Personal Finance

Are deposits safe in banks?

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  • Jun 5th, 2019 5:18 pm
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[OP]
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Sep 17, 2018
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Are deposits safe in banks?

This is from cdic page of what's excluded from bail ins

Can someone translate the last paragraph to some thing simplier.

What is Excluded?
The following are not eligible for a bail-in conversion:

Deposits (including chequing accounts, savings accounts and term deposits such as GICs);
Secured liabilities (e.g., covered bonds);
Eligible financial contracts (e.g., derivatives); and
Most structured notes.4

While they are not subject to conversion under the bail-in regime, NVCC instruments are subject to conversion pursuant to their contractual terms and would fully convert into common shares prior to the bail-in conversion of senior debt into common shares
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Your references don't apply to your question "Are deposits safe in banks".

Bail-ins are the forced conversion of a bank's (under CIDC control) issued tradable debt instruments (senior debt, subordinated debt, preferred shares) into common shares to re-capitalize the bank. The money at risk are investors in the banks debt not the depositors.

So, if you are asking, "are your investments in bank issued debt instruments safe?" that would be a different question.

If you are asking what deposits are excluded, those are here:

https://www.cdic.ca/about-deposit-insur ... gJKh_D_BwE


Eligible deposits include:

Savings accounts
Chequing accounts
Term deposits, (such as GICs) with original terms to maturity of five years or less
Debentures issued to evidence deposits by CDIC member institutions (other than banks)
Money orders and bank drafts issued by CDIC members
Cheques certified by CDIC members
What’s Not Covered


Uninsured financial products include:

mutual funds (including money market funds), stocks and bonds;
term deposits, such as GICs, with original terms to maturity greater than five years;
foreign currency deposits (e.g., U.S. dollars);
digital and cryptocurrencies;
treasury bills and bankers’ acceptances;
principal protected notes that are traded;
debentures issued by banks, governments or corporations;
deposits with receipts payable to bearer (rather than to a named person);
deposits held at financial institutions that are not CDIC members.

Note changes coming next year.
[OP]
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Sep 17, 2018
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Ok. So deposits in savings accounts and all other cdic eligile can not be converted to shares prior to a bail in process.

I may be over analysing but doesn't it state that banks will convert deposits to common shares before claiming insolvency and having cdic step in.
Last edited by Carymay on May 31st, 2019 12:25 am, edited 1 time in total.
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Well said, @robsaw. To the OP, Rob is correct. Essentially, those liabilities that are convertible, usually into common shares, are a method by which CDIC can recapitalize a federally-regulated financial institution in order to continue it on a go forward basis. Deposits, which are CDIC insured to applicable limits, would continue as is and cannot be converted. However, a bank could have its preferred shares converted into common shares, if ordered by CDIC, so as to reduce its funding liabilities. This would be dilutive to common stockholders, but would have no effect on depositors.

CDIC could also just transfer all deposits - insured and uninsured - to another CDIC member financial institution. It's very, very rare for the CDIC's deposit insurance scheme to be tapped.

You could argue Canadian bank GICs, insured by CDIC, are safer than U.S. federal government bonds. ;)

Cheers,
Doug
[OP]
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Essentially, those liabilities that are convertible, usually into common shares, are a method by which CDIC can recapitalize a federally-regulated financial institution
.....Doug.....







Then why would they be excluded from bail ins in the first place if they are to converted....into shares that can be bailed in?

Are deposits considered nvcc?

Sorry....but all these definitions are not easily understood
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Carymay wrote: Essentially, those liabilities that are convertible, usually into common shares, are a method by which CDIC can recapitalize a federally-regulated financial institution
.....Doug.....

Then why would they be excluded from bail ins in the first place if they are to converted....into shares that can be bailed in?

Are deposits considered nvcc?

Sorry....but all these definitions are not easily understood
The only things that can be converted during a bail-in are certain debt securities issued by the bank. Insured deposits are not part of the bail-in scope and will not ever be subject to conversion into common shares.

