Tuesday, September 29, 2009

What if a bank failed in Canada?

The news is definitely not good for at least one of the regulators in the States. The Federal Deposit Insurance Corporation or FDIC, which had about $45 billion in assets before the banking crisis began, said that they're going into the red this week and if they didn't act now it would be "illiquid" to the tune of $22 billion in no time flat -- so they're requiring banks to prepay deposit insurance premiums up to and including 2012 now.

It doesn't necessarily affect Joe and Jane Depositor necessarily, but this means that on top of the twelve to fifteen cents per $100 of deposits banks already pay into the trust fund, plus the five cent "special" tax they were "temporarily" paying they'll have to pay another three cents. This may replenish the fund for now, but it certainly won't stop more banks from failing before it's all over.
So the question I'd ask Canadian regulators here is: What about us? There's only so much cash on hand in the trust fund of the CDIC, plus so-called "reinsurance." Who pays if a major bank, either national or regional, goes belly up? Last time I checked, the cushion our deposit insurance slush fund had was barely $1.6 billion, or 0.35% of insured deposits in Canada, which even CDIC itself admits is way below the target of 0.50%. Likely, provincially chartered agencies providing similar benefits are not adequately funded as well.
What gives? I'm not an expert here, so someone out there and in the know, please help me out: Can the "full faith and credit" of the Canadian government be truly relied upon to prevent a major bank run in case there is a worst case scenario -- and to what extent would we the taxpayer be expected to bail out the banks? A bank or credit union failure is not out of the picture in Canada, contrary to what we may have been led to believe. There was last a failure in 1996 and three in 1995 (including a bank where I had stashed some money but pulled out just before the closure -- but I would have been covered, after 60 days.)
So would our "assets" (ahem) be really covered, and how much of a hit on our already high deficit could be incurred or would it be an "off the book" (whatever that means) accounting item?

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