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Fun fact: credit unions in my province (BC, Canada) insure 100% of deposits, with no limit. See https://www.bcfsa.ca/public-resources/credit-union-deposit-insur

by patmcc 4y ago

Fun fact: credit unions in my province (BC, Canada) insure 100% of deposits, with no limit. See https://www.bcfsa.ca/public-resources/credit-union-deposit-insurance/about-cudic https://www.bcfsa.ca/public-resources/credit-union-deposit-i... This, thankfully, has never been tested in a significant way, as they are not backstopped by the federal government. (It also suggests a rather lucrative arbitrage opportunity.)

idiotsecant 4y ago
An assurance of 100% backing with no limit is only as valuable as you think the aggregate institution is stable, which you should read as 'not very' on a long enough timeline. The CUDIC does not have a 1 to 1 backing for these assets and it can't print more, so there's risk there.
- patmcc 4y ago
  I agree completely. I will say the Canadian banking system (as well as credit unions, which are regulated differently) is generally quite healthy and stable, I don't think it's imminent risk of collapse. But I would certainly not count on this guarantee, it's very silly.
  - prottog 4y ago
    I don't live in Canada but as your (very) southern neighbor, it seems that banks could be in trouble with the real estate market having been so out of control. As interest rates rise, isn't there a real risk of forced liquidations by leveraged property speculators resulting in banks sitting on a lot of losses?
    - patmcc 4y ago
      It's possible; there really have to be two pieces for it all to come crashing down. The first is rising interest rates leaving people unable to pay, and the other is prices falling enough that mortgages would be underwater. I think the first is pretty likely, but not sure how many people that will hit. There are decent stress test rules so anyone who couldn't afford a 1 or 2 percent jump shouldn't have qualified. The second is less likely, I think. We've got an absolute minimum 5% down payment, and almost always more like 10%, and anything under 20% requires default insurance. So I think pretty low chances unless the housing market craters ~30% or more. Which might be what it actually should fall by, honestly, but the government will probably intervene way before that happens.
      - tenpies 4y ago
        Just to add some colour on the insurance aspect: > Mortgage default insurance protects lenders in the event a borrower defaults on their mortgage. It does not protect the borrower or a guarantor. If a borrower defaults, the insurer may oversee all legal proceedings and payment enforcement. In addition, the insurer compensates the lender should there be a shortfall after the property has been sold and expenses paid. The defaulting borrower remains responsible for any shortfall on the mortgage and the lender or mortgage insurer may pursue the borrower for any deficiency following sale of the property.[1] I just want to highlight that last part because the insurance is 100% not for the borrower, but for the lender. Just like when any other insurance policy is used, the insurance provider has a strong incentive to reduce how much of the policy's pay out it pays from its own reserves and that means going after the borrower. There is also a vague idea that because one of the major mortgage insurers is a government corporation (CMHC), they will pay out and not pursue the borrower. This is not true, and if Canadians know anything it's that no one loves taking other people's money as much as the government. To get out of paying you have to declare bankruptcy, much like the US. [2] So in short, the Canadian system is set up to have the borrower pay for the lender's ability to expeditiously be made whole in the case of default, and for the insurer to then pursue compensation from the borrower if the asset price is below the loan value. It's the most Canadian thing ever: the borrower is getting screwed but thinks it's a good thing. --- [1] https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Default_Insurance.pdf https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Defaul... [2] https://rates.ca/resources/does-declaring-bankruptcy-get-you-out-paying-cmhc https://rates.ca/resources/does-declaring-bankruptcy-get-you...
    - Waterluvian 4y ago
      The 2008 collapse didn’t really happen up here. I think the big five banks are so heavily regulated that the bar is exceptionally high for catastrophe. The stress test rules around mortgages and mandatory default insurance for high ratio mortgages (less than 20% down) also help. Interest rates were incredibly low, but they still weren’t just handing out mortgages like we saw in the States in the previous collapse. Of course nothing is impossible.
advisedwang 4y ago
Is it backstopped by the provincial government?
- ceejayoz 4y ago
  > Section 271 of the Financial Institutions Act provides that the Provincial Government may provide financial support to the CUDIC Fund if the CUDIC Fund is impaired (see the CUDIC Fund Target Policy for further details about the CUDIC Fund).
  - JumpCrisscross 4y ago
    > the Provincial Government may provide financial support to the CUDIC Fund Know nothing about Canadian law. But that doesn't sound like an obligation.
    - acover 4y ago
      The federal deposit insurance in Canada is the same (cdic). The relevant legislation explicitly says the government has no obligation to bail out the insurance fund. Practically the fund doesn't have sufficient funds to bail out a big bank failure - let alone multiple - and everyone expects a government bailout.
      - rkagerer 4y ago
        The Federal government can rely on printed money to cover Big Five bank failures. In BC, how would the government fund a bailout if several Credit Unions collapsed at the same time?
        acover 4y ago
        Where there is a will, there's a way. The us federal reserve bought corporate bonds during the covid crisis. Can you imagine the fallout of a bank run on all credit unions? The federal government would find a way to prevent that.
rkagerer 4y ago
In practice, are they perceived to be safer or riskier than banks as a place to store deposits?
- patmcc 4y ago
  About the same, in that the vast majority of Canadians perceive both to be incredibly safe. Which they probably are, the biggest risk would be a huge housing crash, which the government has a lot of incentive to prevent.
chollida1 4y ago
> (It also suggests a rather lucrative arbitrage opportunity.) What is this lucrative arbitrage opportunity we have to make money with this setup?
- maxbond 4y ago
  I don't think this actually monetizable but if they're giving you unlimited free deposit insurance, while other banks aren't, then you could keep a bunch of money there & resell the deposit insurance. Of course, if you actually pitched someone on this, their first question would be, "who insures you?" At which point you either didn't tell them (and lose their trust and they don't give you their money), tell them and they don't trust the coops (in which case you don't get their money), or tell them and they do trust the coops (in which case, they'll cut you out as a middle man and bank with these coops).
  - chollida1 4y ago
    How would you sell the insurance? All the insurance does is make sure you get your money back if the credit union ogoes under. If I put $500,000 of my own money in the credit union I can't see how I can sell my "insurance" to someone else as I need it to protect my own money. If someone else wants the insurance they have to put their own money into the credit union. I can't sell my insurance to someone else unless I hand them my money but I cant see why i'd do that as it wouldn't make any sense and its certainly not an arbitrage opportunity as the OP suggested.
    - maxbond 4y ago
      You'd either write an insurance contract and pray you have enough money in your account when the redemptions come or you'd accept their deposit and put it into your account & basically be a bank with a negative interest rate (that negative rate being your insurance premium). The arbitrage is that in some places, universal deposit insurance costs >$0 but these banks are giving it out free. So there is a difference here that's exploitable on paper, but presumably the reason it exists is that it isn't in practice. It fits the strict definition of an arbitrage opportunity in that there's a difference in pricing that you could exploit without taking on market risk, in a frictionless vacuum where wires clear instantly and carry no transaction fees and a bunch of other unrealistic assumptions. I don't view it as real, but it gave me a chuckle, like when people turn DNS into an ersatz file system or similar hackery. Like a pun in the financial system.
dehrmann 4y ago
Apparently lots of places around the world do this. Probably not in Argentina. Not that pesos are worth insuring right now, anyway.

