COVID-19 has shown that the country and its financial system are resilient, says the head of federal agency Canada Deposit Insurance Corp.
Who knew that the guy in charge of protecting Canadians’ bank deposits plays war games? It’s all in a day’s work for Peter Routledge, president and CEO of Canada Deposit Insurance Corp.
Named head of CDIC in 2018, Ottawa-based Routledge previously held leadership posts in the financial services industry at home and abroad. At the federal Crown corporation, he leads a team of 200 whose job is to safeguard deposits at more than 80 CDIC member institutions.
Routledge, who went to high school in North Vancouver and has a business and economics degree from SFU, usually returns to B.C. three times a year to visit family—or at least he did before the pandemic. He likes his current home, which reminds him of his old one. “Ottawa today is like Vancouver in the ’80s—the million-three population, outdoorsy, fairly relaxed environment,” he says. “So it takes me back.”
We chatted with Routledge about the health of Canada’s financial system in the wake of COVID-19, the difference between a bank bailout and a bail-in, and why climate change could pose a threat to the banks, credit unions and trust companies he watches.
For the complete interview, check out the BCBusiness Podcast.
I’m not sure everyone is up to speed on the role of CDIC. Can you talk about the agency’s mandate and the scale of its insurance coverage?
The first thing CDIC does is protect Canadian deposits—bank deposits or deposits at federal credit unions or at trust companies, up to $100,000 per institution across seven different deposit categories. Which means at each institution, in theory you could have up to $700,000 of coverage. The way to do deposit insurance in Canada means it’s very likely that all your money is covered by CDIC.
The second thing we do—and it flows from the first—is we keep an eye on our members. We don’t regulate them, and we’re not the superintendent or the regulator of the banks; the Office of the Superintendent of Financial Institutions is. But we keep an eye on our members, and if they start down the path to non-viability—failure is the more common phrase for it—we’re ready. We act as resolution authority, and our job in that case is to make sure that if an institution in our membership is approaching non-viability, we make that as non-disruptive to the financial system as possible. The notion is to protect depositors and promote financial stability.
The pandemic has had a major impact on the Canadian economy. How worried are you about your member banks—and how safe are all of their deposits today?
No matter what happens to our member institutions, Canadians’ insured deposits are safe. No one’s ever lost a dime on a deposit insured by CDIC in our 54 years of existence.
To the first part of your question, the safety of our membership, which is 85 institutions across the country, pre-pandemic I would say our capital and liquidity buffers were quite strong, and we felt quite good about the resiliency of the system. The pandemic hits about a year ago, and that was a pretty huge challenge to the presumption that our system was resilient. And we were, to be honest, very watchful and concerned about what might happen in the economy and how that might impact our member institutions.
Over the course of the last year, because of the resilience of the Canadian economy, because of the exceptional fiscal and monetary support that flowed into the system last spring and summer, our membership operated through the pandemic quite well. They built additional loan-loss buffers just in case, and this year it looks like they’re not using them to the extent we expected. So the outcome and the shock to the system is much less than we anticipated.
There hasn’t been a failure of a federal financial institution in some time. Given that, what do you and your colleagues do at CDIC? What does a typical day look like?
The last bank failure, or rather it was a trust company failure, was in 1996 in Calgary. It was Security Home Mortgage Corp. It was a small institution, only about $40 million in assets. That’s the last one we did, and that was the 43rd.
So we’re in this 25-year period where we haven’t had a failure. There have been times when members worry us a little bit more than normal, and we try and get ready. Despite having to get ready a couple of times over the last 25 years, we haven’t had to act.
I like to explain CDIC as kind of like the firehouse waiting for a fire in the neighbourhood, and we haven’t had the fire alarm go off for quite some time. So what does a good firehouse captain do? He does two things. He calls up his neighbouring firehouses who may have had fires and tries to learn from them. And so we’ve been quite active with our peers globally and more specifically in the United States, where the Americans have experienced over 500 failures since the [2008-’09] financial crisis. So we try and learn what we can from them, and we’ll send people down to the United States for courses on how to do bank resolutions and all that.
