Tuesday, March 13, 2007

CDIC insurance

I notice that the Canada Deposit Insurance Corporation has launched a phalanx of public-awareness ads, hoping to educate the public about what CDIC is and what they do.

For those who don't know, CDIC is an arm of the federal government that insures the savings Canadians keep in their bank or other CDIC-covered financial institution in case they fail or go bankrupt. In essence, it's the government's way of ensuring that we put our money to work in banks or other investments, rather than keep it under our mattress where it's not contributing to the Canadian economy.

CDIC coverage typically applies for amounts up to $100,000. It's a nice feeling -- knowing that should anything happen to your financial institution, you would be reimbursed up to $100,000 is nice to cling to in an age where we all watch our investments fluctuate in the short term. I suppose it's a no-brainer idea for the government to implement, since the benefits are obvious while the costs are unlikely to every come into practice. But part of me questions the wisdom of having it. It seems like an empty promise.

Firstly, if we ever got into a situation where one of Canada's national banks or major insurance conglomerates went bankrupt, since the economy is so inter-connected, the negative impact such an event would have on the finances of every single Canadian would be certainly comparable to a hundred thousand dollars per person. I suppose I'd feel good about having that $100,000 in cash to hold on to while my mortgage went haywire, the value of my home plummetted, my cash was inaccessible, my stock portfolio tanked, and/or my life insurance ceased to exist, but I doubt I'd be able to see that at the time.

And secondly, I wouldn't be getting $100,000 cash in real terms anyway. An event like that, I suspect, would put the economy into such a tailspin that inflation would zoom up to ridiculous, developing-world levels, at least temporarily. So even if I was one of the lucky few who had $100,000 cash and zero other possessions to lose their value, the buying power of that cash would be drastically less than the $100,000 you think of it as.

Maybe I'm being a little overly-melodramatic here, but to me CDIC insurance is nothing more than a stamp that says "don't worry, this isn't sketchy. You can put money here." It's more of a general database of legitimate financial institutions than a promise that's worth anything more than the paper it's printed on.

Like anything else, I suppose, it's a nice little security blanket. Although if I ever need to put it on I suspect that'll be the least of my problems.

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