by patmcc 4y ago

idiotsecant 4y ago

An assurance of 100% backing with no limit is only as valuable as you think the aggregate institution is stable, which you should read as 'not very' on a long enough timeline. The CUDIC does not have a 1 to 1 backing for these assets and it can't print more, so there's risk there.

patmcc 4y ago
I agree completely. I will say the Canadian banking system (as well as credit unions, which are regulated differently) is generally quite healthy and stable, I don't think it's imminent risk of collapse. But I would certainly not count on this guarantee, it's very silly.
- prottog 4y ago
  I don't live in Canada but as your (very) southern neighbor, it seems that banks could be in trouble with the real estate market having been so out of control. As interest rates rise, isn't there a real risk of forced liquidations by leveraged property speculators resulting in banks sitting on a lot of losses?
  - patmcc 4y ago
    It's possible; there really have to be two pieces for it all to come crashing down. The first is rising interest rates leaving people unable to pay, and the other is prices falling enough that mortgages would be underwater. I think the first is pretty likely, but not sure how many people that will hit. There are decent stress test rules so anyone who couldn't afford a 1 or 2 percent jump shouldn't have qualified. The second is less likely, I think. We've got an absolute minimum 5% down payment, and almost always more like 10%, and anything under 20% requires default insurance. So I think pretty low chances unless the housing market craters ~30% or more. Which might be what it actually should fall by, honestly, but the government will probably intervene way before that happens.
    - tenpies 4y ago
      Just to add some colour on the insurance aspect: > Mortgage default insurance protects lenders in the event a borrower defaults on their mortgage. It does not protect the borrower or a guarantor. If a borrower defaults, the insurer may oversee all legal proceedings and payment enforcement. In addition, the insurer compensates the lender should there be a shortfall after the property has been sold and expenses paid. The defaulting borrower remains responsible for any shortfall on the mortgage and the lender or mortgage insurer may pursue the borrower for any deficiency following sale of the property.[1] I just want to highlight that last part because the insurance is 100% not for the borrower, but for the lender. Just like when any other insurance policy is used, the insurance provider has a strong incentive to reduce how much of the policy's pay out it pays from its own reserves and that means going after the borrower. There is also a vague idea that because one of the major mortgage insurers is a government corporation (CMHC), they will pay out and not pursue the borrower. This is not true, and if Canadians know anything it's that no one loves taking other people's money as much as the government. To get out of paying you have to declare bankruptcy, much like the US. [2] So in short, the Canadian system is set up to have the borrower pay for the lender's ability to expeditiously be made whole in the case of default, and for the insurer to then pursue compensation from the borrower if the asset price is below the loan value. It's the most Canadian thing ever: the borrower is getting screwed but thinks it's a good thing. --- [1] https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Default_Insurance.pdf https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Defaul... [2] https://rates.ca/resources/does-declaring-bankruptcy-get-you-out-paying-cmhc https://rates.ca/resources/does-declaring-bankruptcy-get-you...
  - Waterluvian 4y ago
    The 2008 collapse didn’t really happen up here. I think the big five banks are so heavily regulated that the bar is exceptionally high for catastrophe. The stress test rules around mortgages and mandatory default insurance for high ratio mortgages (less than 20% down) also help. Interest rates were incredibly low, but they still weren’t just handing out mortgages like we saw in the States in the previous collapse. Of course nothing is impossible.