The only thing you need to be worried about as a DEPOSITOR is those items that are NOT covered by CIDC insurance - these:

Uninsured financial products include:

mutual funds (including money market funds), stocks and bonds;
term deposits, such as GICs, with original terms to maturity greater than five years;
foreign currency deposits (e.g., U.S. dollars);
digital and cryptocurrencies;
treasury bills and bankers’ acceptances;
principal protected notes that are traded;
debentures issued by banks, governments or corporations;
deposits with receipts payable to bearer (rather than to a named person);
deposits held at financial institutions that are not CDIC members.


You are unlikely to hold any securities that would be a target for a bail-in directly, except for some preferred bank shares. Those other types of securities are held by big-money investment firms, although you MAY hold some indirectly through mutual funds, ETFs or similar composite investments.

You also need to consider that if a bank is at risk of failing due to lack of capital a bail-in that keeps the bank operating is probably better than having it simply fail and being liquidated under the full control and ownership of CIDC where all securities issued by the bank could become worthless.
[OP]
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Would this be accurate then....

All cdic insured deposotd could essentially be converted to recapitalize a bank that is in trouble?

A cdic bail in regime would only be activated when the bank is declaring bankruptcy.....which they wouldn't....because they are too big too fail?

Maybe I'm understanding this whole process wrong.....but isn't bail in regime a tivated only when the bank is already non viable?
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Carymay wrote: Would this be accurate then....

All cdic insured deposotd could essentially be converted to recapitalize a bank that is in trouble?

A cdic bail in regime would only be activated when the bank is declaring bankruptcy.....which they wouldn't....because they are too big too fail?

Maybe I'm understanding this whole process wrong.....but isn't bail in regime a tivated only when the bank is already non viable?
Yeah, that's not accurate. Don't be worried about these bail-in provisions. To add to what @robsaw said, the only other type of instrument you may hold, if you have your own corporation, is bankers' acceptances (deposit instruments booked through the bank's Treasury department on amounts usually in access of $1 million}.

The whole idea behind the bail-in process is to recapitalize a bank when it is overleveraged, either by excessive borrowing or the mark-to-market value of its assets (loans to customers, primarily and usually) has declined relative to their debt instruments on their balance sheet. Since deposits are also considered a liability, this would create an overlevered balance sheet. So, certain instruments - excluding CDIC insured deposits and deposits that would be CDIC insured but which exceed per-depositor limits - can be converted from debt into equity.

Also, separately, the CDIC insured deposits rules are changing effective April 30, 2020, next year. Deposits in a mortgage property tax account, which used to be a separate insured deposit category, will now be insured within your individual or joint deposit limit, as applicable. Foreign currency deposits will also be CDIC insured, calculated daily at the Bank of Canada's noon foreign exchange rate as if converted to Canadian dollars and included within your Canadian dollar depositor limit. GICs and term deposits will also be CDIC insured regardless of maturity (i.e., no more 5 year time limit). RESPs and RDSPs will also now become their own insured deposit category. There are some other changes related to disclosure of insured deposits and dissemination of CDIC brochures on brokerage nominee form deposits, but those are the main ones.

Cheers,
Doug
[OP]
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So, certain instruments - excluding CDIC insured deposits and deposits that would be CDIC insured but which exceed per-depositor limits - can be converted from debt into equity
Doug.....

Then this is how cdic should have framed it to cause less confusion aND make cetrain that deposits are untouchable. As it is framed.....it makes me think that deposits are the hugest liabilities in a banks balance sheet aND would be the first to be converted.

.....I have no vocabulary for finance.....so pardon me as I'm just learning.....
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Safest place is under your mattress. Everybody knows that. What safer place than knowing you are literally sleeping on top of your money. How can anybody steal it or lose it that way?
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Carymay wrote: So, certain instruments - excluding CDIC insured deposits and deposits that would be CDIC insured but which exceed per-depositor limits - can be converted from debt into equity
Doug.....

Then this is how cdic should have framed it to cause less confusion aND make cetrain that deposits are untouchable. As it is framed.....it makes me think that deposits are the hugest liabilities in a banks balance sheet aND would be the first to be converted.

