Well over one month ago, our High Rock Private Clients may have noted that their cash began to be held in a High Interest Savings Account (HISA) at monoline mortgage lender, Equitable Bank (EQB).
The fact that we started holding our excess cash in an EQB HISA weeks before a subsidiary of Warren Buffet's Berkshire Hathaway invested in EQB competitor and stressed monoline mortgage lender, Home Capital (HCG), says nothing of our investing prowess. To be sure, we are invested for entirely different reasons. The Berkshire subsidiary owns both seriously over-collateralized debt of HCG along with a chunk of equity. We own a one day deposit of EQB, no equity.
We had owned EQB HISA's before (a year ago) but had basically steered clear of them since then due to the market dynamics surrounding HCG and a lack of clarity on exactly how Canadian Deposit Insurance Corp (CDIC) actually works (ie, how it would pay out if the deposit-taking institution defaulted). So I rolled up my sleeves and did a bit more work on how CDIC actually works - how accounts are covered, for how much and how it pays out.
The CDIC insures eligible deposits that are issued by CDIC Member Institutions (all the big banks, along with both HCG and EQB and a ton you may not have heard of....basically, any deposit-taking institution is a Member Institution).
CDIC considers various accounts as "categories" for insured purposes. Categories fall under the following and are all insured separately for $100,000 per category for principal and interest combined:
Effectively, what this means, is that you could have up to $100,000 in deposits in each of those 8 categories ($800,000 in total) and be fully-insured on your principal and interest.
This much I knew, but still we avoided holding EQB HISA's for quite a period of time. As mentioned, my lack of understanding on the payout on insured deposits of a failed Institution was my fear. If HISA's are meant to be "cash", I would not want to be wrapped in a time-consuming event where it would take months, or longer, to get the cash payout from CDIC upon a bank failure..if it cash, I want it the next day or so.
So I made two separate calls to CDIC (they were excellent) and was able to get a lot more information about their "payout process", CDIC's creditworthiness and how they actually fund themselves.
Payout Process - Problem #1
Shockingly, CDIC is transitioning to electronic payout ability but, at this stage, it is a written cheque. That I found crazy. What I was pleased to learn was that, payouts occur within three business days of the failed member institution failing. Three days I can live with. T-bills are one day so three days is in-line. Problem #1 solved.
Creditworthiness - Problem #2
I knew this was largely the credit of the Government of Canada but, what the heck, might as well check, just to be sure. They actually file their quarterly and financial statements, like any publically-traded company, on their website. So I opened up their Annual.
What I found was about $700 billion in insured deposits with provisions for losses on those insured deposits listed as a liability of $1.3 billion. On the asset side, they list about $3.4 billion in Total Assets plus a Line of Credit with the Government of Canada for $20 billion (Total Available Funds of $23.4 billion). Obviously the $23.4 billion does not cover the entire $700 billion but the probability of every single deposit-taking institution in the country failing at the same time is extremely low. So realistically, based on their assumptions, they have $23.4 billion to pay out $1.3 billion of potential (modeled) losses. Well-covered I would say. Problem #2 solved.
Funding Process - Problem #3
Here, I am no expert but what I was able to find was that CDIC has a formula for charging deposit-taking institutions. For instance, in 2016, they pulled in $361 million in premiums from various deposit-taking institutions. And from what I can tell, if there is a failure by a deposit-taking institution, it is largely the DSIB's (domestically systemically important banks - the big banks) that will make up the shortfall for funding CDIC. Problem #3 solved.
After doing that research, I concluded (along with some associates who confirmed my thought process) that if you invest in any deposit (HISA, GIC) of ANY of these CDIC Member Institutions, and ensure your deposit is under $100,000 per category, then you are really taking on the credit risk of the Government of Canada. Had HCG been allowed to disseminate this information to the broader public, they wouldn't have had to fall into the waiting arms of Mr. Buffet because there would not have been a run on their deposits. Warren's benefit that CDIC does not allow members to "advertise" how it really works.
By way of comparison,:
So, same credit (Government of Canada, up to a max of $100,000 per account) and even shorter a maturity at one day vs one month. Not bad.
And given the credit-risk (Government of Canada) of holding deposits of any CDIC member institution, up to a maximum of $100,000 per account/category, we should be agnostic as to which member institution's deposits we hold. HCG, EQB, B2B Bank, General Bank of Canada...you get the picture.
But we will stick with EQB at this stage and collect our 1.75% on cash balances.