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Canada's banks are perhaps the safest places to hoard your money - why? Because the way successor governments have keep pace with, and orchestrated the various regulators that administer the banking system. Canada Deposit Insurance Corporation (CDIC) has masterminded and implemented strict controlling measures to protect your deposits. It works hand-in-hand with the Office of the Superintendent of Financial Institutions (OSFI) the national banking regulator. You may even be surprised to learn that CDIC exports those controls to other countries around the world and is regarded as benchmark in depositor protection. In 2004 my concerns that deposit protection was inadequate and out of step with the growth of deposits we managed for our clients, I felt that some action needed to be taken. To accomplish that goal my firm Fiscal Agents instigated a movement and campaigned with other members of the Federation of Independent Deposit Brokers (FCIDB) for more protection for deposits. In 2004 the government of the day was persuaded by a successful "Up-the-Limit" campaign that moved the then 20-year $60,000.00 depositor protection to its present $100,000.00. This newspaper helped promote that initiative. As a backdrop, present and prior governments have held a belief that bigger banks have bigger problems and have rejected numerous suggestions that banks should be allowed to merge - thus limiting the inherent liabilities that accompany such actions. Also recent moves within the mortgage market have stopped aggressive lending practices such as 40-year amortization and low down payment schemes. Calls for higher or 100% overall depositor coverage seem to be a growing clarion calls lately - This would be a mistake for Canada. If institutions had 100% blanket coverage what internal controls or moral judgments constrain lending practices - the global banking system was contaminated by such thinking. Even with wise and prudent actions by our governments now, in the past and into the future, will we be immune from banking bailouts or even closing, not likely but we've seen and weathered them before. Talking the talk - Guaranteed and principal protection It's been a marketing managers treat to attach those magic words to new financial products - sounds better, but are they? So here are a few examples of recent times - the Portus debacle; Rob Carrick - Globe and Mail put it this way "Portus marketed a complex hedge fund investment that was supposed to protect the investor from losing money over a five-year holding period. In other words, investors were to get the benefit of having hotshot hedge fund managers work on their behalf, with zero risk. Hedge funds are one of the most complicated products available to investors, but Portus's packaging made them seem benign and even friendly for small investors." Not in the same league as the aforementioned-are Principle Protected Notes (PPN). However, what those PPN investors are now realizing and or experiencing, due to the violent drops in the securities values-linked to those PPNs, is that investment manages are contractually obliged to sell those securities and buy more bonds to sure-up those portfolios. The consequences of that action of guarantying the principle wiped out any chance of having any return on the original investment - much better than losing the principal but in comparison to a GIC? CBS and other direct obligations of the provincial or federal government as secure as they come - the risk factor is that they mark to market and while carrying 100% guarantee to principal and interest at maturity, may be subject to a market value adjustment if sold beforehand.
The guarantee is from the issuer not CDIC. CDIC protects (insures) your deposit by collecting premiums from the institutions. That means that the assets of the institution are guaranteeing any amount over and above the deposit insurance limit. Are smaller institutions more susceptible to the problems of the US mortgage market? Yes and No. Larger institutions that have invested in that market and holding such securities, will find their shareholders taking the brunt of such consequences - Smaller trust Companies, regional banks and credit unions are unlikely participants but will feel the pressures that the credit markets dole out - It has to be remembered - Canada mortgage funding systems is far more prudent and attuned to credit controls and instilled integrity - therefore far more robust and should not be compared with the USA. How much protection do you have - With the 2004 increased limit 200 billion - CDIC now insures over 500 billion Simply put CDIC insures deposits (GICs, term deposits and savings accounts) for individuals, couples and retirement accounts all separately. That means 1) John has coverage in his name, 2) John and Mary having registered a deposit jointly, 3) Mary like John as an individual - all three deposit are insured separately. 4,5,and 6) RRSPs, RRIFs and LIFs are all considered separate insurable deposit at any member institution of CDIC. Totaling all the above permutations at the maximum, its possible to see the family of John and Mary have $300,000.00 in deposit protection plus another $100,000.00 in each of the retirement classes. For a more information on coverage go to www.CDIC.ca What to do if your deposits are over the limit. Consider moving part of your deposit at maturity to another issuer - remembering the major institutions often have more than one in-house issuer to choose from. Consider having your spouse or beneficiaries name added to the deposit or splitting the deposit into smaller amounts. (Be advised by adding another persons name grants legal entitlements; so fully understand those actions prior to any re-registration and if need be seek legal advice) Does CDIC coverage need updating? Somewhat. I believe so, since 2005 we've been calling for the government to increase CDIC coverage up to 100% for all retirement accounts. What we've found is that married seniors are especially concerned that retirement accounts held by both spouses and concentrated at one issuer - separately insured until the death of either party are endemically problematic. The demise of a spouse causes the retirement account to be automatically transferred into the surviving partners name, and unless the registered monies are transferred to a new carrier (impractical or prohibited within a fixed term investment), the surviving spouse's combined retirement monies then are likely to exceed the CDIC limit and unbeknownst to them - put at risk! To explain: John and Mary (both with identical $80,000 RRSP accounts) with a single issuer- one spouse dies the other automatically inherits say a 4 year GICs, the combined retirement amounts now exceeding 100,000.00 deposit protection, meaning exposing $60,000 for the balance of the 4 years. It's widely recognized that the senses of seniors often become dulled after the loss of a life partner, therefore its imperative that either more insurance protection in such circumstances is needed, and/or a least provide a provision in the income tax and retirement account rules for the investment to maintain its full coverage prior to its maturity. If worth noting that the U.S recognized this type of need in 2005 by providing separate and permanent protection for retirement accounts at US$250,000.00 Taking action To let the government know of such concerns join the other concerned conservative investors by participating in a mail in at www.fiscalagents.com/RSPCDIC or talk to your local political candidate with a call for action.
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, Fiscal Agents Money Management Newsletter
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