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Meridian Online Bank Launching in 2018
August 21, 2016
11:02 am
Norman1
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Depositors who are placing $500K are expected to make an effort to evaluate the risks and act appropriately. Yes, that can mean spreading the money across multiple institutions. That does actually reduce the risk. Failure of one institution won't result in a 100% loss.

No-one has to take any risk. At $500K, fixed income trading commissions won't be significant. At Scotia iTRADE, it would be no more than $250 or 0.05%. One could put the money into AAA-rated Government of Canada treasury bills, 100% backed by the federal government. The rate won't be great. Currently, it is around ½% per annum. sf-frown But, that's what companies do with their payroll money and pension funds do with their money to paid out shortly.

I don't think deposit insurance is for enabling depositors to pile unlimited amounts of money into riskier BBB-rated institutions, like Equitable Bank, or unrated institutions, like the credit unions, for the higher return and have all the risk born by a deposit insurer. That one can do that for $100K is just a consequence of how CDIC coverage is set up.

Companies and pension funds would just love to earn around 2% at Equitable Bank with their short-term cash, instead of the ½% in Government of Canada treasury bills, with CDIC bearing the risk!

August 21, 2016
12:18 pm
Loonie
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I take your point, Norman, but I wouldn't compare the situation of individual depositors to those of large pension funds etc.

Pension funds have enormous diversity built into their portfolios, so, while they would no doubt prefer to get 2% on deposits, they can afford not to.
The horizon of a pension fund is infinite, and no individual has that capacity - retirees least of all.
Buying TBills is not an option. To pay any commission for them at all is outrageous - we should be able to buy them like Canada Savings Bonds. They amount to negative interest after inflation alone, never mind taxes.

In any event, the choice of a 100K limit is an arbitrary figure, a nice round number. I think 500K would be more reasonable nice round number.* I wouldn't object to a graded system, whereby FIs that are less secure would have lower limits - and I'm sure the Big Banks would love me for that. The problem, though, is that I'm not sure I'd want to rely on the bond rating services for that assessment. Establishing valid criteria can be tricky.

As for the amount of risk born by deposit insurer, I will cry no tears for them. In the end it's all about the premiums. Insurers of all stripes insure all kinds of things, high risk and low risk. You can insure almost anything for the right price. It's about what the industry thinks it can get away with in terms of lowest possible level of insurance and of premiums. Those who agree with me need to make a big noise or nothing will ever change..

* By the way, the figure of 500K is not based on my personal circumstances. I just think it would provide safety for the vast majority of people, based on the stories I have read in various financial advice columns.
With virtually every mortgage-free home owner in Toronto and Vancouver being a millionaire, it will not likely cover them when they move out of the home ownership category. A great many of them became rich simply by doing nothing and will be quite unprepared for the responsibility of handling such a large amount of money.

August 22, 2016
8:15 pm
Loonie
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So, now that Oaken is offering 2 FIs, CDIC insurance has effectively doubled there. A couple could easily get 600K coverage in unregistered funds, and each individual could get 200K in RSP. Add in TFSAs and you have about 900K total (allowing that TFSAs are not yet at the 100K level per person in most cases). Add a few more years of TFSA contributions down the road and the family of 2 could easily have $1million at Oaken, all covered by CDIC. Problem is almost solved!

This reminds me that the Big Banks have all had this capacity for years - and even more. Most of them have about 3 to 5 CDIC-insured businesses under their umbrella. However, they rarely mention this or advertise it. I don't know why they don't, but clearly they could offer a million dollars coverage to a family of 2 without much effort. Their rates are terrible, but, still, it could be done, and it wouldn't be any worse than government bonds - and in some cases maybe better.

August 23, 2016
9:01 pm
Norman1
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Probably don't need to use multiple accounts to multiply coverage if one deposits the $1 million with one of the big banks.

These are the current DBRS ratings of the big banks and some governments:

DBRS Rating Issuers
AAA Government of Canada
AA (high) Province of Alberta
Province of British Columbia
AA Bank of Montreal
Bank of Nova Scotia
Canadian Imperial Bank of Commerce
Royal Bank of Canada
The Toronto Dominion Bank
Province of Saskatchewan
AA (low) National Bank of Canada
Province of Ontario
A (high) Province of Manitoba
Province of Quebec
A
A (low) Province of Newfoundland & Labrador
Province of Prince Edward Island

The uninsured deposits at the Big 5 are risker than a Canada Savings Bond. But, the deposits are slightly less risky than an Ontario Savings Bond.sf-embarassed The deposits are about the same risk as a Saskatchewan Savings Bond.

That's likely why companies have no problem leaving $10 million on deposit with one of the big banks.

August 23, 2016
9:12 pm
Norman1
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Not likely to get CDIC to increase coverage to $500K.

However, the last increase to $100K was in 2005. According to the Bank of Canada inflation calculator, $100K of goods in 2005 now costs about $120,350.

