242 PA R T I I I Financial Institutions CDI C D EVE LO P ME N TS The Canada Deposit Insurance Corporation (CDIC) insures each depositor at member institutions up to a loss of $100 000 per account All federally incorporated financial institutions and all provincially incorporated trust and mortgage loan companies are members of the CDIC Insurance companies, credit unions, caisses populaires, and investment dealers are not eligible for CDIC membership; the Qu bec Deposit Insurance Board (QDIB) insures provincially incorporated financial institutions in Qu bec, and the other provinces have deposit insurance corporations that insure the deposits of credit unions in their jurisdiction, on terms similar to the CDIC s The CDIC is allowed to insure only deposits in Canadian currency and payable in Canada; foreign currency deposits, such as accounts in U.S dollars, are not insured Moreover, not all deposits and investments offered by CDIC member institutions are insurable Insurable deposits include savings and chequing accounts, term deposits with a maturity date of less than five years, money orders and drafts, certified drafts and cheques, and traveller s cheques The CDIC does not insure term deposits with an initial maturity date of more than five years, treasury bills, bonds and debentures issued by governments and corporations (including the chartered banks), and investments in stocks, mutual funds, and mortgages The primary rationale for deposit insurance is protecting depositors from bank insolvency and thus ensuring financial stability Deposit insurance could also promote competition among financial institutions by removing barriers to entry for new deposit-taking institutions In the absence of deposit insurance it is difficult for new banks to attract deposits Most depositors, for example, are not capable of making appropriate risk calculations to assess the risk of a new bank Those depositors would tend to place their deposits in banks that are considered too big to fail, thereby producing significant barriers to entry and unfair disadvantages for small new entrants By insuring deposits at all deposittaking financial institutions, the CDIC effectively removes barriers to entry for new deposit takers Differential Premiums Until recently, CDIC premium revenue was not tied to the risk profile of financial institutions; the premium rate was the same for all deposit-taking institutions, irrespective of their risk profile For example, in the 1998 1999 fiscal year, the flat-rate insurance premium was 1/6 of 1%, or 0.1667%, meaning that each deposit-taking financial institution paid an insurance premium of close to 17 cents per $100 This was one of the reasons that the Big Six, represented by the Canadian Bankers Association, vigorously opposed the establishment of the CDIC in 1967; it was argued that deposit insurance would be a subsidy to small banks paid by the big banks Over the years, the Canadian Bankers Association strongly promoted the reform of the Canadian deposit insurance system As a result, the CDIC developed the Differential Premiums By-law, which came into effect for the premium year beginning May 1, 1999 The bylaw undergoes regular reviews and has been amended a number of times The important feature of this legislation is its implicit, prompt corrective action provisions, which require the CDIC to intervene earlier and more vigorously when a bank gets into trouble CDIC member institutions are now classified into four premium groups based on their risk profile An institution s risk profile is determined using a variety of quantitative and qualitative criteria, including capital adequacy, profitability, asset concentration, income volatility, regulatory ratings, and adherence to CDIC s Standards of Sound Business