My memories of the global financial crisis are still so vivid, I think it incredible to note that we’re more than 10 years beyond its arrival. I was at Moody’s Canada during that time and have since held senior roles with the National Bank of Canada and the Department of Finance, so I suppose you could say I’ve seen the industry, and the aftermath of the crisis, from all sides. Perhaps it’s no surprise then, that in my new role as CEO of Canada Deposit Insurance Corporation, I am obliged to think instead that we are 10 years closer to the next one. So, I ask myself, will we be ready?
We can’t predict when the next financial crisis will occur, so at CDIC, our working assumption is that we must be ready for a failure tomorrow. Or next week. Or next decade.
What has changed over this decade?
Looking at the bigger picture, the financial system in Canada is safer than 10 years ago. Better tools to identify troubled institutions and address them, better capital and liquidity buffers, and more detailed resolution planning mean we are better prepared than ever. As well, there is a bail-in framework in place that shifts the burden of risk from taxpayers and depositors to shareholders and certain creditors who are aware of – and accept – the risk of loss when they make their initial investment in a systemically important bank. Therefore, in a free market and in advance of a failure, sophisticated investors price the risk of failure into their investments while agreeing to recapitalize the bank should that unwelcome day ever arrive. Thus, our objective with systemically important banks and with all CDIC members is not to create failure-proof financial institutions. Rather, we – CDIC in conjunction with our member institutions and other partners – must strengthen our mutual readiness for resolution in the event of a failure.
Yet while the system is safer, we recognize areas where we must improve to make our financial system more resilient.
Resilience to failure, not the absence thereof, is the mark of a sound financial system. So we intend to become far more ambitious in our readiness to reimburse depositors if a CDIC member is closed. Within five years and consistent with industry standards, we aim to transform our technology to build a T+0 payout platform, able to make payment of all insured deposits on the date of failure. This means investing more in technology and business process redesign.
We are also committed to improving the data flow between CDIC member institutions and nominee brokers – who invest in deposit products in trust for their clients – so we can make prompt and accurate reimbursements of deposits held in trust in a failure.
And we will work closely with industry to implement the upcoming changes to Canada’s deposit insurance regime, which begin to take effect next year. In my meetings with CEOs of our members since my arrival at CDIC, I have been encouraged by their spirit of cooperation with our mandate. These are audacious goals, but the financial world is evolving quickly, and now is not a time to be complacent.
We are an $800 billion deposit insurance system, a total we estimate will approach $1 trillion when foreign currency coverage is added in 2020. Cost should not be an impediment in protecting this system, and urgency is required if we are to protect and enhance Canada’s resiliency to financial institution failures.
In the 52 years since CDIC was established, we have responded to 43 failures of member institutions, affecting more than 2 million Canadians. No one has ever lost a single dollar of deposits protected by CDIC.
I will keep this perfect record intact.