.....I have no vocabulary for finance.....so pardon me as I'm just learning.....
I think it's confusing when you start looking at bail-in provisions. What you need to understand is the CDIC guarantee:

Start with this: https://www.cdic.ca/about-deposit-insur ... s-covered/

Move on to this: https://www.cdic.ca/about-deposit-insur ... nce-works/

Then, calculate your coverage in a hypothetical scenario: https://www.cdic.ca/about-deposit-insur ... -coverage/

Finish up with this fun "test your knowledge" deposit insurance game from CDIC: http://www.depositinsuranceendurance.com/

Also, review the summary of planned changes to CDIC deposit insurance coverage I mentioned: https://www.cdic.ca/about-deposit-insur ... rotection/

Generally, what CDIC would try and do first is they would work with the financial institution confidentially to improve their balance sheet. If that didn't work, they could put the bank under supervision and administration whereby they take over the day-to-day administration, or appoint a third-party administrator to take over that reports directly to them. If that failed, they'd try and negotiate a full sale of the FI's assets and liabilities to another CDIC member institution. At this point, no CDIC deposit insurance funds need to have been tapped to cover insured deposits.

If all this failed, and this is exceedingly rare, then the $100,000 inclusive of principal and accrued but as yet unpaid interest per depositor, per deposit category would kick in. Using its ~$5 billion in cash and short-term money market funds and AAA rated government and corporate bonds plus its authorized Government of Canada borrowing limit of $22 billion or so, it would make depositors whole to their insured deposit limits. Government of Canada can, at any time, increase CDIC's authorized borrowing limit and CDIC can also use private lenders to borrow, too.

In the largest financial institution failure, that of a provincial Crown corporation bank, the Bank of British Columbia, it never came to that last stage. CDIC found a willing buyer of its assets and liabilities in Hongkong Bank of Canada, now HSBC Bank Canada. The only one that got burned in that scenario was the Province of British Columbia as its common stockholder and, by extension, B.C. taxpayers.

Does that help?

Cheers,
Doug
[OP]
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I'm more under the impression that cdic coverage only applies if the failing bank actually goes bankrupt.

Bail ins are from products not cdic insured or deposits that go over the limit. So if bank falls into ttouble those funds would be the first to be recapitalize

But when cdic states products that are cdic eligible aND can not be bail in as deposits under $100000 in each of their structured categories but then adds....

"While they are not subject to conversion under the bail-in regime, NVCC instruments are subject to conversion pursuant to their contractual terms and would fully convert into common shares prior to the bail-in conversion of senior debt into common shares"

To me why add that
It makes me go Neutral Face
Especially the.....convert into common shares prior to the bail-in

Thanks for answering.
Last edited by Carymay on Jun 1st, 2019 12:43 am, edited 1 time in total.
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Carymay wrote: I'm more under the impression that cdic coverage only applies if the failing bank actually goes bankrupt.
Yes, and only if CDIC can't find a buyer or force an assumption of deposits, which is highly unlikely.
Bail ins are from products not cdic insured or deposits that go over the limit. So if bank falls into ttouble those funds would be the first to be recapitalize
If a bank had to be recapitalized, the deposits would not be touched. They would remain as is, that is, as deposits. Full stop.
But when cdic states products that are cdic eligible aND can not be bail in as deposits under $100000 in each of their structured categories but then adds....

"While they are not subject to conversion under the bail-in regime, NVCC instruments are subject to conversion pursuant to their contractual terms and would fully convert into common shares prior to the bail-in conversion of senior debt into common shares"
I think you might be trying to read things piecemeal. In that case, that has nothing to do with the deposits. Preferred shares are a form of non-viable contingent capital ("NVCC") and it's talking about converting them to common stock, which count as Tier 1 Common Equity, the highest form of a bank's equity capital. Such an event would be dilutive to existing common shareholders in that there would be more shares outstanding and, thus, earnings per share would be reduced (which would increase the bank's relative P/E Ratio), but have no bearing on deposits.

