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Provincial deposit insurance, Manitoba rates, etc
December 31, 2011
1:00 pm
NorthernRaven
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Since the questions of provincial deposit insurance and Manitoba savings and GIC rates come up often, it might of of interest to have a discussion thread for this. I know I was curious enough to do a little research of my own, so here's some what I've found and my opinions on it – I'll do posts as I get a chance. This is partly spurred by a post elsewhere on these forums:

The reason Manitoba Credit Unions pay high interest rates is that they are NOT CDIC insured. – this is somewhat silly. The 5-year GIC rate at Big5 banks is currently around 1.85%, but you can get better rates from other CDIC institutions, all the way up to 2.75% (from Ally and others). Manitoba CUs are running around 3.5%, which needs to be explained (I'll take my shot below), but does not necessarily represent a risk premium, (and you can actually get matching rates from Peoples Trust, a CDIC institution). Also, non-Manitoba CUs do NOT offer Manitoba GIC rates, despite also lacking CDIC insurance.

…how much does the Credit Union insurers have on deposit? I could not find this amount anywhere…you would think they would make this public… – I can only assume this was a lack either of interest or basic research skills. The annual reports of the Deposit Guarantee Corporation of Manitoba (DGCM, formerly CUDGC) are online, and show the Manitoba fund was a bit over $160 million at the end of 2010. I'll post some basics on the various provincial guarantee funds below.

…as for bailing out the investors in a run on deposits or a collape this would not be political acceptable and not likely to happen…if the Achieva's /Accelerate's and Maxa's were to go bankrupt the Government would not step in to cover losses for investors across Canada with Manitoba taxpayers funds…it is rather an unhelpful contribution to throw up phrases like "run on deposits" and "bankrupt" without actually providing any balanced discussion. I'll give my opinions below.

December 31, 2011
2:05 pm
NorthernRaven
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I'm no banker, but the Manitoba rates did catch my attention, and I've done some work to try and figure them out. For brevity I'll present them as assumptions, and feel free to challenge them, but I've pulled figures from annual reports for most of the big Manitoba CUs and a few from other provinces, asked a couple of questions of regulators and such, so I'm not just winging this off the top of my head!

Manitoba credit unions loan portfolios aren't dramatically different from CUs in other provinces. Credit unions seem fairly bland as banking goes - they'd be making mortgage, commercial and agricultural loans, as would, say, a CU next door in Saskatchewan. Manitoba CUs' interest income as a percentage of loans seems to fall squarely in the general range of Canadian credit unions - no evidence they specialize in Florida swamp developers or other high-margin, high-risk loans, which of course would be worrying. Their "risk-weighted capital" numbers seem reasonable as well.

Manitoba credit unions pay out more as interest as a percentage of deposits (those GIC rates and such), so have a higher cost of funds. So they have normal revenue, but higher interest costs.

Manitoba credit unions are profitable, and reasonably capitalized. So the excess interest has to come from elsewhere.

Operating costs - A couple Manitoba credit unions (Crosstown [Accelerate] and Cambrian [Achieva]) seem to be at the top of the list for "efficiency" (a measure of operating costs against revenue). Lower costs (salary, branch, whatever) could provide part of the cost of the higher interest paid. Part of this is probably due to the non-resident online deposits the higher rates can attract, since this would be a lot cheaper than attracting deposits through branch banking.

Dividends - a bank pays out a chunk of its profits to shareholders as dividends. If it instead spent some of this money on higher GIC rates for customers, the shareholders would be unhappy. For a credit union, the shareholders are the customers, so they benefit either way. Credit unions often distribute a share of profits to members as dividends or "patronage refunds", etc. I suspect that at least some of the Manitoba CUs may do less of this, and instead funnel that money to customers as higher rates.

So in theory other credit unions could probably do something similar, if they sharpened their pencils and tweaked their ledgers as Manitoba seems to have done. I suspect the reason they don't is that credit unions are generally restricted to offering membership to residents of their own province - Manitoba presumably allows this. In any case there is little sense in setting up an online division and implicitly targeting Canada-wide deposits unless you have something like those Manitoba rates to interest people in considering some remote credit union.

