CBA submission to the Department of Finance’s consultation on Canada’s Deposit Insurance Framework

The Canadian Bankers Association (CBA)¹ appreciates the opportunity to provide the sector’s views to the Department of Finance’s (Finance) consultation on Canada’s Deposit Insurance Framework.

The CBA and its members would be pleased to meet with Finance should clarification be required on any of the submission’s contents.

General comments

Canada’s banking system is one of the safest, strongest and most secure in the world. It is globally recognized for its stability and resilience, being consistently ranked among the world’s soundest. Canadian banks’ diverse businesses, prudent lending practices combined with robust supervision and regulation has meant there have been no bank failures in 40 years and only three in the last century.

Canada already benefits from a strong framework to protect against bank failure, which the country has continued to strengthen since the Global Financial Crisis (GFC) with the introduction of several regulatory initiatives, including:

• Higher and better quality capital requirements with stringent criteria e.g. Tier 1, Non‑Viability Contingent Capital (NVCC)
• More robust liquidity requirements
• Increased leverage ratios
• Extensive global and Canada-specific recovery and resolution requirements including testing, numerous playbooks and ongoing crisis management procedures
• Increased bank disclosures

These enhancements plus other preventative tools have worked as evidenced by the performance of the banking sector during the COVID‑19 pandemic and the subsequent 2023 United States banking crisis, which included the failure of Silicon Valley Bank (SVB). The proposed changes to the deposit insurance system would do little to further reduce the already remote risk of bank failure or contagion.

The justification for these enhancements is, in the view of the CBA, generally quite limited. The current deposit insurance system allows consumers to stack deposits across CDIC coverage categories at a single member institution, giving them deposit coverage as high as $900,000 – one of the highest limits in the world. Consumers can also spread their deposits across multiple member institutions, further insulating them from bank failure risk.

Finance should be cautious about shifting deposit insurance’s focus from preventing bank runs toward offering more compensation in the unlikely event of failure, as it departs from the original rationale for deposit insurance, erodes market discipline, and may be a less efficient use of bank resources than projects which reduce bank risk and better prevent bank runs in the first place. In a stress scenario, deposit insurance may be a less effective tool than others used by the financial industry to stem deposit outflow. This fact is underscored by the U.S. experience, where hundreds of banks have failed, despite the presence of a higher deposit insurance limit. A run on an insured deposit base has also recently occurred in Canada.

Canadian policy makers are currently seized with the country’s lackluster productivity record. In an environment where economic growth, innovation, and higher business productivity are key strategic priorities, increasing costs and adding resource demands to an already safe and stable banking system is not optimal. The consultation paper quantifies benefits to various stakeholder groups but does not quantify the additional costs its proposals will impose on banks and their customers: ongoing higher premiums, as well as significant change in costs to operations, training, systems, advertising, information materials, and reporting.

Furthermore, by focusing on elements of the framework that are quantitative and legible – namely the coverage limit for various categories of bank customer, the review does not adequately address less tangible contemporary developments in technology and communications that will likely have a far more significant impact on bank runs in the years and decades ahead. The most notable aspect of the 2023 run on SVB was the unprecedented speed with which it occurred, enabled by instant communications, social media, and the ability to rapidly transfer funds with a few button presses on a mobile device. Viral panic and the speed of deposit flight are arguably more immediate concerns in an age of content algorithms, ubiquitous smartphones, generative/agentic AI, open banking, online banking apps, and instantaneous bank transfers.

The CBA believes that Finance, OSFI and CDIC should put more focus on developing tools and response plans to contain exponential spread of information or misinformation and manage rapid deposit flight. Both Finance and industry would benefit from focused consultation, scenario analysis, and creative problem‑solving on these pressing developments.

The CBA believes that Finance, OSFI and CDIC should put more focus on developing tools and response plans to contain exponential spread of information or misinformation and manage rapid deposit flight. Both Finance and industry would benefit from focused consultation, scenario analysis, and creative problem-solving on these pressing developments.

Implementation costs

Changes to the deposit insurance framework will involve significant implementation costs. At least 24 months should be allotted to implementation, depending on the extent of changes adopted. Areas affected include training and communications, forms and websites, operations, technology, data classification and governance, reporting, and consumer education.

Finance should consider a holistic cost-benefit analysis to determine the cumulative impact of the proposals before proceeding. Ideally, each proposal ought to demonstrate a significant net benefit – both to Canada’s economy, financial stability and bank customers – before it is pursued.

1. What are your views on the department considering increasing the deposit insurance limit to $150,000 per category? Should there be a mechanism for periodic revisions to the limit?

