CHAPTER 10 Economic Analysis of Financial Regulation 243 and Financial Practices, with capital adequacy dominating the criteria, accounting for 20% of the score Under the new system the premium rates for CDIC member institutions are those shown in Table 10-2; they vary from cent to 11 cents per $100 Group 1, classified as best, is well-capitalized banks that significantly exceed minimum requirements On the other hand, banks in group 4, classified as worst, are significantly (and perhaps critically) undercapitalized and the insurance premium that they pay is 11 basis points, the maximum allowed under the CDIC Act In addition, for group banks, the CDIC is required to take prompt corrective actions such as requiring them to submit a capital restoration plan, restrict their asset growth, and seek regulatory approval to open new branches or develop new lines of business Today, over 90% of CDIC member institutions are classified in categories and 2, but as in other countries, the premium category and related supervisory information applicable to individual CDIC members are confidential Opting-Out Another interesting recent development is the Opting-Out By-law that came into effect on October 15, 1999 This legislation permits Schedule III banks that accept primarily wholesale deposits (defined as $150 000 or more) to opt out of CDIC membership and therefore to operate without deposit insurance The new legislation, however, includes provisions to protect depositors who hold deposits eligible for CDIC protection In particular, it requires an opted-out bank to inform all depositors, by posting notices in its branches, that their deposits will not be protected by the CDIC, and not to charge any early withdrawal penalties for depositors who choose to withdraw Probably the most important feature of the opting-out legislation is its minimization of CDIC exposure to uninsured deposits This represents a significant departure from past practices, when the CDIC showed generosity to uninsured depositors For example, in the Canadian Commercial and Northland failures of the mid-1980s, the CDIC paid 100 cents on the dollar to all depositors, both insured and uninsured By compensating only the insured depositors rather than all depositors, the opting-out legislation increases the incentives of uninsured depositors to monitor the risk-taking activities of banks, thereby reducing moral hazard risk Premium Structure and Rates for CDIC Member Institutions TA B L E 10 - Premium Category Premium Rate (as a % of Insured Deposits) 1/72 of 1%, or 0.01389% 1/36 of 1%, or 0.02778% 1/18 of 1%, or 0.05556% 1/9 of 1%, or 0.11111% Source : CDIC website: www.cdic.ca Reprinted with permission of the Canada Deposit Insurance Corporation