What Happens If My Bank Fails?

This post is sponsored by the Canada Deposit Insurance Corporation (CDIC).  All views and opinions expressed represent my own. 

Important:  Today, I’m going to tell you a story about what might happen if your Canadian bank fails.  Please consider this a starting point if you are curious about how the money in your Canadian bank account is insured.  But please don’t just assume that this post applies to your specific situation and be done with it. It’s up to you to make sure that your money is safely in an account at a CDIC member institution.  The best way to do that is to use this interactive Deposit Insurance Estimator that the CDIC made for you. And when in doubt, ask questions.

So what happens if my bank fails?

Basically, if your bank is on the CDIC member list and you have less than $100,000 in your account, then you don’t have to worry.  

The Canada Deposit Insurance Corporation (CDIC) has you covered if your banks fails.

Also look for this logo on your bank’s website and in the branch to make sure it is a member:

It’s like a purple safety blanket for your money.

But my bank can’t possibly fail, right? Banks are safe places, right??

Is a bank failure possible? Of course it is.

Is it likely?  Who knows.

There are currently 84 banks on the CDIC member list and I didn’t know half of them even existed until today.  

There are big banks and little banks and some that may not operate in your area.

Banks are run by human beings just like me and you and human beings have the ability to fail.

And that’s why deposit insurance was created.

Happy 100th birthday Canada! Here’s some deposit insurance.

The CDIC was created in 1967 and since then, 43 Canadian banks have failed.   

Yeah, I didn’t know that either.

Seems like a lot until you find out that 465 US banks were closed by the United States Federal Deposit Insurance Corporation(FDIC) from 2008 to 2012.  

In 4 years, the US had 10 times more bank failures than we have ever had.

But the US is a bit bank-crazy.  At one point there were over 12,000 banks in the US. What?

The last bank failure in Canada was in 1996, but that doesn’t mean that it couldn’t happen today, and if it does, the CDIC is ready.  

Oh, and when those 43 banks failed, CDIC made sure every insured deposit was paid in full.

All of it.

So what might cause a bank to fail anyway?

To answer this question as simply as possible, please join me in my time machine as we revisit the classic holiday movie It’s a Wonderful Life.

In the movie, George Bailey (Jimmy Stewart) runs Bailey Brothers Building and Loan, a type of financial institution, very much like a savings bank, where people deposit their money, and that money is then loaned to people who want to buy a house.  (For simplicity, let’s call it a bank going forward.)

Most people deposit money in the bank because they don’t need it right away, so there’s no problem lending most of it out.  The idea being that there is enough money in the vault to pay out regular withdrawals.

A bank failure happens when the bank is unable to pay out money that the depositors request at any given time. This is called insolvency and as the bank ultimately “failed” to meet demands, it is considered a bank failure.

In the movie there are two incidents that almost cause the bank to fail:

• The Bank Run
• The Lost Deposit

The Bank Run

Mr. Potter, the movie’s antagonist who owns everything in the town except Bailey Brothers, starts this rumour that the Building and Loan doesn’t have any money to pay out to depositors.

Whether that’s true or not doesn’t matter anymore because mob mentality takes over and everyone goes to the bank asking for their money.  

Well I don’t know if any bank has enough money on hand to pay out everyone all at once and George Bailey definitely doesn’t, so he has to use some of his own personal money to keep the bank from going bankrupt.

And George tells them essentially that this is how a bank works.  

“I don’t have your money.”, he says. “It’s in Tom’s house, and Fred’s house…”

Banks are not setup to be able to pay out every cent of their depositors’ money on demand, all at once.

Whether the Bailey Brothers were having financial troubles or not really isn’t the point but let’s look at the second incident before I say any more about that.

The Lost Deposit

George’s wacky uncle gets turned around on his way to deposit the bank’s daily deposit at a larger bank and he misplaces $8,000.

He can’t find it anywhere.  It’s all cash so it’s devastating.  Can’t trace it. (Reminder to not carry large amounts of cash anywhere!)

Unfortunately, evil Mr. Potter is the one that finds the bag of money and because he is the worst human being, he doesn’t tell them he has it.  

He decides to make them sweat.

George is so terrified and he doesn’t know what to do. He can’t float another bank run.

