but does protect against a member’s insolvency.
CIPF covers up to $1 million for all:
- General accounts combined (such as cash accounts, margin accounts and TFSAs), plus
- $1 million for all registered retirement accounts combined (such as RRSPs, RRIFs and LIFs), plus
- $1 million for all registered education savings plans (RESPs) combined where the client is the subscriber of the plan.
For joint accounts, each party has protection for their proportionate interest up to their general account limit.
Are deposits with credit unions insured?
Another consideration, Mrs. B, is that credit unions generally have different insurance coverage for deposits. In Ontario, for example, the Deposit Insurance Reserve Fund (DIRF) covers deposits at member institutions up to a $250,000 limit, and registered accounts like TFSAs and RRSPs have unlimited coverage. Several provinces provide unlimited coverage on credit union deposits in the event of a failure.
If your deposit is with one of the Big Five banks, Mrs. B, I would say we would all have big problems if one of them were to fail. Regardless, risk tolerance and mitigation is an important part of investing, so consider the above before deciding what to do.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
