How Deposit Insurance Works

I quizzed the banking and credit deposit insurance about what happens when a bank goes under. My thinking: with all of the "Canadian banks can't fail" talk, there is too much smugness afoot. It begs for a big bank or credit union in Canada to collapse. When my Mom tried to move her RRSP to another company, her credit union refused to acknowledge her request to move. I think they were holding onto the cash for dear life. People are living on debt and saving for their retirement, so when a bank falls apart it will likely be when their RRSP management falls apart. But, in Canada, collapses are uncommon. Not a lot of people have make use of the insurance system.

Here's what I posed and what I found out:

Can you help me understand the process of submitting a claim for an insurance deposit. Here is the hypothetical situation and I am unclear how it carries out:

- say, I have $50,000 in a BC bank-- a member of the CDIC
- the credit union becomes financially insolvent and cannot allow members to withdraw any of their money
- How would I get the $50,000 or be able to withdraw it? Does the CDIC issue the claim pay-out? Is it issued to the bank? How would I know if they have those funds? What is the mechanism that would prevent them from disallowing withdrawals while accepting an CDIC insurance claim?

Thank you for your e-mail, in which you inquired about deposit insurance coverage provided by Canada Deposit Insurance Corporation (CDIC). I must point out to begin that CDIC does not provide legal advice to third parties and does not issue rulings on the interpretation or application of the Canada Deposit Insurance Corporation Act (“CDIC Act”), its by-laws, or any related legislation. These are legal matters for which only the courts can provide decisive answers. This reply is subject to those caveats.

CDIC is a federal Crown corporation created in 1967 to insure eligible deposits at member financial institutions in case of their failure. CDIC’s members are banks, trust companies, loan companies and cooperative credit associations that have CDIC membership.

Credit unions are not members of CDIC. The guarantee of deposits of credit union members in Ontario is a legal responsibility of the Deposit Insurance Corporation of Ontario (DICO).

For more information about DICO, you may wish to access their web site at http://www.dico.com or their toll free telephone line at: 1-800-268-6653.

This being said, in the event of failure of a banks, trust companies, loan companies and cooperative credit associations that have CDIC membership, depositors do not have to file a claim. CDIC contacts insured depositors advising them of the amount of insured deposits and of the method of payment. Depositors are reimbursed as soon as possible, depending on the size and the circumstances.

CDIC may make payment by making the amount of insured deposits available at another member institution, or by issuing cheques to insured depositors. Accrued interest (monthly or annually), will be calculated on eligible deposits up to the date of the deposit insurance payment or the date on which a court application is filed to wind up the failed, whichever comes first, and will be included in the deposit insurance payment, subject to coverage limits.

CDIC insures eligible deposits at each CDIC member institution up to a maximum of $100,000 (principal and interest combined) per depositor (or, in the case of joint deposits, per set of joint owners), for each of the following:

(a) savings held in one name,

(b) savings held in trust for another person,

(c) savings held in Registered Retirement Savings Plans (RRSPs),

(d) savings held in Registered Retirement Income Funds (RRIFs),

(e) savings held for paying realty taxes on mortgaged property, and

(f) joint deposits (savings held in more than one name).

To be eligible for deposit insurance, deposits must be payable in Canada, and in Canadian currency. As a general rule, a deposit is considered to be payable in Canada if it is held at a branch or office of a CDIC member institution in Canada.

Eligible deposits include savings accounts, chequing accounts, GICs or other term deposits with an original term to maturity of 5 years or less, money orders, certified cheques, and bank drafts issued by CDIC members, and debentures issued by loan companies that are CDIC members.

For more information on CDIC and deposit insurance, you may wish to visit CDIC’s Web site at www.cdic.ca , or call CDIC’s toll-free information line at 1 800 461-2342.

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Can you help me understand the process of submitting a claim for an insurance deposit. Here is the hypothetical situation and I am unclear how it carries out:

- say, I have $50,000 in a BC credit union-- a member of the CUDIC
- the credit union becomes financially insolvent and cannot allow members to withdraw any of their money
- How would I get the $50,000 or be able to withdraw it? Does the CUDIC issue the insurance claim pay-out? Is it issued to the bank? How would I know if they have those funds? What is the mechanism that would prevent them from disallowing withdrawals while accepting an CUDIC insurance claim?

Thank you for your e-mail inquiry regarding payout procedures from the Credit Union Deposit Insurance Corporation ("CUDIC') in the event of a credit union becoming financially insolvent.

CUDIC's responsibility is to administer and operate the deposit insurance fund. The Financial Institutions Commission (FICOM), an agency of the Government of British Columbia, is responsible for administering CUDIC and for administering the regulation of financial institutions operating in the province.

In answer to your inquiry, procedures are in place for CUDIC to issue cheques to depositors or transfer funds electronically to the depositor's financial institution of choice, and to redirect electronic or preauthorized payments, in the event that a credit union is unable to pay its depositors.

I trust that this information will be useful in resolving your inquiries. If you require further assistance from our office, please call the Contact Centre directly at 604 953-5200.