What the CDIC Actually Does (and Why It Matters)

The CDIC—A very important institution that protects us from them and them from us!

💈💈💈

You’ll find this video interesting, I promise. Yes, I say that all the time. The CDIC — the Canada Deposit Insurance Corp — a very important institution — is actually here more to protect the banks from us, than us from the banks. Stick with me. First, what is the CDIC? It’s a Crown Corp that protects eligible deposits at member financial institutions in the event of their failure.

In other words, let’s say a bank goes kaput, within limits, your deposits will be returned to you. We, the taxpayers, don’t fund the CDIC — the member institutions support it through premiums. I think the last failure was in the mid-90s, but, hey, they do happen on occasion. You can go online to CDIC.ca and get all the details about what’s covered and what’s not.

You don’t need me for that. Instead, I’m going to give you an insight few are aware of. Everyone thinks the CDIC is here to protect us against a bank going under — true — but it’s more to protect the bank against us worrying the bank is going under. When depositors don’t trust a bank’s financial stability, they naturally go get their money out.

Makes sense. But that’s not good for the bank. In a fractional-reserve banking system, like ours, like almost all in the world, banks don’t keep all depositor money on hand. Instead, they hold a fraction in reserve (usually just enough to meet day-to-day withdrawals and a cushion). The rest is lent out to borrowers.

This, obviously, creates a vulnerability. If everyone wants their money at once, the bank doesn’t have it all. Even if the bank is solvent. Heck, even if the bank is prosperous. Just the way this works. This, of course, causes chaos. And the chaos feeds off itself. The depositors were worried about the bank collapsing and, ironically, it’s that very worry

that causes the bank to collapse. A negative self-fulfilling prophecy. That’s a bank run. Ah, but if we know our deposits are insured, we’ve stayed within our limits, we don’t have to worry. And therefore, neither does the bank. Deposit insurance is a win-win and a very important component of a stable banking system. It’s in everyone’s best interest. See what I did there?