The Ontario government is being urged to allow "unlimited deposit insurance" for consumers who park their money at credit unions in this province – a proposal that, if adopted, could intensify the competition for personal deposits with big banks.
Central 1 Credit Union – an umbrella organization representing nearly 200 credit unions in Ontario and British Columbia – made its case for that change in a prebudget submission to Finance Minister Dwight Duncan. It argued that Ontario’s current ceiling on deposit insurance, set at $100,000, is out of step with coverage provided in other provinces.
Moreover, a shift to unlimited deposit insurance would "increase consumer confidence" during the current economic malaise by bolstering the protection of hard-earned savings, according to the group.
"As the Ontario economy embarks on a period of little-to-no growth, Central 1 believes the Ontario government should take steps that will boost confidence among consumers, businesses and financial institutions," its submission states.
Other provinces already provide unlimited deposit insurance to credit union members. British Columbia is the latest convert, with Premier Gordon Campbell scrapping the previous $100,000 cap last October. The move was among 10 key measures outlined in his economic plan to "alleviate the impacts" of the global financial crisis on the province.
Alberta, Manitoba and Saskatchewan also provide unlimited coverage on deposits held in credit unions. Three other provinces – Newfoundland and Labrador, New Brunswick and Nova Scotia – have a $250,000 cap, while Prince Edward Island’s maximum is $125,000. That makes Quebec the only other province with a $100,000 limit.
The Deposit Insurance Corp. of Ontario is charged with the responsibility of protecting depositors of credit unions from loss here. The 32-year-old government agency has more than 200 members.
"By offering unlimited deposit insurance, DICO and Ontario credit unions can work together to ensure sustained confidence in our system," said Central 1, adding such a move would also "make the administration of deposit insurance less complicated."
Ontario’s credit unions are prepared to bear the full cost of the stepped-up coverage. "Furthermore, moving to unlimited deposit insurance would likely increase the size of the fund administered by the Deposit Insurance Corp. of Ontario … as credit unions would likely be required to pay a premium on those deposits that are currently uninsured."
DICO’s deposit insurance reserve fund was estimated at $122 million, or 0.63 per cent of insured deposits, at the end of 2008. The agency says the fund is "slightly ahead of target, due to lower than anticipated claims and improved recoveries on previous losses."
Its official goal is 0.61 per cent of insured deposits, according to its annual report. The reserve fund was worth $105.3 million at the end of 2007.
Finance Minister Dwight Duncan met with Central 1 representatives to discuss unlimited deposit insurance in late November. His office declined to comment on whether he might act on the idea in the upcoming budget.
Duncan, however, has pledged to “modernize” the credit union sector. Yesterday, the province launched public consultations on other proposed regulatory changes that focus on technical issues such as governance, regulatory oversight, risk management, innovation and consumer protection flexcheck cash advance.
“Our government is serious about financial services regulation in Ontario,” Duncan said in a release. “The aim of these changes is to balance the needs of credit unions to remain competitive with the need for regulatory prudence, an important goal in light of the current global financial turmoil.”
Central 1’s request on deposit insurance, however, comes at a time when jittery consumers are increasingly seeking safe havens for their money. Some banks are already reporting a swell in deposits. That trend is expected to continue across the financial services industry this year as consumers sock away cash to ride out the recession.
Big banks largely dominate Ontario’s deposit-taking market. Industry statistics suggest credit unions and caisses populaires have about a 5 per cent market share. Within the Greater Toronto Area, credit unions have a 2 per cent share.
There are already suggestions that unlimited deposit insurance could give credit unions a leg up by sharpening the competition for deposits in Ontario. That’s because major banks, regardless of which province they operate in, offer clients a maximum $100,000 worth of savings protection via the Canada Deposit Insurance Corp.
While federal Finance Minister Jim Flaherty strengthened certain CDIC powers in the Jan. 27 budget, he resisted calls to elevate deposit insurance coverage. He faced pressure to do so after the U.S. Congress hiked coverage – provided by the Federal Deposit Insurance Corp. – from $100,000 (U.S.) to $250,000 until the end of 2009.
Thomas Velk, a banking expert at McGill University, said there’s no doubt that unlimited deposit insurance for credit unions "would be competitively disadvantageous" for banks in the key Ontario market.
The Canadian Bankers Association, however, suggested that consumers also consider a number of different factors when choosing where to bank, including products, services, branch locations, ABM networks and customer loyalty.
"Bank customers’ deposits are well protected and its important to point out that banks in Canada are stable and strong. CDIC insurance would only be needed in the highly unlikely event that a bank failed," Maura Drew-Lytle said in an email. She did not say if the CBA would oppose such a move.
Until now, the Ontario government has been reluctant to enhance deposit insurance for credit unions unless the federal government would provide a similar boost for the banks, said Central 1 spokesperson Art Chamberlain.
"But we are encouraging them to move on their own in this area where they’ve got the legislative authority," he added.
Bruce Cran, spokesperson for the Consumers’ Association of Canada, agrees unlimited depositor insurance is a "step in the right direction" toward enhancing consumer protection and market choice. Velk, however, worries about what such a move could mean for taxpayers.
"The problem with all these insurance schemes … they’re all massively undercapitalized, especially given the situation," Velk said.
"So, the trivial premiums that would be collected – even if they raised the premium in the case of making the coverage unlimited – would be far inadequate to meet the potential losses."