So, one could ask for an inflationary adjustment to $120K.

August 23, 2016
11:21 pm
Loonie
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I don't take DBRS as the last word on risk though.
Evaluating risk depends on your criteria and the way you perceive economies. DBRS has been known to be spectacularly wrong. See http://www.theglobeandmail.com...../?page=all And let's not forget that they are a for-profit privately-held wealthy company, not a public think tank.

There are some who think that the big Canadian banks are much more risky than is generally supposed. I'm not saying if they're right or wrong, but there are different opinions.

It's hard to imagine Alberta sustaining such a high rating given the challenges they face with so much of their economy in oil.

I bought PEI long bonds about 25 years ago. They had the lowest rating back then too - and the highest return. I wish they'd been even longer!

I'm not saying the banking/insurance industry would WANT to give us 500K coverage. If they had it their way, there might not be any coverage at all. I'm just saying that's what I think would be a good number. It's enough to allow most people who have the money put aside in various pockets to enjoy a middle class retirement.

In fact, CDIC coverage has NOT been keeping up with inflation. CDIC began in 1967 and initially, for unknown reasons, offered $20,000 coverage (according to wikipedia). If they'd kept pace with inflation, they would now offer coverage over $141,000. And that's only the Official rate of inflation, which always seems less than my reality. (Only today, for instance, Ontario announced that annual car licensing fees would be going up 11% next month. And that's only one small example. In 1967 in Toronto you could still buy a modest house for $20,000. Today, that modest house would probably cost about $700,000, if you could find one to buy - about 5 times the official rate of inflation.)

August 24, 2016
4:23 am
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Loonie said
There are some who think that the big Canadian banks are much more risky than is generally supposed.

Could you tell us who "some" are? That is not what I read or my experience reviewing financial statements as part of my background. Reality is the big 5 Canadian banks are among the strongest, most profitable and best regulated in the world - yes - there is risk - but actually very low for Canadian big banks.

Loonie said
It's hard to imagine Alberta sustaining such a high rating given the challenges they face with so much of their economy in oil.

Very true - Alberta economy is in bad shape and getting worse as investment in oil and gas industry "dries up" - and the economic effects take hold on other businesses and individuals supported by oil and gas prosperity - increasing unemployment, more welfare, less taxes being collected by govt, higher deficit, higher debt, etc. etc. No doubt, very soon, Alberta rating will be lowered from the AA high.

August 24, 2016
11:39 am
Loonie
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Sorry, I don't maintain a list of critics of our banks. I'm sure that you can find them though, if you look for them. It can't be that hard, if I have found them.

It's not my goal to get into a discussion of whether the critics are correct. I am merely noting that there are contrary opinions. To be a "true believer" in our banking system, to think they could never be vulnerable, is, to me, very problematic. As Bill noted in a recent post somewhere here, we are in global economic difficulty such as we have not seen before. So, who knows where it will end up and where the fallout will be felt?

August 24, 2016
8:19 pm
Norman1
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Loonie said

I don't take DBRS as the last word on risk though.
Evaluating risk depends on your criteria and the way you perceive economies. DBRS has been known to be spectacularly wrong. See http://www.theglobeandmail.com...../?page=all And let's not forget that they are a for-profit privately-held wealthy company, not a public think tank.

There are some who think that the big Canadian banks are much more risky than is generally supposed. I'm not saying if they're right or wrong, but there are different opinions.

I think that is setting aside rating agency estimates of default risk way too easily.

Ratings agencies, like DBRS, provide a highly informed estimate of default risk. They have access to public information and are also given access to non-public information from the companies they rate.

Not a single one of the ratings agencies has ever said default risk is zero. Not even for their top AAA rated issuers.

Subjective criteria and economic outlooks are not as important as you suggest. I don't see one rating agency issuing a AA rating to a company that receives a BB rating from another rating agency. We are talking here about ability to service their debt on time and not ability to grow earnings and share price.

There's always contrary opinions. My challenge is to find contrary opinions that are informed and filter out the majority that are just garbage. If someone thinks that the banks are higher risk than DBRS, S&P, and Fitch estimates them to be, then let's hear their reasoning. The reasoning better be more than some superficial hand waving like "bitcoin will one day take over and we won't need intermediaries like the banks!"

I think we are challenged by risk because it is not black and white. The question is not "Is it safe or is it risky?" That's the wrong way to look at risk, whether for investments, medical treatments, or life.

The question to ask is "How risky is it?" If an uninsured bond in a big bank has about the same risk as an Ontario Savings Bond and one can sleep with $50,000 in Ontario Savings Bonds, then it is irrational to worry about being $20,000 over the CDIC limit with a big bank.

I think it can be argued whether the banks should be up one notch to AA(high) or down a notch to AA(low) instead of AA. That's not that significant.

I think the ratings from DBRS (and other ratings agencies) are an accurate estimate of the risks in the uninsured deposits of the big banks in relation to government bonds.

