Banks are intended to be a place for people to keep their money safe, which is why deposit insurance is a critical feature of North America’s banking system. Insurance on deposits guarantees customers will get their money back up to the insured amount in the event of a bank failure.
Deposit insurance in Canada is provided by the Canada Deposit Insurance Corporation (CDIC) and in the U.S. it’s provided by the Federal Deposit Insurance Corporation (FDIC).
Origins of deposit insurance
Following The Great Depression, The Banking Act of 1933 led to the establishment of the FDIC, which has the authority to supervise, regulate, and provide deposit insurance to commercial banks. Its key function is to ensure customers get their money if a bank becomes insolvent. The FDIC also works to promote sound banking practices and maintain the public’s confidence in financial institutions.
In Canada, the CDIC was established as an independent Crown corporation in 1967, following a year marred by financial turmoil which led the public to lose faith in banks. Its goals were to insure against the loss of deposits, promote and contribute to a stable financial system, and act for the benefit of depositors while minimizing losses. All of this meant it could act as a source of emergency liquidity.
Coverage limits
FDIC insurance covers deposits up to US$250,000 per depositor, per FDIC-insured bank, per ownership category. In some cases, more coverage could be provided, but this is determined on a case-by-case basis.
CDIC coverage is C$100,000 per depositor, per eligible account, with the amount unchanged since 2005. While this wasn’t much of an issue prior to the 2023 U.S. bank failures, there are now mounting calls for the insured maximum to be increased.
The Canada Deposit Insurance Corporation
CDIC member institutions include federally regulated deposit-taking institutions such as banks, trust companies, and federal credit unions. Balances at provincial credit unions (aka caisses populaires in Quebec) are protected by provincial deposit insurance.
The CDIC is financed by premiums assessed to member institutions, and not public money. Membership is mandatory for all banks, which must contribute to the reserve fund that would be used in the event of a failure. Banks themselves pay for the deposit insurance coverage — and so all of them are affected when one fails.
The CDIC can act as a lender of last resort to relieve liquidity pressures and/or give the troubled bank time to avoid having a firesale of their assets. Since the CDIC’s inception, it’s had to step in to assist depositors on 43 occasions.
Neither depositors’ residency nor nationality affect the eligibility of their deposits for CDIC insurance, which covers deposits in foreign currency, including U.S. dollars, but all eligible deposits must be payable in Canada.
The Federal Deposit Insurance Corporation
The FDIC is an independent agency created by the U.S. Congress to maintain stability and public confidence in the United States’ financial system. It insures deposits, examines and supervises financial institutions for safety, soundness, and consumer protection, makes large and complex financial institutions resolvable, and manages any receiverships.
Bank customers don’t need to purchase or apply for deposit insurance since this coverage is automatic for any deposits at FDIC-insured banks. Coverage applies to certain deposit products, including checking and savings accounts, money market deposit accounts, and certificates of deposit (CDs).
The FDIC is funded by member institutions, not taxpayers, and FDIC deposit insurance is backed by the full faith and credit of the United States Government.
To determine if a bank is FDIC-insured, depositors can look for the FDIC sign at the bank or check the FDIC BankFind tool.
Detailed information about personal deposit insurance coverage can also be obtained via the FDIC’s Electronic Deposit Insurance Estimator (EDIE), where depositors can enter their account and balance information.
Extent of deposit insurance coverage
On average, Canadian banks have a greater proportion of uninsured deposits than U.S. banks, which logically stems from the lower coverage provided by the CDIC.
Approximately 65 per cent of Canadian deposits at the Big Six banks are uninsured (as of early 2023), while roughly 25 per cent of deposits at medium-sized Canadian banks (such as CWB, Equitable Bank, Home Capital Group and Laurentian Bank) are uninsured.
In the U.S., many of the large U.S. banks that are currently rated by DBRS Morningstar have less than 50 per cent of their deposits uninsured, with several below 30 per cent. Any shortfall is covered by a change in the premiums paid by banks and other financial entities.
SVB and FDIC
When Silicon Valley Bank (SVB) ran out of money to satisfy customer withdrawal requests in March 2023, it was shut down by the FDIC to protect the remaining deposits and try to prevent more customers from making withdrawals. Unfortunately, it wasn’t enough to accomplish the latter, as nearly 95 per cent of deposits were uninsured balances over $250,000.
While customers feared these monies would be lost entirely if they didn’t withdraw, the FDIC pledged to make all investors whole, which means no losses for SVB customers. But, it’s going to cost upwards of $20 billion.
Todd Phillips, a former FDIC attorney, told the Washington Post that the FDIC “exists to stop bank runs, and because of its existence, the FDIC was able to step in, use its systemic risk exception, and stop bank runs from occurring in the rest of the banking system.”
The FDIC agreed to a deal with First Citizens Bank, which will acquire all of SVB’s deposits and loans, as well as a large portion of its remaining assets. First Citizens and the U.S. government will share any loan losses, according to the terms of the deal.
Deposit insurance actually delivered beyond expectations in the SVB collapse, as no customer deposits were lost — even those above the insured limit of $250,000. At the time of writing, all former SVB branches were set to reopen on April 3rd under the First Citizens banner after those balances migrate to new accounts.