The second thing we’ve really ticked up in the past year and a half is war-gaming or simulations. We pretend bad things happen, and we put ourselves through an exercise to try and think through what decisions we might have to make in the event something actually happens. The idea there is that that’s a pretend, or simulated, world, and making mistakes in that world is quite inexpensive because it’s not real.
If the real thing does happen, what can CDIC do to stem the damage?
It’s not as if we wake up one day and a bank has failed and we have to snap into action. Because we’re tightly tied into the federal financial safety net system, we get early warnings, and we like to think of a member that starts to get into trouble as in a runway. So there’s hopefully an extended period, and that runway is long and it makes it easier, but usually there’s a runway leading up the point of non-viability, where an institution fails.
Early on in a runway, we can invite ourselves into the boardroom of a troubled member and do what we call special exams, where we can get much more detail [on] the financial condition of a member. That helps us plan out decision-making if the situation deteriorates early in the runway.
As we move further and further into the runway, everything we do is governed by what’s called the CDIC Act, which is Parliament saying, Here’s your mandate, and here’s what you can do within the law. And we stay within the confines of the Act. Our Act gives us two ways to react to a troubled member: before failure, or before the point of non-viability, and after.
Before failure, we can take actions in the same manner a senior creditor or a senior lender to a company would. We can make loans to the company; we could invest equity in the company; we could help facilitate a sale of the troubled bank or financial institution to another, healthier financial institution.
If there’s nothing available or nothing attractive, after the point of non-viability, other, more significant powers open up. So we can put that institution into a windup and restructuring, in which case it basically liquidates its assets and pays out its creditors. In that scenario, we immediately insure depositors their insured amounts in full. So they’re fine, and we accept the losses that come from that.
We can force the sale of an unhealthy institution to a healthy institution. We can create something called a bridge bank, where we lift the good liabilities and the good assets out of the bank, move it into a new institution that’s healthier, perhaps sell it off or send it back into the private sector.
And then for a specific type of institution which we call systemically important banks, we can recapitalize through particular instruments on their balance sheet.
So is the last thing you described basically a bank bailout?
We don’t like to call it a bailout. We like to call it bail-in.
From the financial crisis, people labelled actions taken by governmental authorities bailout because in some form or fashion, they were adding capital to a troubled institution or an institution that was near failures. And that capital came from the taxpayer. That’s a bailout, and we built a system to prevent that from happening.
A bail-in is we ask our systemically important banks, in particular, to issue liabilities that convert to common equity if the bank becomes non-viable. So one way to think about it is, the typical systemic bank in Canada—and there are six of them—has about 12-percent equity cushion. And that is in the form of tangible common equity. On top of that, protecting depositors, protecting CDIC, protecting any third party that might come in and add capital is another, give or take, 12 percent of liabilities or capital instruments that will convert into common if the Superintendent deems that institution non-viable.
That’s the bail-in. It’s an de facto automatic investment of equity into a troubled bank that recapitalizes the bank, at no cost to the taxpayer. The real cool thing about it, all those instruments that’ll convert, they’ve already been issued, and the private sector investors who purchased them or have invested in the institution know in advance that they’re accepted that risk. And so when they get converted into common equity in that very, very rare condition, they will have been paid before for the fact for accepting that risk. That’s why we call it bail-in: the institution gets recapitalized without any injection of public funds.
What about a so-called run on the bank: a failing institution where shareholders and depositors are bolting for the exits? What are your options?
First of all, we don’t protect shareholders. They own shares in the banks as private investors, and more power to them, and they suffer the ups and downs of valuations changes. For depositors, the first thing we do is before a run, we make sure that the insurance is in place. And we tell people about it so they know they’re protected.
If that’s not enough—if there’s a true run on the bank—it’s very likely the Superintendent would come to a determination of non-viability, and then we could start to use our tools to stabilize the situation. And that’s what we’d do pretty quickly.