August 24, 2016
8:45 pm
Norman1
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Loonie said
It's hard to imagine Alberta sustaining such a high rating given the challenges they face with so much of their economy in oil.

Brian said
Very true - Alberta economy is in bad shape and getting worse as investment in oil and gas industry "dries up" - and the economic effects take hold on other businesses and individuals supported by oil and gas prosperity - increasing unemployment, more welfare, less taxes being collected by govt, higher deficit, higher debt, etc. etc. No doubt, very soon, Alberta rating will be lowered from the AA high.

DBRS does not agree. The oil and gas situation is already reflected in the April downgrade from AAA to AA(high).

The April 15, 2016 DBRS report, along with the reports from two other ratings agencies, can be found at Alberta Treasury Board and Finance: Provincial Borrowing.

DBRS feels that the AA(high) will stay because Alberta still has lots of financial ability to deal with the adverse conditions in the oil and gas sector:

The Stable trend [of the current AA(high) rating] reflects the still-considerable financial flexibility the Province has at this lower rating category to withstand further economic and fiscal deterioration. Furthermore, Alberta’s debt burden is expected to remain relatively low in relation to provincial peers.

August 25, 2016
6:14 am
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Thanks Norman - your points are quite valid and providing the supporting documentation is great. However the quote you make "Alberta’s debt burden is expected to remain relatively low in relation to provincial peers." is not necessarily positive since other provincial peers are carrying high and growing levels of debt - namely Ontario and Quebec.

August 25, 2016
7:51 pm
Norman1
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Brian said

Thanks Norman - your points are quite valid and providing the supporting documentation is great. However the quote you make "Alberta’s debt burden is expected to remain relatively low in relation to provincial peers." is not necessarily positive since other provincial peers are carrying high and growing levels of debt - namely Ontario and Quebec.

I initially agreed that Ontario, in particular, is not in very good financial shape from what I've seen in the news. But, I'm not so sure now that is really the case.

This is part of the April 2016 press release Moody's Affirms Ontario's Aa2 Ratings, Changes Outlook to Stable from another rating agency, Moody. Like DBRS, Moody is also confirming the stability of their assigned rating for Ontario:


"The stable outlook on the Province of Ontario's ratings reflects our opinion that the province has presented a budget plan with little risk that the debt burden will exceed recent levels," said Michael Yake, Moody's Vice President and lead analyst for the Province of Ontario. "While we remain highly attentive to the province's elevated debt burden, our current forecasts are for it to fall marginally across the medium-term and, as importantly, for interest expense to remain manageable as well."

Moody's forecasts that the province's net direct and indirect debt will reach 237% of revenues in 2016/17, which is expected to be slightly lower than the estimated 240% for 2015/16. While Moody's notes that the debt burden is high compared to other Aa2-rated peers, and remains an important credit weakness for the rating, this debt burden is offset by a manageable level of adjusted interest expense relative to revenues.

…. The current low interest rate environment has enabled the province to extend the maturity of its debt profile and issue long-term debt bearing historically low coupons which has also kept debt service low and manageable. While the proportion of revenues consumed by interest payments is expected to increase as interest rates rise, current forecasts indicate that it [proportion of revenues consumed by interest payments] should remain below 10% of revenue, a manageable level given the province's fiscal flexibility. Moreover, the province's large and diversified economy and growing population provides access to a broad and productive tax base and, as such, remains a source of credit strength.

Less than 10% of revenue going to debt interest payments doesn't sound all that percarious.sf-smile

If Alberta has even less than that going to debt interest payments, then maybe their AA(high) rating from DBRS is not that outrageous.

August 26, 2016
4:43 am
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Norman1 said

Less than 10% of revenue going to debt interest payments doesn't sound all that percarious.sf-smile

In the event interest rates start to increase (of course, not likely in the near future) that 10% of revenue starts to creep up to a higher % - and the govt either cuts expenditures eg healthcare, education etc. or raises taxes.......

August 26, 2016
7:10 pm
Norman1
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Norman1 said

Less than 10% of revenue going to debt interest payments doesn't sound all that percarious.sf-smile

Brian said
In the event interest rates start to increase (of course, not likely in the near future) that 10% of revenue starts to creep up to a higher % - and the govt either cuts expenditures eg healthcare, education etc. or raises taxes.......

That could happen. But, not necessarily.

Governments, like the Province of Ontario, borrow for the long term with fixed rates. Interest changes don't affect existing debt until it matures. For example, Ontario is still paying 8.1% on some 30-year bonds they issued in 1993. sf-cry Ontario will also be paying 2.8% on those 32-year bonds they issued a few months ago in June, no matter what interest rates do until 2048. sf-smile

Also, if interest rates were to be up to dampen excessive economic growth, then that growth in economic activity would mean more tax revenues. That could offset any increase in interest payments.

Current Ontario government predictions for interest expense are at Ontario: Province's Consolidated Debt Portfolio. The predictions are for 8.9% to 9.2% between now and 2019.

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