Personal Finance

Stricter deposit rules could impact online banks

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  • Feb 7th, 2019 9:36 am
Deal Addict
Jul 3, 2017
3859 posts
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Stricter deposit rules could impact online banks

"Canada’s banking regulator is proposing tougher rules governing deposits sourced online or from third-party brokers, in a move that would make banks more stable in times of stress but could also put some smaller lenders at a competitive disadvantage....

The draft changes put forward by the Office of the Superintendent of Financial Institutions (OSFI) have not yet been made public. If approved, banks would be required to hold 20 per cent to 40 per cent of deposits gathered from unaffiliated brokers or internet-based accounts as a buffer against sudden withdrawals that could put a lender at risk. ...

Although all banks would be affected, the impact could be felt most acutely by institutions such as Home Capital, Equitable Bank and Manulife Bank of Canada, depending on each institution’s funding strategies. Low-cost online banks Tangerine and Simplii Financial, which are owned by Bank of Nova Scotia and Canadian Imperial Bank of Commerce respectively, may also be more exposed."

https://www.theglobeandmail.com/busines ... for-banks/

What they are talking about is not something that would affect customers directly, but rather a measure that would impact the online bank's financial returns and probably force them to reduce interest payouts and increase loan rates. They would be required to hold a larger percentage of their deposit assets rather than investing or loaning the money out. This puts them at a competitive disadvantage compared to traditional banks.
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Deal Addict
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Jul 25, 2008
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Ottawa
any links to Government proposal document?

When Government favourite banks....and fool around your money.
Deal Guru
Dec 20, 2018
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Exp315 wrote: "Canada’s banking regulator is proposing tougher rules governing deposits sourced online or from third-party brokers, in a move that would make banks more stable in times of stress but could also put some smaller lenders at a competitive disadvantage....

The draft changes put forward by the Office of the Superintendent of Financial Institutions (OSFI) have not yet been made public. If approved, banks would be required to hold 20 per cent to 40 per cent of deposits gathered from unaffiliated brokers or internet-based accounts as a buffer against sudden withdrawals that could put a lender at risk. ...

Although all banks would be affected, the impact could be felt most acutely by institutions such as Home Capital, Equitable Bank and Manulife Bank of Canada, depending on each institution’s funding strategies. Low-cost online banks Tangerine and Simplii Financial, which are owned by Bank of Nova Scotia and Canadian Imperial Bank of Commerce respectively, may also be more exposed."

https://www.theglobeandmail.com/busines ... for-banks/

What they are talking about is not something that would affect customers directly, but rather a measure that would impact the online bank's financial returns and probably force them to reduce interest payouts and increase loan rates. They would be required to hold a larger percentage of their deposit assets rather than investing or loaning the money out. This puts them at a competitive disadvantage compared to traditional banks.
cf7777 wrote: any links to Government proposal document?

When Government favourite banks....and fool around your money.
They want to prevent what happened to home capital when there was a run on them and had to be bailed out it sounds like

Bank runs are real and makes sense they want the small more risky banks to have better ratios as govt will have to pay out when they fail
Deal Addict
Jul 3, 2017
3859 posts
2814 upvotes
StatsGuy wrote: They want to prevent what happened to home capital when there was a run on them and had to be bailed out it sounds like

Bank runs are real and makes sense they want the small more risky banks to have better ratios as govt will have to pay out when they fail
That's undoubtedly the reason - but it still creates a competitive disadvantage for online competitors with the big banks.

I suspect the majority of people still have a vague idea that money deposited at a bank is sitting around in their vaults, waiting until you need it. They don't realize that the bank immediately turns around and invests your money for themselves - sometimes in moderately risky things. Even fewer people realize that banks can loan out more money than they actually have (see https://www.investopedia.com/articles/i ... -loans.asp for a discussion of what bank reserves really mean). If it was left up to the banks, they would keep only enough money around and immediately available to meet anticipated withdrawal needs on any given day. They can and do attempt to control that by specifying that you have to give them notice to withdraw a large amount of money in many cases. It's only government regulation that has forced the banks to keep a larger percentage of their deposit money on hand over the years because of the disasters that have occurred when regulators weren't watching.

This sort of discussion around potential new banking regulations again makes me wish that there was some type of mandatory high-school class in basic finance, so that young people leaving school would know more about how it operates.

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