Runs in the Canadian banking system are very rare because generally speaking, people know their deposits are covered, and they don’t react in a panicky fashion to bad financial news. We really did see that through the pandemic. Not only did deposits stay stable early in the pandemic, but then our membership’s deposit funding—and by that I specifically mean insured deposit funding—we believe has spiked at a growth rate well above historic numbers.
To give you some numbers around that, deposits that we insure generally grow with nominal GDP, so around 4 or 5 percent a year. Since the pandemic, we’ve seen deposit growth annualized at about 10 percent.
Social media has made it easy to spread misinformation and, often, outright lies. If there was a rumour about a bank failure that caught fire, say, on Twitter what tools do you have at your disposal to stop people from panicking?
We have the same tools at our disposal as folks who may put out misinformation have. We have access to social media, we have access to regular mainstream media, and over the last couple of years, we’ve really experimented with a mix between those two forms of media to get our message out.
We didn’t find too much misinformation in the immediate aftermath of the pandemic onset—March, April, last year. But we noticed people got really worried. So what we did with both our social media and our mainstream or television advertising media is quadrupled our presence in those platforms for about three months. And so we quadrupled the amount of times people would see us and engage with us. And that worked. It certainly wasn’t the sole responsible factor for the return to a less-worried state among Canadians, but it helped.
Investors of all stripes are piling into cryptocurrencies, but CDIC doesn’t cover digital currency. Why is that, and what would it take for things to change?
CDIC, up until about a year ago, only insured deposits denominated in Canadian dollars. But as the world globalized and more Canadians decided to hold their deposits denominated in foreign currencies—U.S. dollars, euros or what have you—the government of the day elected to widen our coverage to include deposits denominated in foreign currencies. And they were saying, de facto, as Canadians hold their savings in deposits denominated in foreign currency, we’d like that to be included within the protective net provided by CDIC.
We give governments our fearless advice, but we’re not elected. Parliament is elected and reflects the sovereign will of the people, so we take orders from them, not the other way around. If cryptocurrency gains wider acceptance, that’ll be a policy matter for the federal government to determine. We’ll weigh in with our technical advice on financial stability and deposit protection, and we’ll do that in a manner in keeping with the notion of cabinet secrecy.
Besides cryptocurrency, what other shifts or innovations in financial markets are you watching as part of your job?
Increasingly, I’m really interested in all the work done around the financial exposure related to climate change. There was an outstanding study done in Canada, orchestrated by the Department of Finance and led by a few people, one of whom is the now-governor of the Bank of Canada, Tiff Macklem. It pointed out that climate change will shift the allocation of capital across the globe, and as that happens, the relative value of capital assets will change.
And what’s interesting for us, and the Office of the Superintendent of Financial Institutions is really on point on this, is to understand the financial risks to our membership that might flow from that. It’s very cutting-edge, and what you’re doing when you’re trying to think through it is think through tremendous uncertainty, a known unknown. We don’t really know the full financial impact of climate change on capital markets, but it’s important to start thinking about it now and to start asking ourselves, Do we have the buffers to absorb that changes that might flow from relative valuations of assets?
A third one is financial technology companies, or fintechs. They’re innovating in the financial services space, and we want our product to keep up with that innovation. And so we’re doing a lot of thinking and consulting with industry on, OK, what sort of new products might get developed, and how would a deposit insurance product be supportive of creating more value through that innovation for Canadians?
What keeps you up at night as we make our way out of the pandemic?
Right now, we dealing with an onset of more-virulent strains of the coronavirus, and you worry about will there be another shutdown; what would be the economic impact of that? And that could be significant.
On the other hand, the economy is outperforming even the most optimistic expectations of six to 12 months ago, and there’s no evidence that that basic outcome is changing. You look at the bank results that have come out in the last week, it’s happy days. Things are going really well.
And so what keeps me up is… I’m pretty optimistic. I think basically, the story of the pandemic is the economic resiliency of Canada and of the financial system. I’m, like, 80-percent confident that that’s going to be the story. I’m not paid to worry about that. I’m paid to worry about the 20-percent downside. And so that’s what keeps me up at night.