Home Capital Group Inc. is in the news, and the news is not good. The beleaguered mortgage lender, which caters to borrowers who don't qualify for loans at the major banks, has seen its shares collapse and serious questions raised about the viability of its business. On April 19, the Ontario Securities Commission alleged that certain current and former executives were aware of mortgage-broker fraud affecting the company months before it was publicly disclosed.
Along with being a painful lesson for stock investors, there's another issue related to Home Capital that deserves attention: the importance for savers of having, where possible, all their deposits protected by government insurance.
This appears to have been on the minds of at least a few Canadians with large balances in the company's high-interest savings accounts. In the week up until May 1, depositors withdrew more than $1 billion from Home Capital's savings accounts. The $2-billion credit line extended by lenders to the mortgage company was designed, in part, to help it offset these significant outflows.
While its savings accounts have seen heavy withdrawals, Home Capital reported on May 1 that it also has just under $13 billion in outstanding guaranteed investment certificates with staggered maturities. This has created uncertainty over whether the company will be able to meet these GIC obligations when they come due.
Deposit insurance explained
Every day, banks (and other deposit-takers) accept new money from savers. These savings allow banks to make loans to people and businesses wishing to borrow money. One consequence of this activity, however, is that banks do not have enough liquidity on hand if every saver wanted their money back immediately.
Furthermore, if the bank was to lose enough money on its loans, via defaults, it could find itself in a position where some depositors would not get their money back. This isn't a hypothetical problem. During the Great Depression of the 1930s, the U.S. saw runs on banks and numerous bank failures.
Recognizing that depositors need to have faith in the banking system, governments around the world have instituted deposit insurance. The essence of deposit insurance is that if a bank or credit union fails, the government acts as a backstop to guarantee, subject to prescribed limits, people's savings. In Canada, most deposits are insured by Canada Deposit Insurance Corp. (CDIC), a federal crown corporation. For savings held at provincially regulated credit unions, separate deposit insurance plans exist.
Since its inception in 1967, CDIC has overseen 43 bank failures, which it says have affected two million depositors. The last CDIC-member bank to fail was Security Mortgage Trust Corp. in 1996. Nearly all the company's $42 million in deposits held by 2,600 savers were covered by CDIC insurance.
What's covered by CDIC
CDIC insures eligible deposits up to a maximum of $100,000 (principal and interest combined) per depositor per insured category. There are various separately insured categories of deposits, including:
- Deposits held in one name;
- Deposits held in more than one name;
- Deposits held in a RRIF;
- Deposits held in a TFSA;
- Deposits held in an RRSP;
- Deposits held in trust for a named beneficiary;
- Deposits held for the purpose of paying property tax on a mortgaged property.
CDIC website's lists the types of deposits that are eligible for the $100,000 coverage per insured category. They are:
- Savings accounts and chequing accounts;
- GICs and term deposits 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.
Crucially, some deposits are explicitly not CDIC-insured. These include foreign-currency GICs and any deposit product with an original term of greater than five years. Also ineligible for coverage are principal protected notes.
How to get the most out of CDIC coverage
Let's say you have $200,000 sitting in a high-interest savings account at a small, CDIC-insured bank that is heavily exposed to the mortgage market. In this case, only $100,000 of your money would be government-backed. There are some straightforward ways to ensure that all your funds are subject to CDIC guarantees.
First, if you have a spouse, you could just transfer half of the money into a joint savings or chequing account at the same financial institution. $100,000 would be covered by one category of CDIC insurance (the money in your name) and the other $100,000 would be backed by another (deposits held jointly). Alternatively, you could withdraw $100,000 and deposit it with another CDIC member bank.
