Banks rarely fail in Canada, but how many billions of dollars would be needed if there's trouble?
Funding to protect depositors at Canadian institutions currently below CDIC's target
Bank failures haven't happened often in Canada.
The Canada Deposit Insurance Corporation (CDIC), which insures deposits in Canadian banks, last handled one in the mid-1990s, and the Crown corporation has dealt with only 43 such incidents since it was established in 1967.
By contrast, the United States has seen more than 500 failures since 2000 — including the collapse of Silicon Valley Bank and Signature Bank last month.
Experts say these kinds of episodes are less likely to occur in Canada, with strict banking regulations and a group of big, well-capitalized banks at the core of the sector.
The federal Department of Finance said in a statement emailed to CBC News that the country has "one of the strongest and most resilient banking systems" in the world, with robust protections for financial institutions, deposits and the financial system itself.
Yet CDIC funds that are earmarked for protecting Canadian depositors when things go awry at member institutions — and when all other resolution options are exhausted — are not at their target level.
How much does that matter?
Cristián Bravo Roman, a Canada Research Chair in Banking and Insurance Analytics at Western University in London, Ont., said it comes down to the kind of possible, but not probable, events that deposit insurance is meant for.
"It is about risk," he said via email, noting that such reserve funds are built to cover expected losses should a bank failure occur.
They are also built assuming such failures are unlikely to happen and that many will not occur at the same time, he said.
Below the near-term target
The CDIC's deposit insurance is funded through premiums from its dozens of member institutions, which include the country's big banks, federally regulated credit unions, and loan and trust companies.
The federal agency has a near-term target for its deposit protection funding of 85 basis points — or 85/100ths of one per cent — of its insured deposits.
At the end of last year, however, the CDIC's ex-ante fund — which provides for future deposit insurance payouts if needed — totalled $7.9 billion, which represented 73 basis points of insured deposits.
Bravo Roman said the gap between the near-term target and the gathered funds doesn't mean the CDIC lacks the capacity to deal with a bank collapse.
"They will be able to respond," he said, noting the the CDIC would seek extra resources as needed in the event of a failure.
The CDIC told CBC News that it is able to access more than $30 billion in extra funding — via borrowing and with the approval of the finance minister — if it is needed as part of a resolution following a bank failure.
What if things change?
The federal government, in its recently announced budget, expressed a willingness to expand deposit insurance limits if need be.
The CDIC currently provides depositors with $100,000 of coverage for each of nine categories of eligible accounts, per member institution. Depositors can spread out their money to achieve more expansive protection.
But there have been calls to increase that coverage.
In its statement, the Finance Department said that Ottawa "is taking precautionary steps to ensure that it has all the potential tools necessary to respond quickly to protect financial stability and maintain consumer confidence should the need ever arise."
The CDIC said it will "evaluate the potential impacts" on its ex-ante fund if the government moves ahead on this front.
But a change in the level of deposit insurance offered would seemingly require collecting additional premiums from CDIC-member institutions.
"If we decide to increase coverage, it must be because we believe confidence in the system is not enough, and we are all collectively willing to pay a bit more for our banking, which is already expensive," Bravo Roman of Western University said.
More protection, more to pay out
Recent U.S. experience demonstrates there are limits to what deposit insurance can do in the event of the failure of a large financial institution.
The coverage by the U.S. Federal Deposit Insurance Corporation (FDIC), per eligible account in its system, is $250,000 US (more than $330,000 Cdn).
And yet when Silicon Valley Bank (SVB) collapsed in March, there were numerous companies with tens of millions of dollars or more deposited with the institution, far above insured totals.
Then came the demise of Signature Bank, which failed soon after the collapse of SVB.
Martin J. Gruenberg, the FDIC's chairman, told the U.S. Senate banking committee that 88 per cent of SVB's deposits were uninsured, as of the end of 2022, and that figure was 90 per cent for Signature.
In these cases, U.S. officials opted to make all depositors whole, declaring systemic risk exceptions in both cases — with SVB being the second-largest bank failure in U.S. history and Signature the third.
Doing so cost the FDIC's Deposit Insurance Fund about $20 billion US in the SVB case and $2.5 billion US in the Signature case, according to preliminary estimates.
Gruenberg told the Senate committee that the lion's share of these costs — roughly $19.6 billion US (more than $26 billion Cdn) — came from covering the uninsured deposits.
The losses to that fund must now be recovered by a special assessment on U.S. banks.
What would happen here?
If a CDIC-member bank failed in Canada and it was necessary to access deposit insurance funds to pay affected depositors, the federal agency confirmed that any losses "would be recovered from its member institutions through premiums."
But before that happened, many steps would need to take place to deal with a bank failure.
"As Canada's resolution authority, CDIC's resolution tools are not confined to reimbursing insured deposits," the CDIC explained in an email.
"Other tools include the ability to support a transaction with another financial institution, create a bridge bank or provide various forms of financial assistance. These options would ensure the member would remain open and depositors would continue to have access to their savings."
Overall, Bravo Roman said, he believes the Canadian system is safer than its U.S. counterpart.
But he sees a bigger question: "Whether the current level of deposit insurance is enough to provide sufficient trust in the system so that bank runs are unlikely to occur."
The optimal level of such protection is unclear and "probably a moving target," he said, adding that limitless coverage is too expensive, but not having enough is risky for the economy.
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