Funding: A vital ingredient for CDIC
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March 28, 2018 – Adequate funding is critical for the proper functioning of Canada’s deposit insurance system. As Canada’s federal deposit insurer, CDIC has two primary funding mechanisms we would rely on if a member bank were to fail and funds were needed to resolve the failure. The first is an “ex ante fund,” or simply our fund, which is being accumulated over time. The second is the ability to borrow from the Government of Canada.
How much is enough?
The fund is built up over time from the annual premiums that CDIC member institutions pay on the insured deposits they hold. The goal is to accumulate financial resources well ahead of the unlikely event that a member institution were to fail. An important consideration for CDIC in building such a fund is setting a target amount, essentially answering the question “how big does the fund need to be?” CDIC uses sophisticated statistical techniques (known as Monte Carlo Simulations) to estimate what size of fund makes sense. The results of these simulations, combined with an analysis of CDIC’s losses from past member failures, provide the necessary information to set the size of the fund.
Currently, CDIC targets a minimum fund size of 1% of insured deposits. When the fund was first established in 2004, the target size was a range of between 0.4% and 0.5% of insured deposits. The 2008 global financial crisis caused CDIC (and many other deposit insurers around the world) to re-evaluate funding targets. We consulted with our members, academics and other stakeholders to get views on what funding target made sense and how best to reach that target. The outcome of this process was a revised funding target and a plan on how to reach it over a realistic period of time (approx. 10 years).
The ex ante fund stands at over $4 billion and current forecasts indicate that it will reach the minimum target of 1% of insured deposits in 2025 (see chart below). Each year, CDIC reviews the target, based on current economic and other factors, and periodically runs Monte Carlo Simulations to consider if changes to the target are called for.
Ability to borrow is critical
CDIC’s second key funding resource is its ability to borrow funds, if necessary. The CDIC Act permits us to borrow from the Government of Canada or from capital markets. This limit is adjusted each year as insured deposits grow. As of December 31, 2017, the borrowing limit was $23 billion.
Furthermore, Parliament could authorize additional funding if the available funds were not adequate to cover CDIC’s obligations in the event of a bank failure.