The federal government’s review of the deposit insurance framework that protects Canadians’ deposits at banks, trust and loan companies and federally regulated credit unions is welcomed. Since the coverage limit was increased to $100,000 in 2005, much has changed, underscoring the need for a higher limit.
Inflation has eroded the real value of coverage; uninsured balances have grown sharply — rising from 42% of Canada Deposit Insurance Corporation (CDIC)-eligible deposits in 2005 to 64% in 2024 — and the proliferation of social media and mobile banking has heightened the risk of rapid depositor runs in the event of a crisis.
The federal government has proposed raising deposit insurance coverage to $150,000 per category; to $500,000 for non-retail depositors; and to at least $1 million for temporary high balances resulting from significant life events. This raises policy and practical challenges.
Multiple coverage tiers and temporary high-balance provisions complicate tracking and verification, slow claims and increase costs. Tiered coverage can also be perceived as unfair — favouring some depositors over others, such as businesses versus individuals — and can be exploited by sophisticated depositors who can restructure their finances to maximize protection by creating companies to access higher-tier coverage. Further, as Canadians age and rely more on term deposits and savings, overly complex structures are impractical.
A straightforward system — $250,000 per category for non-registered accounts and unlimited coverage for registered and tax-free accounts — could boost competition by giving Canadians greater confidence to deposit with smaller institutions, prompting larger banks to offer more competitive rates, fees and services.
More generous coverage also helps ensure that depositors at both large and smaller financial institutions are treated fairly. If a domestic systemically important bank fails, losses are first absorbed by shareholders and bail-in creditors which, in practice, protects most uninsured depositors. Smaller deposit-taking institutions don’t have this bail-in mechanism.
Catch up with the provinces
Federal deposit insurance also needs to catch up to the protections offered by provinces. Provincial deposit insurance — which covers most credit unions, caisses populaires and regulated trust and loan companies — often exceeds CDIC coverage.
For example, the four western provinces provide unlimited coverage for non-registered and registered and tax-free accounts. New Brunswick, Nova Scotia and Newfoundland and Labrador provide coverage up to $250,000 for non-registered and registered and tax-free accounts. Ontario covers deposits in non-registered accounts up to $250,000 and provides unlimited coverage for deposits in registered and tax-free accounts.
The International Monetary Fund has noted that “the diversity of deposit insurance coverage between the federal level and several provincial agencies could undermine confidence and negatively impact deposit flows during periods of instability. Hence, gradual convergence towards a national standard is desirable while respecting the current structure of the various deposit insurance mechanisms across Canada.”
Critics of expansion argue that higher coverage may weaken depositors’ incentives to monitor bank risk-taking, while encouraging institutions to assume greater risk. This claim is unconvincing. Most retail depositors lack the expertise to assess the financial health of their institutions, while sophisticated depositors typically use other tools to manage their risk. In practice, this means depositors exert little or no market discipline.
Rather, effective prudential regulation, supervision, oversight and risk-based premiums limit excessive risk-taking. Peter Routledge, head of the Office of the Superintendent of Financial Institutions, stated that Canada’s systemically important banks have ample capital headroom that would allow them to extend nearly $1 trillion in new loans or other credit while remaining above minimum-capital requirements. It, therefore, also appears the financial capacity is there to extend coverage without passing the costs on to consumers.
Higher, simplified federal deposit insurance coverage should be Canada’s attainable goal.
Laura Paglia is president and CEO, Canadian Forum for Financial Markets