advisedwang 4y ago

Is it backstopped by the provincial government?

ceejayoz 4y ago
> Section 271 of the Financial Institutions Act provides that the Provincial Government may provide financial support to the CUDIC Fund if the CUDIC Fund is impaired (see the CUDIC Fund Target Policy for further details about the CUDIC Fund).
- JumpCrisscross 4y ago
  > the Provincial Government may provide financial support to the CUDIC Fund Know nothing about Canadian law. But that doesn't sound like an obligation.
  - acover 4y ago
    The federal deposit insurance in Canada is the same (cdic). The relevant legislation explicitly says the government has no obligation to bail out the insurance fund. Practically the fund doesn't have sufficient funds to bail out a big bank failure - let alone multiple - and everyone expects a government bailout.
    - rkagerer 4y ago
      The Federal government can rely on printed money to cover Big Five bank failures. In BC, how would the government fund a bailout if several Credit Unions collapsed at the same time?
      - acover 4y ago
        Where there is a will, there's a way. The us federal reserve bought corporate bonds during the covid crisis. Can you imagine the fallout of a bank run on all credit unions? The federal government would find a way to prevent that.

rkagerer 4y ago

In practice, are they perceived to be safer or riskier than banks as a place to store deposits?

patmcc 4y ago
About the same, in that the vast majority of Canadians perceive both to be incredibly safe. Which they probably are, the biggest risk would be a huge housing crash, which the government has a lot of incentive to prevent.

chollida1 4y ago

> (It also suggests a rather lucrative arbitrage opportunity.) What is this lucrative arbitrage opportunity we have to make money with this setup?

maxbond 4y ago
I don't think this actually monetizable but if they're giving you unlimited free deposit insurance, while other banks aren't, then you could keep a bunch of money there & resell the deposit insurance. Of course, if you actually pitched someone on this, their first question would be, "who insures you?" At which point you either didn't tell them (and lose their trust and they don't give you their money), tell them and they don't trust the coops (in which case you don't get their money), or tell them and they do trust the coops (in which case, they'll cut you out as a middle man and bank with these coops).
- chollida1 4y ago
  How would you sell the insurance? All the insurance does is make sure you get your money back if the credit union ogoes under. If I put $500,000 of my own money in the credit union I can't see how I can sell my "insurance" to someone else as I need it to protect my own money. If someone else wants the insurance they have to put their own money into the credit union. I can't sell my insurance to someone else unless I hand them my money but I cant see why i'd do that as it wouldn't make any sense and its certainly not an arbitrage opportunity as the OP suggested.
  - maxbond 4y ago
    You'd either write an insurance contract and pray you have enough money in your account when the redemptions come or you'd accept their deposit and put it into your account & basically be a bank with a negative interest rate (that negative rate being your insurance premium). The arbitrage is that in some places, universal deposit insurance costs >$0 but these banks are giving it out free. So there is a difference here that's exploitable on paper, but presumably the reason it exists is that it isn't in practice. It fits the strict definition of an arbitrage opportunity in that there's a difference in pricing that you could exploit without taking on market risk, in a frictionless vacuum where wires clear instantly and carry no transaction fees and a bunch of other unrealistic assumptions. I don't view it as real, but it gave me a chuckle, like when people turn DNS into an ersatz file system or similar hackery. Like a pun in the financial system.

dehrmann 4y ago

Apparently lots of places around the world do this. Probably not in Argentina. Not that pesos are worth insuring right now, anyway.