As Canada’s deposit insurer and resolution authority for federally-regulated deposit-taking institutions, our ability to deliver on our mandate rests crucially on a sound understanding of key trends and developments in our member institutions’ business environment. One critical aspect of the business environment for CDIC is the manner in which member institutions’ fund their lending activities. As a deposit insurer, we closely monitor and analyze available data and information on our member’s financial risk profiles to better understand our insurance obligations and risk exposures.
Membership deposits grew at a faster pace than insured deposits year over year
As a group, Canada’s Big 6 banksfootnote 1 hold the bulk of the deposits insured by CDIC. These domestic systemically important banks (DSIBs) hold nearly 90% of CDIC-insured deposits. This means that the broad trends we see overall in deposit activity are largely trends in DSIB deposits.
At the end of April 2018, CDIC’s members reported total deposits of $3.1 trillion, of which $792 billion, or just over one-quarter, were insured by CDIC. Compared to the previous year, overall deposits rose 4.6%, but the insured component grew at about half that pace, increasing by 2.3%.
The faster pace of growth in overall deposits is broadly consistent with historical trends and is driven by several related factors. Certain deposit products and deposit-like financial instruments are not eligible for deposit insurance by CDIC. Examples include foreign currency deposits, term deposits with original terms to maturity exceeding five years, and bearer deposits whose receipts are payable to the bearer rather to a named person. One deposit product whose gains augmented overall deposit growth without impacting the insured component is foreign currency deposits. These deposits had a compounded annual growth rate (CAGR) of 9.7% over the past decade. This contributed to a CAGR of 7.3% in overall deposits while insured deposits grew at 4.6%footnote 2. On June 21, 2018, “An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures” received Royal Assent. It includes a number of important changes to the CDIC Act that will modernize and enhance the Canadian deposit insurance framework, including extending coverage to foreign currency deposits payable in Canada and term deposits irrespective of their maturity dates. These changes will be proclaimed in force by order of the Governor in Council.
Another contributing factor to the relatively slower growth in insured deposits is the incidence of eligible deposits in excess of CDIC insurance limits. Accounts greater than the $100,000 limit end up only receiving partial insurance coverage. This might be applicable to depositors with very large accounts, such as those sourced through deposit brokers or corporate deposit accounts.
The combined effect of these factors has been on a steady decline in the share of CDIC-insured deposits to total deposits in the last decade. Insured deposits currently represent about 26% of the total, compared to 33% in 2008 (Figure 1).
Canadians continue to benefit from a high level of deposit protection
The declining proportion of insured deposits has not translated into less deposit protection for Canadian households. Nearly all personal deposit accounts (about 98%) are fully protected by CDIC, meaning that ordinary Canadians continue to benefit from a high level of protection for their deposit savings. Following a brief rise during the financial crisis of 2008, the share of personal deposits in total deposits has remained relatively stable at 40%.
Banks’ use of demand deposits on the rise
Other features of the membership’s deposit base have also changed over time. For example, member institutions are increasingly using demand deposits compared to longer term deposits to fund their operations. Indeed, demand deposits currently represent over one-half of total deposits at CDIC member, compared to 38% in 2008 (Figure 2). Possible drivers for this change likely include the prolonged low interest rate environment which may have discouraged savers from locking their money into longer term accounts and regulatory changes that have incented banks to use more deposits (notably retail deposits) instead of short-term financial instruments for funding and liquidity purposes. The growing popularity of online banking has likewise encouraged some member institutions, including a number of smaller banks, to launch their own direct-to-consumer deposit-raising platforms offering high interest demand savings accounts.
The significant portion of demand deposits (now 54% all deposits) that can be quickly and easily withdrawn underscores the importance of awareness of CDIC deposit insurance in supporting public confidence in our members and thereby contributing to financial stability.
Change remains on the horizon
Significant changes are on the horizon in virtually all aspects of banking as individual Canadians, financial institutions, and regulators all adjust to the impacts of new technologies and business models that aim to disrupt traditional banking relationships. All this is taking place against the backdrop of changing Canadian demographics, local and global economic uncertainty, and a regulatory landscape that must continually adapt to confront evolving risks.
CDIC continues to work with its regulatory counterparts and its membership to better understand and manage the impacts of these risks, and will keep readers abreast of changes that affect deposit-taking institutions in Canada.