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CDIC Annual Public Meeting - May 15, 2019
May 9, 2019
7:32 pm
Doug
British Columbia, Canada
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CDIC, of which we all, as Canadian citizens, own indirectly, will be holding its Annual Public Meeting at a Payments Canada summit on May 15, 2019. You can pre-submit any questions via e-mail or Twitter and they'll do their best to ask as many questions that members of the public submit. No idea if the meeting will be webcast live, but I suspect an archived webcast will be available via either the CDIC website or, at a minimum, CPAC's website (which often covers such government agency and Crown corporation meetings).

Former National Bank Financial bank stock analyst and current CDIC President & CEO Peter Routledge will give one of the keynote speeches.

CDIC will also unveil what it calls an "ambitious" goal being "T+0," which means that depositors will be reimbursed on the same day that a CDIC insured financial institution failed. Part of this strikes me as a bit of marketing/PR fluff, since most, if not all, CDIC member institution failures see the failed financial institution's assets and liabilities absorbed - in full - by way of a transfer to an assuming financial institution. Nevertheless, it helps their branding of CDIC being like a warm, snuggly, purple security blanket. 😉

Separately, and further to discussion here and here, I was able to glean a few more details on the CDIC Act modernization - some of the changes of which are either in force or not yet in force. So, aside from the elimination of the 5-year maximum on GIC terms and inclusion of foreign currency deposits in CDIC insurance, here are the lesser known changes we didn't yet discuss and which were from its 2018 Annual Report:

  • Provide separate coverage up to $100,000 for deposits held in Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs) [already discussed]
  • Set out specific coverage and disclosure requirements for the following types of deposits held in trust:
    – Nominee broker deposits
    – Professional trustee deposits
    – General trust deposits [this is all a good step; will be interesting to see how this plays out - watch this space]
  • Remove separate coverage for deposits held in mortgage tax accounts, which will be covered under the individual or joint categories instead. [this surprised me a bit, as this has been a long-standing, separate CDIC deposit insurance category. I was surprised by the suddenness that CDIC would just eliminate deposit insurance on previously eligible deposits. They're still insured, but as part of your non-registered deposit limit (sole or joint, depending on how the mortgage property tax account is held). This is how TFSAs used to be.]
  • Eliminate coverage for travellers’ cheques, as member institutions no longer issue them [kind of surprising, since Scotiabank still cashes American Express travellers' cheques and there's still quite a few travellers' cheques in circulation]

Other highlights from CDIC's annual report:

  • CDIC's undrawn borrowing limit with the Government of Canada's Consolidated Revenue Fund (or from "market sources") was increased by $1 billion from $22 billion to $23 billion (pg. 3)
  • CDIC has $4.3 billion Canadian in cash and cash equivalents/marketable securities, namely AAA-rated corporate and government debt securities, that it can tap to cover insured deposits, in addition to its borrowing limit
  • CDIC insured deposits, calculated as at April 30, 2018 following its fiscal year-end, was $774 billion Canadian, an increase of $33 billion Canadian, or 4.4%. By comparison, TD Canada Trust has ~$900 billion Canadian in Canadian and U.S. customer deposits, about half of which were booked in Canada, so that shows that there's a large percentage of non-CDIC insured deposits.
  • Domestic banks and subsidiaries increased from 47 to 50. Domestic trust companies remained constant at 15. Foreign bank and branch subsidiaries numbered 17.
  • There are four (4) categories that CDIC member institutions pay for deposit insurance, which are calculated as basis points (less than 1%) of insured, on-balance sheet deposits for the year. CDIC and/or OSFI assign members into a risk category, with the lower the number being the lowest risk and thus they pay the lowest premium. One would suspect that the "Big 5" banks, and their subsidiaries, are at Category 1. Category 1's premium is 6.5 bps (0.065%) of insured deposits. Category 2 is 13 bps (0.13%). Category 3 is 26 bps (0.26%). Category 4 is 33.3 bps (0.333%). Understandably, CDIC does not disclose which category institutions are assigned and the CDIC Act prohibits members from disclosing which category they've been placed. For the most recent recent April 1, 2017-March 31, 2018 fiscal year, there were 83 institutions in Category 1; 11 in Category 2; 5 in Category 3; and 1 in Category 4. One might be able to figure out which category a given institution is in by cross-referencing the CDIC annual report with the institution's public financial statements, if available, and examining what they paid in deposit insurance from their Statement of Cash Flows and their total deposits from their Balance Sheet.

Cheers,
Doug

May 9, 2019
8:18 pm
AltaRed
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Good info Doug. Some of us can guess approximately which category a few FIs might be in by the credit rating of their GICs.

Example: of all the GIC issuers carried by Scotia iTrade, I believe Home Trust is lowest at BBB- .

May 9, 2019
9:30 pm
Doug
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AltaRed said
Good info Doug. Some of us can guess approximately which category a few FIs might be in by the credit rating of their GICs.

Example: of all the GIC issuers carried by Scotia iTrade, I believe Home Trust is lowest at BBB- .  

Thanks for your comments, as always, AltaRed...yeah, credit rating might be a good start, but I looked up the CDIC premium risk calculation from their sample financial data form and it has more to do with capital and liquidity, I believe. Hard to say where Equitable and Home Capital are, but I suspect maybe Category 2? They might surprise and be Category 1, seeing how many FIs are in Category 1.

