Federal budget 2023 may buttress Canada’s bank turmoil defences

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Financial Post writers went back to their notebooks to set the scene for budget 2023. Veteran Bay Street reporter Barbara Shecter wonders if the international banking turmoil will prompt Ottawa to raise the limit for deposit insurance.

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In the spring of 2022, on the eve of the federal government’s annual budget, things were roaring along nicely for the big banks after a profitable run during the COVID-19 pandemic that hammered many other businesses.

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It’s different this year. The outlooks for Canada’s Big Six are weaker, as tougher economic and financial conditions weigh on their asset quality, growth prospects and funding mix — and that was before concerns over the sector helped sink three banks in the United States and caused a shot-gun marriage of two former rivals in Europe.

So instead of bracing for a one-time 15 per cent tax on earnings over $1 billion and other smaller but longer-lasting tax tweaks that were imposed in last year’s budget, bank watchers this year are waiting to see whether Ottawa will heed calls to increase the size of deposits covered by the Canada Deposit Insurance Corp.

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The last budget made the smallest of changes to insuring deposits, including First Home Savings Accounts (FHSA) among those separately insured for up to $100,000. In what was surely an unintentional turn of events, given the attention being paid to the CDIC in the aftermath of Silicon Valley Bank’s collapse in March, that change comes into effect on April Fool’s Day this year.

Deposit insurance coverage may seem like a boring corner of the financial world — leading the CDIC was a quieter job for Peter Routledge than his current one at the helm of the Office of the Superintendent of Financial Institutions — but it has attracted some attention over the years.

Most recently, a coalition of executives from smaller lenders in Canada, including Home Capital Group Inc. chief executive Yousry Bissada and Equitable Bank CEO Andrew Moor, sent a letter to federal finance minister and deputy prime minister Chrystia Freeland urging her government to raise the limit on deposit insurance, which is far lower than the US$250,000 cap guaranteed by the CDIC’s counterpart in the United States.

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Even the U.S. Federal Deposit Insurance Corp.’s standard coverage wasn’t considered enough when Silicon Valley Bank’s assets were seized by authorities March 10 following a run on deposits. Two days later, the U.S. Treasury, Federal Reserve, and the FDIC issued a joint statement saying that all depositors would be made whole, not just those below the US$250,000 cap.

In a wrinkle specific to Canada’s fragmented regulatory landscape, credit unions across the country tend to offer higher deposit insurance than the banks. In Ontario, the cap is $250,000, while credit unions in some provinces in Western Canada guarantee unlimited deposits.

While the Canadian Bankers’ Association has no formal position on caps for deposit insurance, which is funded by financial institutions, some bankers have suggested over the years that higher levels of protection at credit unions give them an unfair advantage when it comes to competing for large, lucrative corporate deposits.

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Those arguments, though, rested on the idea that the credit unions should not be allowed to guarantee deposits with higher caps or even without caps at all — not that Canada’s big banks should abandon the longstanding guaranteed $100,000 cap and operate deposit insurance with limits closer to parity with their U.S. bank and Canadian credit union counterparts. And that’s what budget watchers will be looking for.

• Email: bshecter@nationalpost.com | Twitter: BatPost