December 31, 2011
4:29 pm
NorthernRaven
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For provincial deposit insurance, let take a look at Ontario (DICO). It is an "agency" of the provincial government, and people seem to assume that the government would be required to cover any debts from the guarantee. When you look more closely, though, it turns out be an "operational enterprise", and DICO declines to comment on the legal liability, referring you to the Ministry of Finance, which never responded. However, the Ontario auditor-general's office did, saying:

DICO is in fact classified as a “Trust” and therefore its results are not consolidated in the Province’s financial statements (Public Accounts). Typically, an agency is classified as a Trust when the government is under no obligation to finance their operations, but rather that responsibility rests with the agency’s stakeholders.

This is a very strong indication that whatever the practical realities, Ontario is not legally required to cover DICO's debts (they have provided DICO with a line of credit, which is a separate matter).

If you look at Manitoba's DGCM, they, like DICO, are established by provincial legislation with directors appointed by the government, and act as the provincial regulator of credit unions. So for all effective purposes it is similar to DICO and other provincial guarantee/regulator setups. Manitoba explicitly indicates that it is not obligated to back DGCM, but as we've seen neither is Ontario with DICO, and nothing prevents either government from doing so in times of trouble should it wish to, which is a separate issue.

I suspect most provinces are similar - I can't find a case where a provincial guarantee corp can explicitly be shown to be an unlimited liability on that government's credit. Alberta has some wording in its Act that the government will "ensure that the obligation [of the guarantee corp] will be carried out", which might be a stronger legal hook in some sort of ultimate collapse scenario, although I'd argue that economic realities make these cases rather moot.

December 31, 2011
6:44 pm
NorthernRaven
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So, provincial guarantee funds. Manitoba's is a bit over $160 million (as of the end of 2010), which represents about 1% of deposits, and is actually proportionally larger than most provinces. BC's is about 0.76%, Alberta's about 0.89%, and Ontario's is rather small at about 0.4%; those conservative Saskatchwanites have a fund of around 1.35%. Any of these funds are probably fine for helping little piddler credit unions merge or dissolve, or resolving difficulties in a larger one.

Some of the provinces (especially during the global financial mess) have provided a line of credit (a potential loan) for their guarantee corps. Ontario for instance backstops its small-ish fund with a $250 million line of credit, which takes the potential resources up to about 1.5% of deposits, and BC provides a $200 million line which with their fund would be about 1.25%. I suspect Manitoba feels there is enough confidence in DGCM to not require an explicit provincial line of credit in place (Saskatchewan with its even larger fund doesn't seem to have one either), but this is certainly not the same as saying they wouldn't do so if necessary. It is perfectly reasonable thing to wonder about, but the assumption that Manitoba would provide no additional assistance to the DGCM and allow it to fail runs into some pretty big associated consequences, at least in my opinion.

Manitoba's credit unions seem to have a direct payroll of around $150 million (3500 people), plus any indirect multipliers. That's a healthy amount of corporate taxes and employment, as well as profits retained in the province that would otherwise flow out to the big banks. This alone would provide the Manitoba government with a pretty good incentive to provide assistance to DGCM. Along with Saskatchewan, they've got the highest rate of credit union participation in the country (up to 45-50%) - credit unions must play a major role in the Manitoba lending scene, and a big percentage of Manitobans' savings would be with credit unions. I'd challenge anyone to come up with a scenario where the deposit guarantee fails, and there isn't a crisis of confidence, a massive flight from the credit unions to CDIC banks, and probably a complete collapse. It would take a pretty persuasive argument (or very extreme financial conditions) to claim the Manitoba government wouldn't provide some credit guarantees, or even take some actual losses, rather than have this happen.

DGCM's guarantee applies to residents and non-residents alike. Lawyers being what they are, I'd want to see a compelling argument before believing that there would be a way to inject funds into DGCM but pay out only Manitoba depositors. If DGCM were allowed to go bankrupt and Manitoba residents somehow repaid as a separate exercise by the government, you'd still have most of the crisis of confidence/CU collapse problems from above.