My "hunch" would be Bridgewater Bank might be the Category 4, but it's just a hunch and based mostly on their delinquencies and far lower than average credit quality/type of lending they do. I may also well be wrong, too.

As far as corporate credit ratings go, I believe BBB- is the lowest investment grade credit rating, right?

Cheers,
Doug

May 9, 2019
9:42 pm
Norman1
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Home Trust Company's long-term debt rating is not back to investment grade yet.

In March, DBRS upgraded them from BB(low) to BB.

May 9, 2019
9:51 pm
Doug
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Norman1 said
Home Trust Company's long-term debt rating is not back to investment grade yet.

In March, DBRS upgraded them from BB(low) to BB.  

Thanks, Norman...so that confirms that Scotia iTRADE is not good at updating its GIC issuer credit ratings, then. 😉

Cheers,
Doug

May 10, 2019
10:32 am
AltaRed
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Doug said

Thanks, Norman...so that confirms that Scotia iTRADE is not good at updating its GIC issuer credit ratings, then. 😉

Cheers,
Doug  

Or their CDIC insured debt, i.e. GICs, rates higher. Wouldn't be the first time I've seen different ratings on debt, e.g. senior debt vs subordinated debt vs debentures.

I was guessing HCG was the Category 4 on the CDIC list but then Oaken should be rated the same as Home Trust I'd think. BWTFDIK

Edit: Just checked on Scotia iTrade. They do list Home Trust GICs as BB... Mea culpa. It is Equitable Bank listed as BBBL or as some say, BBB-

May 10, 2019
10:40 am
Doug
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AltaRed said

Or their CDIC insured debt, i.e. GICs, rates higher. Wouldn't be the first time I've seen different ratings on debt, e.g. senior debt vs subordinated debt vs debentures.

That's definitely possible. Or, Scotia iTRADE uses a different ratings agency versus the DBRS that Norman quoted. Multiple possibilities here. Good point. sf-cool

I was guessing HCG was the Category 4 on the CDIC list but then Oaken should be rated the same as Home Trust I'd think. BWTFDIK

Edit: Just checked on Scotia iTrade. They do list Home Trust GICs as BB... Mea culpa. It is Equitable Bank listed as BBBL or as some say, BBB-  

Yeah, exactly...since they rate member, not parent company, it would be odd that they would rate Home Trust (or Home Bank) lower than the other. So, that's why I don't think it was Home Trust/Home Bank. Could also be an institution we'd not even considered, like potentially a Haventree Bank, a Home Equity Bank, a Street Capital Bank, or even a President's Choice Bank. Could've also been one of the obscure loan and mortgage companies. So hard to know. 😉

Cheers,
Doug

May 10, 2019
6:12 pm
AltaRed
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In any event, I really don't have the knowledge nor the desire to try and find out who is Cat 3 or 4. I wouldn't go over CDIC limits for any FI with less than an A- credit rating anyway.

May 11, 2019
9:24 am
Norman1
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Scotia iTRADE shows the DBRS long-term debt ratings for the GIC issuers.

DBRS uses the low and high modifiers, like BB(low). S&P and Fitch use the plus and minus modifiers, like BBB+.

The debt ratings reflect the risk of default. It is still a default should one receive the full principal and interest late and not on the maturity date and interest dates of the GIC.

Now, deposit insurance guarantees that one will eventually recover the owed principal and interest. But, deposit insurance does not guarantee that money will be received on time. Consequently, deposit insurance does not affect default risk and debt ratings.

DBRS has a different RR rating scale to reflect recovery rates in the event of default.

May 11, 2019
10:49 am
Doug
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Norman1 said
Scotia iTRADE shows the DBRS long-term debt ratings for the GIC issuers.

Thanks for double-checking, Norman. It seems like Scotia iTRADE's ratings may be out of date, then.

Now, deposit insurance guarantees that one will eventually recover the owed principal and interest. But, deposit insurance does not guarantee that money will be received on time. Consequently, deposit insurance does not affect default risk and debt ratings.

Right, and CDIC is set to announce a goal of "T+0" on May 15, 2019, at their Annual Public Meeting, meaning that insured deposits would be paid on the same day that an institution failed. That's their goal, which I certainly view as achievable, primarily since most if not all CDIC member institution failures have not resulted in deposit insurance limits coming into place as CDIC has the assets and liabilities transferred to a new CDIC member. With their expanded intervention powers, they even temporarily assume the day-to-day management and governance of a troubled institution to ensure a timely wind up or transfer of operations.

Now, whether we'd be paid so quickly with provincial credit unions that fail is entirely different matter ... 😉

Cheers,
Doug

May 12, 2019
6:57 pm
Norman1
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It is good that CDIC is aiming for "T+0" payouts in the event of a failure. That won't be easy to do in all cases.

Deposit records are maintained by the deposit taking institution itself and not by CDIC. That makes them open to tampering.

Luckily, I haven't see any cases where a financial institution has tried to mask the effect of the losses on its loans (loss of assets) by "adjusting" its deposits (its liabilities) so that they aren't as far apart.

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