There is some variation of views within industry on the proposal to increase the deposit insurance limit to $150,000. When considering this question, analysis needs to start from the base that depositors in Canada currently enjoy a high level of coverage – up to $900,000 spread over nine insurable deposit categories and even greater coverage, for some member institutions, through deposit stacking. Against this backdrop, a limit increase to $150,000 would benefit a very limited number of depositors (<2%), primarily in the high‑net‑worth and non‑retail segments.

A decision on a limit increase should be informed by, and made in the context of: (1) the decisions being made on the other proposals within this Review, (2) an environment for deposit protection that has significantly improved since the GFC, (3) the overall universe of regulatory initiatives impacting the banking sector that the government is concurrently pursuing, and (4) the market implications of changes in the deposit insurance limit. The CBA and our members are willing to work with government to find efficient, data-driven solutions that improve depositor protection and bolster financial system stability.

Periodic revisions

The CBA supports establishing a mechanism for periodic reviews to the deposit insurance framework including the premium setting strategy, rather than relying on ad hoc adjustments. Reviews should occur at a predetermined cadence (e.g. every ten years) and/or via an established trigger (e.g. if coverage falls below a certain threshold) to provide a degree of certainty and predictability for member institutions.

Any mechanism ought to provide clear timelines for stakeholder consultation, engagement and implementation. As discussed, changes to the framework involve significant operational work and complexity, which must be carefully planned and managed. Reviews must be data-driven and considered in alignment with the overall financial framework and current insurance policies.

2. What are your views on the department considering increasing the deposit insurance limit to $500,000 per category for non‑retail depositors?

The CBA believes that creating a new class of "non‑retail" depositors and increasing the limit for that class to $500,000 per category is unwarranted. It is extremely rare for non‑retail clients to inquire about enhanced deposit coverage. The proposal focuses on compensating non‑retail depositors post̩failure but will be ineffective at preventing bank runs, which is deposit insurance’s main purpose. Further, a $500,000 limit may not prevent downstream impacts through the loss of operational deposits, since such deposits would typically be greater than $500,000 for large value depositors. 91.32% of eligible non‑retail deposit accounts are fully protected under the current regime. Motivated non‑retail depositors can address their deposit safety needs by stacking coverage across MIs and by taking a risk‑based approach to their choice of deposit‑taking institution.

This proposal would create a two‑tier deposit structure that introduces significant costs and complexity with little significant benefit. It would move the framework further away from the goal of simplification, creating confusion in the market and may lead to perceptions that corporate interests are being provided more favourable treatment under the framework. The proposal could disadvantage small business owners and entrepreneurs who operate accounts in their own name (i.e. are not incorporated). These groups may falsely believe they are insured up to $500,000. A subset of sophisticated and motivated (most likely, high net‑worth) actors may "game the system", for instance by creating shell companies or placing their money into trusts to achieve higher coverage limits. Since higher limits carry higher premiums, the premium impact – and potentially the cost to consumers – could be significant. These higher costs are unwarranted given existing stringent financial regulatory framework requirements and the safety of Canada’s deposit‑taking institutions.

Further, the non‑retail segment plays a more significant role than retail in monitoring institutions for excessive risk‑taking. The capacity to enforce market discipline roughly scales with depositor size and sophistication. Insuring non‑retail deposits could therefore generate moral hazard and undermine financial stability.

There is currently no standard definition for non‑retail employed by the industry – should Finance move forward with the proposal, a standard definition would need to be developed to ensure precise and exhaustive categorization. For instance, it’s unclear whether fintechs, large‑value corporate depositors, nominee brokers, and general and professional trustees would be considered "non‑retail".

Operationally, the implementation of this proposal would be complex and challenging. Considering the volatility of operational accounts, the premium paid will likely not to be representative of the account balance as of April 30 (every year).

Per CDIC’s 2024 study, we believe that more than 95% of small‑and‑medium sized enterprises (SMEs) are currently covered by the $100,000 limit.

The CBA believes that Finance can develop a more targeted approach that covers public‑serving clients such as the Municipal, University, School and Hospital (MUSH) sector. Finance should consider reviewing the definition of "Professional Trustee" to extend coverage to sensitive account types/depositors (e.g. MUSH or business payroll deposits). If a depositor with sensitive funds registers as a professional trustee, it would facilitate beneficiary coverage and payout processing using existing mechanisms. This would remove the need to introduce new coverage types into the framework, and the associated administrative burden of tracking differentiated coverage types. As this policy option was not raised as a proposal, it has not been examined in‑depth by industry, however it merits consideration.²

The CBA believes that the "Professional Trustee"³ designation will protect less sophisticated – yet publicly important – non‑retail customers Finance is targeting.