None of this is unique to Manitoba - it would apply anywhere you assume a sufficient meltdown and no additional government support.

December 31, 2011
9:22 pm
NorthernRaven
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But, let's say the "We Hate Credit Unions" party is in power in Manitoba (or whatever province), and see what sort of things could stress a guarantee fund. We'll have to find ways to put massive holes in the balance sheet of one or more credit unions, which effectively means that their loan portfolio has somehow taken an immense drubbing.

First, the assumption is that the portfolio is basic loans (mortgage, personal, commercial, agricultural) within Manitoba – a credit union isn't going to have a safe-full of Greek bonds lying around, or Florida swampland. There may be some (or even quite a few) bad loans, but in general to have bad things happen to the credit union requires bad things to happen to the Manitoba economy. The riskiest home mortgages (< 20% equity) are probably insured (CMHC requirements), so a housing collapse would in part be offloaded outside the credit union, for instance.

Second, the problem has to be large enough to overwhelm the CUs own resources. These include the annual operating profit, the portion of assets that are held as fairly liquid investments rather than as loans, and the members' equity. Obviously there would be liquidity issues and the CU would be shut down before this all was exhausted, but if you are assuming insolvency and DGCM losses it is all available.

Take Cambrian (just as an example – it would appear to be a very healthy and happy credit union!). Their 2010 year-end statement shows around $330 million in cash and investments (about 15% of their $1.8 billion loan portfolio). Add in their $15 million+ annual net revenue and you have to build a story that wipes out $350 million in loan value even before the $160-200 million the DGCM could provide. If you argue for multiple credit union failures, you get even closer to requiring a complete meltdown of the Manitoba economy. My suspicion is you'd need Martian deathrays or an Irish property bubble, not just a severe recession.

January 2, 2012
7:38 am
Yatti420
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Well spoken. I think the entire non-cdic insured deposit thing is a little overblown.e

You can find the Manitoba Regulators annual report here.. http://depositguarantee.mb.ca/.....Report.pdf

You can find additional information on wide array of CUs in many provinces here..

http://www.cucentral.ca/

See yal,

January 2, 2012
3:37 pm
reg
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Interesting...but in layman's terms, bottom line:

Is it a safe bet to say: putting your money into Achieva/Outlook is a safe thing to do...and I am talking over $100,000 in each.

Bottom line: Can I sleep at night or not?

While I appreciate the information and obviously hard research you did, I still like the "just the facts" so could you answer these questions above:

Am I doing the right thing by using Achieva/Outlook credit unions to put my money there so I can collect a good interest rate for all the hard-earned money I made so I could live comfortably (or at least break even) rather than try to live on less than $30,000 a year?

I eagerly look forward to your comments!

R

January 2, 2012
10:26 pm
Ken
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I have no problem stashing away with non-CDIC guaranteed provincial credit unions, because they are arguably BETTER protected.

The CDIC, when I last checked, has only 0.3% capital plus a line a credit. Even if they drew upon their LOC, I think that their coverage would be less than the 1% Manitoba offers or 1.35% Saskatchewan offers. (corrections to my numbers anyone?)

It's OK to "feel better" about the CDIC protection scheme, and it's mandate, but I don't understand why people ignore the inferior (and hopefully not insufficient) coverage. Hmmm, 1.35% coverage or 0.3%...

January 3, 2012
6:59 am
NorthernRaven
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@reg: I certainly wouldn't want to give anyone investment advice! I have great difficulty seeing how to blow a large enough equity hole into the Manitoba credit union system to cause a failure of the guarantee fund, short of some massive meltdown of the provincial economy, but everyone has to find their own comfort level for their investments.

Does anyone know if a "big" credit union has ever failed in Canada? In the US it would seem that from 1981-2005, out of around 3500 credit union failures (mostly small-fry), not a single one was "large" (> $250 million in assets). I don't know if that perfect record survived through the recent turmoil, but the point is that once they get to a certain size, they it would seem to take something very exceptional to actually cause one to go insolvent, and something hugely systemic to make an entire province's collapse. Manitoba's 5 online CUs range from $750 million - $3 billion in assets.

