More than two years after the

failure of three banks

in the United States, the federal government released a consultation paper that proposes to increase the insurance coverage for bank deposits in Canada.

While Canada’s financial sector was not affected by those U.S. bank failures in 2023, it was a reminder that

large banks

could experience runs that could quickly lead to their end, and also highlighted the important role that deposit insurance can play in promoting stability, the Department of Finance said in the paper that it released Tuesday.

Canadian bank deposits are guaranteed by the

Canada Deposit Insurance Corp.

(CDIC), a Crown corporation established in 1967. The amount customers can get back if a bank shuts down is currently limited to $100,000 per category of deposit (such as savings and chequing accounts and guaranteed investment certificates), per financial institution as long as it is a member firm. All large Canadian banks and many other financial institutions such as credit unions are CDIC insured, though deposit categories such as mutual funds, stocks, bonds or cryptocurrencies are not included.

The government proposes to increase the insured limit to $150,000.

“The deposit insurance limit has not been increased since 2005,” the paper said. “Since then there has been a deterioration of the real value of deposit protection such that the adjusted limit today would be approximately $150,000.”

It also noted that Canadians’ saving patterns and changing demographics have increased the number of deposits that exceed the $100,000 limit, with fewer fully protected depositors.

“Such an increase to the limit would offset the

effect of inflation

on the limit and would increase the proportion of fully protected depositors,” it said.

The paper is also exploring whether non-retail depositors such as corporations, municipalities, universities, schools or hospitals should receive a higher deposit insurance of about $500,000 per category.

The current insurance framework does not differentiate between individual depositors and non-retail depositors, but the needs of the latter group are different, the paper stated.

“Many non-retail depositors hold deposit accounts specifically for operational purposes, to fund their ongoing operations (e.g. transactional accounts to cover payroll, pay suppliers, etc.),” the paper said. “Any delay or cessation in access to the funds in these accounts could be highly disruptive.”

The paper is also proposing providing an insurance limit of $1 million for “temporary high balances,” which it describes as a large sum of payment which depositors hold for a limited amount of time, such as an inheritance, an insurance payout, a divorce settlement, or the proceeds from the sale of a home.

Canada’s

aging population

may increase the circumstances leading to temporary high balances, it said.

“Such an extension would significantly increase coverage for depositors transitioning through major life events when they may temporarily need greater protection,” the paper said.

Aside from the proposals, the paper also states that the government would consider the fact that any increase in the scope and level of coverage could lead to additional premiums paid by CDIC members and affect the cost of financial services to consumers.

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Ottawa will look to receive feedback from “interested Canadians and stakeholders” on the proposals mentioned in the consultation paper until Sept. 26.

• Email: nkarim@postmedia.com