Considering our current market volatility coupled with global political unrest, US banks failing, and a rapidly increasing cost of living; most middle-income Canadian families are scrutinizing their savings very closely. Aside from how much to save and where to make it grow -
news headlines over the last year show American banks collapsing with patrons loosing their lifetime of savings. This has been on most people's minds. Can this happen north of the border? Who protects your savings in a Canadian bank?
Let's begin with a little history
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As the U.S. evolved into the world's largest economy, its regulatory framework evolved as well.
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Early regulations aimed to foster economic financial stability through centralized control of the banking system. Opponents, however, maintained that such regulatory authority gave the federal government too much power in comparison to the states.
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In the years following the Civil War, an assortment of financial crises and bank panics led to new regulations. The Great Depression of the 1930s also gave rise to significant reforms.
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The 1980s saw a move toward deregulation, soon followed by re-regulation in the wake of the subprime mortgage crisis and the Great Recession of the early 2000s.
The Canadian Banking System
In Canada the Office of the Superintendent of Financial Institutions,
OSFI, is the
independent federal government agency that regulates banks, insurance companies and private pension plans to determine whether they are in good financial condition and meeting their regulatory and supervisory requirements. In essence; Canada is highly regulated. I will focus on the Canadian banking system with it's
centralized regulatory regime - it's beyond the scope of this blog to make a comparison between US and Canadian banking systems. The focus is on the protection mechanisms in place depending on where you hold your hard-earned savings.
Protecting Your Assets
Canadian Bank Fund Protection
Here is a breakdown of how your money is covered in the event of a Canadian chartered bank collapse.
This means you will receive the sum of the various accounts with that particular bank that apply to the above list. The exceptions are mutual funds, stocks & bonds, exchange traded funds (ETF's), and cryptocurrency held by the bank in question.
Can Insurance Companies Protect Your Savings?
Who protects your investments not held or managed by a chartered bank? If you're invested in
segregated funds only sold by insurance companies, you're working with an advisor who is contracted with various insurance companies -
a blog is coming on this. Before the insurance company would be at the point of collapse, they would face the potential of being bought or merged with a bigger, more stable insurance company. However, if the collapse was unavoidable,
Assuris provides the policyholders with protection. Here is the breakdown:
A Practical Example
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Let's say you have $400,000 invested in GIC's at your local chartered bank, if it collapsed in the midst of a financial market meltdown, the CDIC would provide you - $100,000.
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You have $400,000 saved over time in a segregated fund (regardless of government program - TFSA, RRSP, FHSA), and the insurance company was so badly mismanaged it faced collapse in the same financial market meltdown mentioned above, and no other stable insurance company wanted to buy it out: Assuris would pay out 90% tax free of the protection class selected.
Final Thoughts
Some people bring up the fees levied on segregated funds.
Firstly: each fund (containing financial assets like bonds, equities, and money market investments) is supervised by a fund manger who works towards getting you the best returns within your risk tolerance even during market volatility, by adding and/or removing assets within the fund. The performance of the fund is net of the management fees paid to the fund manager
Secondly, part of those management fees provide the protection coverage that gets you to keep more of your money if something went completely sideways. Segregated funds are the only investments that bypass probate and allow you to discretely name a beneficiary to receive the funds in the event of your passing. The beneficiary receives funds tax-free and creditor protected.
I hope this provides insight into the world of savings and investment protection. Please leave me your comments.