[CanadianCapitalist]

I believe investors will be covered in both cases. When the issuer of the GIC goes bankrupt, the CDIC insurance kicks in. If the broker goes under, typically the assets in brokerage accounts are held in trust, so every investment should be safe even before the CPIF guarantees kicks in. Anyone else wants to weigh in?

As far as GICs are concerned, I'll go with the one with the highest interest rate.

 

[CanadianCapitalist]

I'm a bit wary of the guarantees by the Credit Unions. I feel that the guarantees are just not as strong as a CDIC guarantee, which is backed by the Government of Canada. Anyone else feel the same way?

 

[CanadianCapitalist]

The CIPF isn't guaranteed by the government either but we buy stocks, and if I understand them, the credit union guarantee is basically the same thing...

True, but client accounts at a brokerage are held in-trust. They belong to the clients, not the broker and even if a broker goes under, it is very likely that there isn't even a shortfall for CIPF to cover.

GICs are not like that. The financial institution has an obligation to pay interest and the principal back but if the institution goes under, I'm not sure where deposit holders stand w.r.t other creditors. It is likely that deposit insurance may have to kick in to make good on deposits. I'm confident of CDIC guarantees but credit union guarantees are not in the same league.

 

[CanadianCapitalist]

Are you sure about that? CDIC is a crown corporation that insures deposits. Premiums are paid to CDIC, which builds up reserves in case of a bank failure. Now, if one of the big five were to fail, there would most like not be enough reserves to pay out, so there would be political pressure on Ottawa to make the payouts whole, but there is no guarantee the federal government would top them up. I would assume the provincial associations would work in a similar fashion.

Fair enough. The backing by the Government of Canada is implicit. The CDIC guarantee is one of the financial safety nets and if a situation ever develops in which the public is not confident that the CDIC safety net isn't strong enough, the Government would have no option but to make an explicit guarantee of deposits. The confidence in our banking system is so fundamental that the financial authorities would have no choice but to act.

Recall that when money market funds threatened to break the buck last fall, the US Treasury moved swiftly to guarantee these funds.

 

[CanadianCapitalist]

I believe the number is closer to 14. So if any of the 14 largest banks were to fail there wouldn't be enough money in the CDIC to cover the failure. It's scary especially since most people wouldn't be able to name any banks outside of the big five with a few more able to name the 6th largest bank.

I don't know why this should be scary. CDIC holds reserves that it believes is enough to cover deposit holders in the event of a bank failure. When a bank fails, it is equity holders who are likely entirely wiped out. CDIC only has to make good the difference between the bank's assets (the loans it made to consumers and businesses) and its liabilities (the bank accounts, GICs and other deposits). For all I know, 35 bps may be enough reserves to cover a few banks failing.

All I'm saying is that a CDIC guarantee is better than any of the provincial guarantees.