Canadian High Interest Savings Bank Accounts

This is probably going to cause an outflow of cash from the credit unions as people spend to clean up. To attract more cash, the CUs might have to increase rates beyond the normal gap with the likes of Ally, etc. This would also make sense if there is a surge in demand for borrowing. Your thoughts?

Can you explain why Doug?

In my opinion, it depends on a number of factors. Take Westoba (Maxa) in Brandon for example. Are flood affected farmers a significant part of their client base? If so, are those farmers going to be looking to borrow money because of the floods, or perhaps not borrow? Maybe they typically borrow for seeding purposes and pay back later after harvest? Maybe it isn't borrowing, but more like drawing down savings. I just don't know, but I think there will be some kind of effect and find the topic interesting. There's also something like 700 homes at flood risk in the city itself. I wish them all the best out there.

What are the chances of Westoba going belly up because so many people are unable, due to flood, of paying the loans they already have?

Folks,

I have been struggling with this.

If there is no significant difference in risk between the canadian governmental guarantee of national banks, versus the non-governmental guarantee of the Manitoba system, why would a rational investor settle for 1.5% with ING (or considerably less at other banks) as opposed to 2% with Westoba?

Canadian deposit insurance is backed by the government. Manitoba credit union insurance is not. My guess is that the current flood situation may provide a robust test of the Manitoba system, particularly for a Brandon-based oufit.

For those interesed I have been looking at the numbers to see which investments offer higher reward for the greaer credit union risk.

It depends on term and tax.

First term: The regular liquid ING savings acct pays 1.5 while Maxa pays 2. This is a 33 percent difference. For every 75. $ you earn from ING, Maxa will give you 100. $ With a longer term, fixed gic, the spread narrows to .25% (.3% at two years and .25% from three years on). However, that is not all, because the .25 % is a greater proportional yield difference in the shorter terms. For example .25 is one eleventh of 2.75 (ing three year) but it is only one thirteenth of 3.25 (ing five year). So the difference changes from a whopping one third yield difference in the savings acct to only a one thirteenth difference of yield in the five year gic.

Next is tax: In the tax free saving acct, ING matches the maxa rate of 2 percent. This is an obvious ploy to get you in the door. For gic rates, they are the same as the taxable rate. But because you pay probably half of that in taxes the examples above must be divided by two. In other words, the after tax yield difference in the five year gic is only one twenty-sixth. That is just shy of four percent, so for every 96 $ paid you by Ing on a tax free five year, Maxa would pay you only four dollars more (as oppsed to 32 dollars more in the savings acct).

To sum up, the best MAXA deals are the short term taxable rates. And the least interesting are the long term tax-free rates.

So returning to my original worries, I wonder how much extra risk there really is, and if these numbers justify taking that risk.

I suspect the flood will have something to say about convincing me. Because, if there is no shake-out in the Manitoba credit unions this year, they are likely fine for the future. And if there is trouble, we will wee how well the back-up system performs.

Best Regards,

Gordon

im a little bit confused with your number crunching illustrations and computations but yeah, with your general statement:

"To sum up, the best MAXA deals are the short term taxable rates. And the least interesting are the long term tax-free rates."

i guess that says it easier to understand.