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The Money Management
Newsletter: SavingsAre your deposits safe in the bank? Never before have we seen a global banking crisis, yet we've thought about it! Canada's banks are perhaps the safest places to hoard your deposits. Why? Because of the way successive federal 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 these controls to other countries around the world and is regarded as a benchmark in depositor protection. In 2004 I had concerns that CDIC protection was inadequate and out of step with the growth of deposits that 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 that included other members of the Federation of Independent Deposit Brokers (FCIDB) and together we lobbied the federal finance minister for more protection for deposits. In 2004 the government of the day was persuaded by our successful "Up-the-Limit" campaign to increase the $60,000.00 CDIC limit that had been in place for 20 years to its present $100,000.00 limit. 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 amortizations and low down payment schemes. Calls for higher or 100% overall depositor coverage seem to be a growing. This would be a mistake for Canada. If institutions had 100% blanket coverage what internal controls or moral judgments would constrain their 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 financial institution bailouts or failures? Not likely, but we've seen and weathered them before. Talking the talk - Guaranteed and principal protection It's been a marketing manager's treat to attach those magic words to new financial products thus making them sound better, but are they? Here are a few recent examples: 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." Principle Protected Notes (PPN) Some PPN investors are now realizing that due to the violent drops in value of the securities that are linked to their PPN, the investment managers are contractually obliged to sell those securities and buy bonds to ensure that the investors receive their principal back at the note maturity date. The consequences of guarantying the principal wiped out any chance of having any return on the original investment - this is much better than losing the principal but far behind the return of an ordinary GIC that had the same original term Government bonds and other direct obligations of the federal or provincial government are as secure as they come - the risk factor is that with the exception of Canada Savings Bonds, they mark to market and while carrying a 100% guarantee of principal and interest at maturity they will be subject to a market value adjustment (positive or negative depending on interest rate movements), if sold beforehand. Is your bank deposit safe? How safe? Up to the limit is my standard answer. The guarantee on your bank deposit is from the issuer not CDIC. CDIC protects (insures) your deposit against the possible failure of your institution and collects premiums from each institution to help fund the insurance coverage. Are smaller institutions more susceptible to the problems of the US mortgage market? Yes, and no. Larger institutions that have invested in U.S. mortgage backed securities will find their shareholders taking the brunt of such consequences as asset values are written down or possible written off. Smaller trust companies, regional banks and credit unions are less likely to have participated in these investments but will feel the pressures that the credit markets dole out. It has to be remembered that Canada's mortgage funding system is far more prudent and attuned to credit controls and instilled integrity than the U.S. model and therefore far more robust. How much protection do you have? With the 2004 increased limit, CDIC now insures over 500 billion dollars of deposits. Simply put CDIC insures deposits (GICs, term deposits and savings accounts)
separately for individuals, joint accounts and retirement accounts. That means
that using an example of a couple named John and Mary: 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(s) added to the deposit. (Be advised that adding another person's name to your investments can give them legal entitlements, so fully understand the consequences of such actions prior to any re?registration. If need be, seek legal advice.) Does CDIC coverage need updating? Somewhat. I believe some updating is required and since 2005 we've been calling for the government to increase CDIC coverage up to 100% for all retirement accounts acquired through spousal estate transfers. What we've found is that married seniors are especially concerned about the estate consequences when they both hold large retirement accounts at one institution. RRSPs and RRIFs are separately insured while both spouses are alive but the demise of one spouse can result in the transfer of the deceased's accounts into the surviving partner's name and the new combined total may exceed their CDIC limit and put them at risk. It may be possible to transfer a portion of the registered assets to a new carrier but this may not be permitted until the maturity date of fixed term investments. To explain: John and Mary both have identical $80,000 RRSP accounts with a single issuer that mature in 4 years ? one spouse dies suddenly and the other inherits the deceased's RRSP. The survivor now has combined RRSPs totaling $160,000 and is exposed for the excess over $100,000 until the RRSP terms mature in 4 years. It's imperative that either more insurance protection is needed in such circumstances, or there should be a provision in the income tax and retirement account rules for fixed term RRSP and/or RRIF assets, received by a spousal estate transfer, to maintain separate CDIC coverage prior to their maturity. It's 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 other concerned conservative investors by participating in our mail campaign at www.fiscalagents/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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