As Canada’s deposit insurer and resolution authority for federally-regulated deposit-taking institutions, CDIC’s ability to deliver on its mandate rests on a sound understanding of key trends and developments in member institutions’ activities and business environment. One critical aspect of the business environment for CDIC is the manner in which member institutions fund their lending activities. CDIC closely monitors and analyzes available data and information on our members’ financial risk profiles and funding activities to gain a deeper understanding of the Corporation’s insurance obligations and risk exposures.
At the end of December 2018, CDIC’s members reported total deposits of $4 trillion, of which approximately one-quarter were insured by CDIC.
Banks’ use of demand deposits is on the rise
Member institutions are increasingly using demand deposits (compared to longer term deposits) to fund their operations. Currently demand deposits represent over one-half of total deposits at CDIC members, compared to 39% in 2008. Drivers for this change 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 incentivized 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 also allowed some member institutions, including a number of smaller banks, to launch their own direct-to-consumer deposit-raising platforms to offer high-interest demand savings accounts.
Demand deposits now account for 54% of all deposits (see Figure 1). This high proportion of deposits that can be quickly and easily withdrawn underscores the importance of promoting consumer awareness of CDIC deposit insurance to support public confidence in our members, ultimately contributing to financial stability.
Membership deposits grew at a faster pace than eligible insured deposits year over year
The faster pace of growth in total deposits is broadly consistent with historical trends and is driven by several factors. In particular, the big banks tend to fund their operations with deposit products and deposit-like financial instruments that are not currently 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).
Foreign currency deposits in particular have been growing rapidly and are up 8.8% year over year and 79% over the past five years, while the five-year total deposit growth rate was 52%. These divergent growth rates are in part attributable to the Big 6 banks expanding deposit gathering activities in foreign jurisdictions, and foreign exchange movements (which inflate foreign deposit figures when the Canadian dollar depreciates).
This contributed to a Compound Annual Growth Rate (CAGR) of 7.4% in overall deposits (see Table 1).
Table 1: Deposit Long Term Trends:
|5Yr Total Growth||10Yr Total Growth||10Yr CAGR||Q4/18 Value ($M)|
|Personal Canadian Currency||26.2%||74.7%||5.7%||$1,016,662|
|Personal Foreign Currency*||79.9%||210.4%||12.0%||$502,549|
|Non Personal Canadian Currency||38.4%||78.5%||6.0%||$891,417|
|Non Personal Foreign Currency*||79.0%||127.1%||8.5%||$1,390,844|
|Total Foreign Currency Deposits*||79.3%||144.5%||9.4%||$1,893,393|
|*Foreign Currency reported in CAD Equivalent|
Overall, the insured deposit growth has accelerated somewhat in recent years after several years of moderate growth (see Figure 2).
The combined effect of these factors has been a steady decline in the share of CDIC-insured deposits to total deposits over the last decade. Eligible insured deposits currently represent about 21% of the total, compared to 33% in 2000 (see Figure 3). This trend is heavily influenced by the big 6 Canadian banks. When those institutions are excluded, deposit insurance has maintained and even gained prominence, rising from 45% of all deposits in 2000 to almost 48% in 2018 (see Figure 4).
Canadians continue to benefit from a high level of deposit protection
The declining proportion of eligible insured deposits at some institutions has not translated into less deposit protection for Canadian households. Nearly all personal deposit accounts 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 approximately 40%.
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 in the face of evolving risks.
In June 2018, the Parliament of Canada approved a number of important changes to the CDIC Act. These changes are designed to modernize and enhance the Canadian deposit insurance framework and extend insurance coverage, and will come into force in two phases – April 30, 2020 and April 30, 2021. Once implemented, insured deposits are anticipated to increase in absolute terms and as a share of overall deposits, and CDIC’s role in safeguarding Canadian depositors will be further enhanced.
CDIC continues to work with its regulatory counterparts and its membership to discern and manage the impacts of the risks they face and will keep readers abreast of changes that affect deposit-taking institutions in Canada.