3. What are your views on the department considering extending coverage for temporary high balances for depositors experiencing significant life events as proposed above?

The CBA appreciates the public policy motivation for temporary high balance (THB) coverage for depositors experiencing significant life events, but believes the operational complexity of the proposal, the absence of customer demand for this coverage, and the unlikelihood of failure together suggest the existing framework is adequate, and that alternative solutions within the existing framework (e.g. customer education) should have priority. The CBA does not support a system of THB coverage that operates ex ante, given that proposal’s complex, intrusive and impractical operational demands would be incommensurate with its benefits. The CBA would only align with extending coverage for THBs if strict conditions are met. Namely, that all program administration and verification be centralized with CDIC, that THB coverage is aligned to other deposit insurance categories to an additional $100,000, and that funding be conducted ex post. Even so, this is not additional coverage that bank customers are asking for. It also fundamentally shifts the operationalization of the deposit insurance system from ex ante to ex post, and forces surviving banks to suffer the consequences of the failed bank. Depositors already have coverage up to $900,000. This coverage breadth is absent in European jurisdictions where much lower deposit insurance limits and THB coverage are prevalent. The proposal contemplates an industry‑wide, ex ante solution to a rare event that is more efficiently addressed through an individualized or tailored approach ex post. Even for CDIC, the operationalization of this proposal would be difficult and complex.

Administering this proposal ex ante would require extensive IT systems changes and ongoing transaction monitoring that would be complex, impractical and resource intensive. Given the rarity of failures, the costs and diversion of resources within institutions necessary for implementation are not commensurate with the proposal’s benefits.

In addition, there are significant privacy issues involved with monitoring and verifying life events. As such, the proposal may conflict with federal privacy legislation such as the Personal Information Protection and Electronic Documents Act (PIPEDA). Given the sensitivity of the information, guidelines would need to be developed on what questions could be asked of a claimant.

Finance would also need to supply clear and precise definitions for eligible life events and time periods to ensure consistency and fairness for all depositors. Determination of eligibility would need to be straightforward.

The need for customers to submit documentation and the potential for disputes over eligibility could lead to reputational risks and a negative client experience. The proposal adds complexity to the framework and may generate market confusion, as consumers may be more uncertain as to when and in what circumstances they will receive coverage. Depending on the process used to authenticate life events, some may attempt to abuse the system.

As funds are in constant flux, it is unclear how banks would track the time span funds are eligible for THB coverage. Damage settlements, insurance payouts, and divorce settlements may occur in installment payments – raising questions around when to "start" and "stop" the clock to determine eligibility. The monitoring of these flows would be impractical and burdensome. Finance would need to carefully specify the parameters for the reporting and assessment of premiums, which would be enormously difficult to track ex ante, given fluctuations in deposits over time.

Should consideration be given to an unlimited deposit insurance limit for certain life events?

The CBA does not recommend unlimited coverage for life events. Unlimited deposit insurance is not consistent with deposit insurance best practices. Analysis would need to be conducted on which life events qualify and the corresponding economic impact. Coverage would accrue to a limited number of high‑net worth individuals, which is out‑of‑step with the purpose of the deposit insurance framework. Further, the promise of unlimited coverage may foster abuse of the system.

4. What are your views on the department considering streamlining deposit insurance categories to four categories by merging the registered and tax-free categories? What are your views on providing unlimited deposit insurance coverage for that merged category?

The CBA does not recommend merging the registered and tax‑free categories and providing unlimited deposit insurance for the merged category. The current structure of $100,000 per category is clear and well‑understood among customers. Customers do not communicate that the current framework is too difficult to understand. Having several products in one category will create confusion for customers and front‑line staff, making it more difficult for them to understand and explain coverage, particularly if only some categories accrue unlimited coverage. It is therefore unclear the measure will achieve its goal of "simplification". Furthermore, it is difficult to justify the increase in premium costs for the primary purpose of attempting simplification.

Merging categories will involve significant IT costs and increased reporting complexity. Having one product per category facilitates reporting and payment of premiums. Any change to the system would require substantial lead time to implement and would require a complete overhaul of training and communication materials, physical and virtual advertising, forms and websites, client servicing and record systems, established nomenclature and reporting frameworks.

Unlimited coverage would unduly advantage high‑net‑worth depositors and create uncertainty regarding premium payments. Unlimited coverage could also distort investor behavior, incentivizing customers away from equities and other investment products.

The change would enable third parties such as robo‑advisors and non‑bank financial institutions who specialize in in investments in registered vehicles to market unlimited deposit coverage.⁴ The proposal could also distort bond pricing because it creates a new unlimited type of risk‑free asset that never existed in the market prior. This change could incentivize the investment industry to concentrate registered holdings into single banks or investment aggregators who can insure entire portfolio coverage.