@Ken - CDIC's fund is around 0.37%, which is over $2 billion and presumably enough for any likely trouble with small or medium banks. The line of credit (with the Canadian government) is massive (around $17 billion) and the total would be over 3% of insured deposits. More importantly, worries about CDIC are effectively worries about Canada going bankrupt or otherwise unable to recapitalize their banks. Whatever the improbability of Manitoba being unwilling or unable to sustain its financial sector, it is just a little less of a sure thing than that... :)

January 3, 2012
8:34 am
88kanaka
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I have not seen a CU in Canada...BC for sure go under as when they are in financial difficulty they usually merge which I would assume happens in the rest of the country too. I have seen a lot of "trust" companies go under in the last 40 years although I do not know if members lost any money. Therefore I would personally deal with a CU or a CDIC insured institution.

January 3, 2012
12:09 pm
Stan
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NorthernRaven said:

It would take a pretty persuasive argument (or very extreme financial conditions) to claim the Manitoba government wouldn't provide some credit guarantees, or even take some actual losses, rather than have this happen.

This is not the government's responsibility to insure credit unions. It is the responsibility of the combined credit unions in Manitoba to come up with the funds to prop up a failed credit union. And if the combined credit unions do not have the funds to take care of a single failed credit union, then our problems are far worse than the failure of a single credit union.

January 3, 2012
1:10 pm
NorthernRaven
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Stan said:

This is not the government's responsibility to insure credit unions. It is the responsibility of the combined credit unions in Manitoba to come up with the funds to prop up a failed credit union. And if the combined credit unions do not have the funds to take care of a single failed credit union, then our problems are far worse than the failure of a single credit union.

Actually, the DGCM is ultimately responsible for the deposit guarantee. It is set up by legislation with this purpose clearly defined, acts as the regulator, etc, just like DICO in Ontario. If you feel that Ontario has a greater obligation to its system than Manitoba and Saskatchewan, you'll have to be clearer.

DGCM is specifically enabled to "enter into an agreement with [CDIC], the Government of Canada or Manitoba, or an agent [thereof] to extend [to DGCM]…loans or insurance…". If the DGCM fund were at Ontario levels, I suspect you'd probably see a similar line of credit put in place by Manitoba for awhile. Since they don't, it's a fair question, but you have to come up with a pretty convincing argument as to why any provincial government (and indeed, Canada) would be unwilling or unable to provide liquidity support to prevent their sector from collapsing.

January 6, 2012
7:02 pm
cmore@shaw.ca
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Over the past 10+ years I have steadily moved all my regular savings and retirement savings from RBC, ING & Citizens to Achieva Financial. Throughout these years, Achieva proved to offer the most consistency with their rates and their parent company, Cambrian Credit Union has the strongest equity & profitability out of all Manitoba Credit Unions. Over the years I have spoken to a representative of the Deposit Guarantee Corporation, who has assured me their reserves are audited by an independent Actuary to ensure appropriate solvency (similar to a pension fund).

All I know is that I am a very risk adverse investor and have done my homework. While I'm sure Outlook is good, Achieva offers me electronic access to my funds, pay me $1 a month for taking my statement online and the consistency of having very high term deposit and RSP interest rates. The full guarantee also helps me sleep very comfortable at night!

March 21, 2017
8:01 am
Sonz
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Hello NorthernRaven and friends: NR - very impressed with your overall summary of the Manitoba credit unions. I personally have had cash in both Achieva and Outlook for more than 10 years. My experience with Achieva has been positive overall although I only have registered funds.

Q1: As for Outlook - I was attracted by the ability to redeem your GICs versus having them locked in. In purchasing property in Northern BC, I ran into some issues with Outlook taking their sweet old time to transfer non-registered funds out (that were sitting in my HISA), which had me wondering if this is the case for all these Manitoba Credit unions when you need access to your own hard-earned savings sitting in non-registered HISA?

Q2: More recently, I'm looking for more CUs to spread some retirement cash and spread the risk. The last time you did this exceptional summary (and research), it was over 5 years ago and wondering if you have any further insights on the financial stability (from the statements) to offer an opinion of which CUs you would choose today in Manitoba?

