“Money in the bank” is a phrase that conveys security. But what happens when the bank fails? That’s a question that was brought home last week when U.S. authorities shut down California-based Silicon Valley Bank (SVB) after a bank run left the US$200 billion lender without enough funds to cover its obligations. So what would happen to your money if a Canadian bank suffered the same fate? The Financial Post’s Naimul Karim looked into it.

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Is your money safe?

The short answer is probably. In Canada, bank deposits are guaranteed by the Canada Deposit Insurance Corporation (CDIC), a federal Crown corporation established in 1967. The CDIC currently safeguards about $1 trillion in eligible deposits at more than 80 member institutions, but there’s a catch: the amount depositors can get back is capped at $100,000 per category of deposit, per financial institution.

What accounts count?

The CDIC has eight separate categories in which it classifies deposits. These are: deposits held in one name; joint deposits that are held in more than one name; registered retirement savings plan (RRSP); registered retirement income fund (RRIF); tax-free savings account (TFSA); registered education savings plan (RESP); registered disability savings plan (RDSP); and deposits held in trust. According to the CDIC’s website, another category, the First Home Savings Account (FHSA) will be added as of April 1, 2023, also with up to $100,000 in coverage. At least in theory, then, it could be possible to have $800,000 (soon to be $900,000) in deposits insured at one institution. The coverage includes savings and chequing accounts, Guaranteed Investment Certificates (GICs) and other term deposits and foreign currency. However, it doesn’t apply to stocks, bonds, mutual funds, ETFs, cryptocurrencies or losses due to fraud or theft.

Can you give an example?

As an example, if your RRSP account holds a $20,000 GIC, a $90,000 term deposit, $50,000 in stocks and bonds and $130,000 in mutual funds, only the GIC and term deposit would be insured. Of the $110,000, only $100,000 would thus be guaranteed. If a person had another RRSP account at another bank with the exact same holdings, $100,000 in that account would also be insured.

How does it work in the U.S.?

The U.S. has a similar system run by the Federal Deposit Insurance Company — an independent agency of the U.S. government that protects depositors with money that comes out of fees paid by banks. The U.S. limit, however, is substantially higher, at US$250,000 per account type per institution. The U.S. also has different account categories.

Is Canada’s limit too low?

Some economists believe that the CDIC should increase the $100,000 limit, which was set back in 2005. “This number needs a serious update,” said Amir Barnea, an associate professor of finance at HEC Montreal. “It should have been higher by 42 per cent, just to keep up with inflation … it doesn’t make any sense.” According to the academic, the only reason he thinks this isn’t being increased is because CDIC is “financed by premiums” from the banks and the banks “don’t want to pay” higher premiums. Olaf Weber, a senior fellow at the Centre for International Governance Innovation, echoed the sentiment. “Given the value of money over time … it would make sense to increase that,” he said. “It’s not high.”

Is that all you get back?

The exact amount that depositors would recover in the event of a bank failure would depend on how big a hole it has in its balance sheet and how the insolvency process plays out. Weber said that in a “real emergency,” he would expect the government to step in and ensure depositors get more than the insured amount. That’s what the U.S. government has done in the wake of the SVB closure in a bid to bring some stability to the financial system, announcing all depositors would get their money back

How likely is a bank failure in Canada?

Canadian big banks follow guidelines that are more strict than their global peers when it comes to ensuring they have sufficient capital on hand, so a major bank failure seems a very unlikely event. Barnea, however, said that the SVB closure provided an idea of just “how bad things could get” if something similar were to unfold in Canada. “I think our Canadian banking system is much more stable, we have seen it in the Financial Crisis of 2008,” he said. “But definitely the crisis we are seeing now in California sends a reminder that it’s time to revisit this and, once the dust settles, it’s going to be very important for our regulators to increase that limit.”

• Email: nkarim@postmedia.com | Twitter: naimonthefield