Clear as mud now...sort of? :)

Cheers,
Doug
[OP]
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non-viable contingent capital ("NVCC") and it's talking about converting them to common stock.....
Doug

But aren't those nvcc....also already stated as cdic eligible and not bail in able? So what would be the point if they're converted into shares prior to bail in.....cdic can not make them whole.
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Carymay wrote: non-viable contingent capital ("NVCC") and it's talking about converting them to common stock.....
Doug

But aren't those nvcc....also already stated as cdic eligible and not bail in able? So what would be the point if they're converted into shares prior to bail in.....cdic can not make them whole.
We're talking about two different things here. CDIC wouldn't be getting involved in restoring depositors' deposits in a bail-in. The whole point behind bail-in is to prevent a taxpayer-financed bailout (i.e., via government investing in the company to make it viable again), thus the name "bail-in."

By converting the preferred shares and other non-CDIC insured liabilities of the bank into common shares, you reduce the bank's indebtedness and overall leverage, which makes it a healthier bank essentially. Deposits would be unaffected and continue to accrue, and pay, interest in this scenario.

If CDIC were to have to tap its deposit insurance regime to restore depositors' deposits, at that point, the bank has been put into bankruptcy and the shareholders have likely lost everything. Unsecured debtors will likely get pennies on the dollar and employee pension plans can expect cutbacks in benefits.

Does that make sense?

Cheers,
Doug
[OP]
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Thank you Doug

But I suppose what I'm trying to get at is if those categories are cdic insured.....why are the banks even converting some of those products into shares.....in the first place. Wouldn't only non cdic categories be put into this position?
And do banks have the to disclose to you if you deposited i money into products can be converted to shares?

Oh and as a depositor I am a taxpayer too. Face With Tears Of Joy
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Carymay wrote: Thank you Doug

But I suppose what I'm trying to get at is if those categories are cdic insured.....why are the banks even converting some of those products into shares.....in the first place. Wouldn't only non cdic categories be put into this position?
And do banks have the to disclose to you if you deposited i money into products can be converted to shares?

Oh and as a depositor I am a taxpayer too. Face With Tears Of Joy
No problem, but I think you misunderstood. Preferred shares, common shares, debt instruments, etc. aren't CDIC insured. In that scenario I illustrated, it would either be CDIC (a) ordering the bank to do the conversion under the bail-in provisions, to right size the bank and prevent either a bailout or CDIC having to protect deposits or (b) CDIC assuming control of the bank through placing the bank under an administration or conservatorship and effecting this capitalization.

No, your deposits cannot be converted into shares. NVCC, such as preferred shares, would be preferred shares that trade on a stock exchange. The two things are entirely separate.

Cheers,
Doug
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Thanks. Still working my head around it. Slightly Frowning Face hopefully they land this monster created safely.

What would happen to stocks purchased from a bank inside an rrsp? Or a government of canada bond if the bank needs recapitalize?
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Carymay wrote: Thanks. Still working my head around it. Slightly Frowning Face hopefully they land this monster created safely.

What would happen to stocks purchased from a bank inside an rrsp? Or a government of canada bond if the bank needs recapitalize?
Well, the RRSPs have to be custodied and trusteed by a trust company, with assets fully segregated from the trust company's balance sheet. Stocks and bonds aren't guaranteed by CDIC, but would be held by an investment dealer (full service or discount brokerage). They'd be trusteed by a federally-regulated trust company. A person is protected up to $1 million in investment assets by the Canadian Investor Protection Fund ("CIPF"), which doesn't cover declines in market value of your investments but which protects your cash balances and ensuring that the number of shares or units you hold in a given stock, ETF, bond, etc. remain in your account and will compensate you if your broker goes under and had been absconding with your funds or something. So, you've got that protection. In terms of a bank or trust company failing, though, I assume CIPF would still cover you - if needed - because they're a third-party service provider of your regulated investment dealer, but not sure it's ever happened. It's an interesting question.

The Mutual Fund Dealers Association Investment Protection Corporation ("MFDA IPC") provides similar CIPF protection for accounts, registered or non-registered, held with mutual fund dealing firms.

Cheers,
Doug

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