Q3: What is the maximum cash you would park in each CU (considering the guarantee on all your funds)?

BTW - these questions are not just limited to NR - feel free to jump in and offer your perspective.

March 22, 2017
2:48 am
Loonie
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Gppd questions, Sonz. I wouldn't want to hazard an answer but hope somebody else does.

March 22, 2017
12:17 pm
NorthernRaven
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If you have retirement funds in Manitoba credit unions, but are worried about losing the money, CUs may not be the place for you... 🙂 If one is worried about the Manitoba guarantee fund, you can usually find a couple CDIC institutions offering GIC rates similar to Manitoba at any given time (Peoples Trust and Oaken these days). Of course, something like Peoples might still go kablooey, and you'd have to wait through whatever CDIC resolution process happened.

I'm not sure how spreading funds amongst many CUs is an actual benefit. Presumably any particular CU that somehow goes insolvent (investing in Flin Flon swampland when the regulator wasn't looking?) gets cleaned up by the guarantee corp. If multiple CUs go kaput (how?), either things will work out, or Manitoba's economy has imploded and they (and the feds) have let their banking system collapse, which there's not really much precedent for. Again, if stuff like this has someone worried, just dump things in the big systemic banks like RBC.

March 22, 2017
5:05 pm
SavingIsGood
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I do trust them all my savings. RRSP are in solid mutual fund and banking stocks.
Your next option is to open accounts in every single bank in Canada having CDIC insurance and park 100K in each account. If you have a 1M that will mean 10 accounts with 0% or so interest.
If Manitoba goes belly up, the whole Canada is not far behind and then you better have your shotgun ready with a lot of ammo.

March 30, 2017
7:08 pm
Sonz
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Thank you kindly for the suggestions. It prompted me to investigate CDIC coverage and was quite surprised to learn that you can park a lot more cash than I thought in a CDIC insured bank. This article explained it quite well...

https://retirehappy.ca/cdic-goes-further-than-you-think/.

I would prefer to have joint accounts with my spouse to avoid probate fees here in Ontario but safety comes first and the thought of having more than 10 bank accounts feels scary.

Really appreciate the insights, research and opinions.

March 30, 2017
7:34 pm
Loonie
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Sonz, some of the info on the site you cited is inaccurate.
It claims that a person could have 100K insured in a savings account in addition to 100K in a GIC, at the same institution, and that both would be covered. This is not the case. Savings, chequing and GICs all come under one umbrella with CDIC, to a maximum of 100K altogether. If the money is in an RSP or TFSA, then it would count for another 100K.

It's best to just go by what the CDIC tells you, rather than a secondary authority. They have revamped their site, and it is now actually more difficult to find this information, but you can always email them to confirm.

You can try using this tool
http://www.cdic.ca/en/about-di.....mator.aspx

Nonetheless, it is possible to double up on coverage through other routes such as joint and single accounts, unregistered, TFSA, RSP, and also the multiple financial entities within various banks - mostly the major banks although Oaken also offers two of them (Home Trust + Home Bank).

If you and your spouse maxed out with TFSA, RSP, unregistered, in joint accounts where possible, at Oaken, you could have up to 1,000,000 coverage. However, it's unlikely you would because TFSAs haven't been around that long and you may not yet have this much in your RSPs.
It would go like this:

TFSA 100K x 2 entities x 2 people = 400K
RSP 100K x 2 entities x 2 people = 400K
Unregistered Savings/GICs 100K joint x 2 entities = 200K
TOTAL.....................................................................1,000,000.

March 31, 2017
9:24 am
NorthernRaven
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Loonie said
Sonz, some of the info on the site you cited is inaccurate.
It claims that a person could have 100K insured in a savings account in addition to 100K in a GIC, at the same institution, and that both would be covered. This is not the case. Savings, chequing and GICs all come under one umbrella with CDIC, to a maximum of 100K altogether. If the money is in an RSP or TFSA, then it would count for another 100K. 

I think that's the point the page is trying to make, but are a bit unclear. They list $620K of stuff, and point out that there's only $320K of coverage because the savings and GIC are merged.

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