A note on bank runs

It so happens that I was at a banking conference in Montreal this week and I saw a presentation by Guy St-Pierre, the current president of Canadian Deposit Insurance Corporation (CDIC).

I learned several things. Here are some interesting ones.

First, apparently only 10% of Canadians can correctly name the maximum amount that their savings deposits are guaranteed in case of a bank failure: it's $100,000. (I was one of the 90%. The previous evening I had been discussing it with sfllaw and thought it was $40,000. He said he thought it might be $60,000, which was actually correct until they increased it again a couple years ago.) On the other hand, 75% of Canadians know that their deposits are insured.

Second, credit unions use a totally different (but equally valid) insurance provider than banks. Each province has its own. Several provinces have limits greater than $100,000. Some have unlimited deposit insurance. And the insurance applies to the home province of the credit union, not the home province of the depositor! So if you have more than $100,000 in cash that you want to guarantee, you might want to look into a credit union in one of those provinces. (I sure wish I had that problem :))

Third, about those bank runs. There was a highly publicized run on Northern Rock bank in England a few weeks ago. My question at the time was: why bother running to the bank if it's in trouble? Since deposits are insured anyway, even if they crash and can't give me my money, somebody else will. Isn't the whole point of deposit insurance to eliminate bank runs?

Well, yes, in fact, that's true... but not in England! There, they use a system called coinsurance, that is, "spreading risk among multiple parties." In this case, that's you and the government. In a fit of brilliance, only 90% of your deposits beyond about $4000 is covered by the deposit insurance in England. So if there's a run on the bank, and you're not first in line, you'll lose 10% of your savings account. Which gives you a perverse incentive to continue a run on the bank; and the worse the bank run gets, the more incentive you have. Oops!

I don't know what the point of the 90% limit was supposed to be; as we've now learned in retrospect, it undermines the main point of deposit insurance, which is that you shouldn't have to ever use it.

In Canada (and the U.S. too, I think), we have 100% insurance up to $100,000. So if there's a run on your bank, feel free to sit at home and watch it on TV.