Maybe Potter will find some decency and give back the lost deposit, but whether he does or not, George knows he has to fix it before anyone finds out.

So are you telling me that if I ever read in the news that my bank lost a lot of money or might not be able to pay deposits that I should rush over there and immediately withdraw my money?

No.

Not if your bank is a member of the Canada Deposit Insurance Corporation (CDIC).

You see, both of the situations in the movie only existed because of the fear the depositors had of losing their money.

In The Bank Run, Potter’s rumour scared the depositors directly.  In The Lost Deposit, George knew that if anyone found out about the missing money, that fear could cause another bank run.

Take away the fear and you just have temporary issues that might have been able to be resolved the next day.

CDIC was created so that you don’t have fear.

Sure, maybe there will be times that your bank is seemingly having troubles or you hear someone lost $8,000,000,000 on the internet somewhere and aren’t sure where it is.  

And the news might report it as terrible and it will seem totally real. They will try to make you lose trust that your bank will resolve the situation, just like Potter did. Everyone reporting this might actually believe what they’re saying is true, and it might even be temporarily true.

But instead of calling up your bank and saying “where’s my money and I want it all now”, you can just:

• take a breath
• look at the CDIC member list for your bank’s name
• or go to your bank’s website and look for the purple logo
• then put down your phone
• and resume watching Netflix.

CDIC has you covered.  

No rumour is going to make you afraid.  

You trust that the CDIC will take care of it.  

The thing that could mess up a bank more, if the bank is actually struggling a bit for whatever reason, is if you demand that your $100,000 be paid out right now.  

And then a thousand other people demand that too.  

And now the bank has a real problem.  

Because of you. Because you panicked.

Of course your instinct is to panic just like the people in the movie so I get it.

But you won’t panic because you already checked the list and looked for the purple logo () on your bank’s website.

The news will say:

“Your bank has no money! Please panic and run in the streets!”  

And you’ll say:

“Whatever, the CDIC has me covered.”

A lot has changed since George Bailey lassoed the moon.

Ok, but what if the bank can’t fix its troubles and really does fail? How do I get my money from the CDIC?

First of all, the CDIC has special powers they can use to resolve a failing institution.

A bank failure, especially if it’s one of the big banks, is no good for anyone.  

So the CDIC can basically take over a bank if they need to, and try a bunch of different things to save the bank.

But, if the bank can’t be saved, then the CDIC will pay you your money.

But I have more than $100,000 in my bank accounts – what happens then?!

Well first, maybe you should invest some of that money instead of keeping it in a bank account! Seriously. 

But that’s a topic for another blog post.  

(FYI, investments are protected by the Canadian Investor Protection Fund, so check that out if you’re ever concerned about your investments. Investments and deposits are not the same thing. )

So let’s break down this $100,000 CDIC limit.  This is where people get a bit confused.

It’s not just $100,000 total.  

You can have $100,000 in EACH of these categories:

• Deposits in your name (so your regular bank account)
• Joint Deposits (Share an account with your spouse?  That’s an extra $100,000 in coverage right there.)
• RRSP/TFSA/RRIF (Each of these types, but it’s only for deposits, not investments, ok?)
• Deposits held in trust (actually $100,000 for each beneficiary named in a trust)
• Deposits held for paying taxes on mortgaged properties (turns out some people save up for their mortgage taxes!)
  

So that’s seven categories, or up to $700,000. (Or even more if you have more than one trust beneficiary.)

And that’s for every bank on the member list.

So you could have millions spread around a few Canadian banks. (But again, please invest some of this money…)

I should mention it’s Canadian dollars only, please.  No foreign currencies…yet…but there are changes coming soon.

This sounds great! So how much does this insurance cost and how much paperwork do I have to fill out? I hate paperwork.

Well, you’re in luck because CDIC Deposit Insurance is free and automatic.  

You don’t have to do anything.  

Just remember that not every financial institution is a CDIC member.  If your “bank” is not on the member list, then you should check their website or call them to find out how your deposits are protected.

There’s no way I can cover everything you need to know in one post but hopefully this gets you started on the road to becoming a deposit insurance expert.  To find out more about everything that I’ve talked about today, please head over to the CDIC website and click on all the links in this post.