Deposit insurance is an important determinant in the potential run‑off characteristics of a deposit under the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). A related factor that impacts the liquidity of an insured deposit is whether it is sourced through a third party. Even though registered deposits are a smaller share of the overall deposit market, we discourage Finance from allowing an unlimited level of insurance. Third party non‑bank financial institutions could market this unlimited insurance on any cash holdings on their platforms without having to manage the liquidity or interest rate risk of the deposits on their balance sheet. Our concern is that unlimited coverage could fundamentally alter asset allocation decisions within these accounts, leading to higher cash holdings and lower holdings of fixed income instruments. Since these deposits will ultimately re‑enter the traditional banking system as a third party deposit with a bank (but at a materially higher run‑off than if the deposit was directly with the commercial bank) this impact on asset allocations could lead to growing leverage among banks, and higher liquidity buffers held in government debt (on bank balance sheets) instead of that cash otherwise being invested in fixed income mutual funds with broad exposure to Canadian corporate, provincial, real estate, and sovereign debt. All else equal this can have adverse impacts on funding costs across the economy.

The comparison Finance draws to the unlimited coverage offered by PEI and Ontario credit unions may not be reasonable, given their size and product suites compared to CDIC members. Indeed, unlimited coverage at the national level is unprecedented among OECD countries.

The CBA believes stronger communication and disclosure of insurance categories could be just as effective in reinforcing trust, without requiring a significant overall of the current system.

5. What are your views on the department considering strengthening disclosure requirements to require that member institutions provide their customers with tailored information explaining the amount of insured deposits that are held at that member institution for that customer?

The CBA does not support introducing new disclosure requirements for member institutions to provide customers with tailored information on the amount of insured deposits they hold in real time. Customers are not requesting this level of information, it is not supported by CDIC’s mystery shop findings, and there have been no widespread concerns about its absence.

The CBA appreciates that Finance is thinking about depositor behavior in a panic situation. However, it is not clear Finance’s proposal would have a material impact on withdrawals.⁵ In a panic, would most depositors seek to contact their bank about precise coverage? Or would most perform a simple mental accounting of their chequing or savings balance against the deposit limit? A more rigorous, empirically informed examination of depositor behavior is necessary to justify the significant costs involved in building a system of real‑time disclosures.

The CBA believes the focus should be on improving tools and educational materials rather than implementing complex disclosure requirements. We recommend that CDIC continue to direct customers of member institutions to its own calculator to avoid any disclosure errors.

Additionally, imposing a requirement only on MIs but not to nominee brokers will create an inconsistent experience for depositors depending on whether they deal with MIs and/or nominee brokers.

Further, current CDIC Deposit Insurance Information By‑Law (DIIB) requirements indicate that banks cannot provide false or misleading information about CDIC coverage. The requirement to provide tailored information would require a level of accuracy that leaves little room for error or interpretation. As deposits are in constant flux and the groupings are complex, the information provided to customers could potentially be misleading. The information would only be accurate at a very specific point in time, but depositors could base financial decisions on the information found in the statement at a later date without fully understanding the impact.

Tailored statements would be costly to produce and would require significant IT builds that are not commensurate with the benefit provided to customers, given customers are not demanding this information. Current systems are not designed to provide this level of disclosure: the complexity of joint, co‑owned, trustee, and beneficiary aggregation make it very difficult to accurately calculate the exact insured balance held by any one client. For instance, deposits that are in‑trust (particularly Professional Trusts) or held with a Nominee Broker are unlikely to be clearly identified (i.e. are UCI based) and therefore a full picture of coverage of deposits at that MI would be incomplete.

It is the responsibility of customers to know which products they have and where they are held. Banks do not have that visibility for different reasons:

1. Banks may not have access to client records from subsidiaries pursuant to their privacy policies.
2. Clients may have accounts with multiple advisors and not want each to know about the other.
3. Banks may not know if clients have funds with a fintech or other PSP.

As banks do not have access to all the necessary client information for reasons of privacy and confidentiality between their subsidiaries, Finance’s proposal conflicts with the Canadian legislative framework. Banks would not be able to put this proposal into practice, as it would breach some of their privacy and confidentiality obligations.

In summary, providing an indication that specific deposits are eligible for CDIC coverage and what category they potentially fall under is already a reasonable standard. Real time calculation of a depositor’s coverage across products, trade names, subsidiaries and or deposit agents would be an enormous and complex task incommensurate with its benefits.

Closing Statement

The industry would like to thank the Department of Finance for the opportunity to comment on its proposals. The CBA and its members would be happy to meet to further discuss the contents of this submission.