As many of our members have likely been reading in numerous media reports such as but not limited to those by NPR, CBC and CNBC, there has been some turmoil coming out of the United States with the news of Financial Institutions ‘failing’, ‘collapsing’ or being ‘closed down’ by their Regulators.
What happened exactly?
According to news articles, a Financial Institution in the United States, primarily serving venture capital firms, startups and wealthy tech workers, suffered a devastating impact to their bottom line, causing regulators to take control of operations. You see, starting in 2020, around the time of the pandemic, this bank saw their deposits skyrocket, this ended up being a big problem when its extra billions were invested in Treasury bonds with long-term maturities and the Federal Reserve raised interest rates, which in turn hurt the value of those government bonds. And with the tech sector struggling recently, more depositors took their money out, meaning that this institution was forced to sell part of its bond holdings at a loss of $1.8 billion. When the Financial institution announced to its shareholders that it would need to raise capital in the amount of nearly $2 Billion to shore up its books, even more depositors rushed to the bank to withdraw their funds. This led to a run on the bank. A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may fail. When this is done simultaneously by many depositors, the bank can run out of cash (due to fractional reserve banking) and collapse. This panic led to additional institutions being shut down by regulators in the following days due to similar bank runs resulting from the news of the collapse of the first Financial Institution.
How Secure are my deposits?
What happened in the United States is not a new problem, it is something that most Financial Institutions are faced with daily, which is ensuring that interest earned is higher than interest paid to cover operational expenses, a term often referred to as ‘matching’ or ‘managing interest rate risk’.
The Energy Credit Union, unlike many larger Financial Institutions, has a very low appetite for risk. This low risk preference is reflective in the type of Financial Instruments in which we choose to invest, and the rates and terms that we offer to our members. In general, the large Banks are trying to earn higher returns for their shareholders, which often means taking on riskier investments to maximize profits. The Energy Credit Union is a not-for-profit Organization, our primary focus is enabling growth, wellness and financial prosperity for our member-owners through our values of Trust, Loyalty, Compassion and Integrity above all.
The Energy Credit Union and the Credit Union system are regulated by the Financial Services Regulatory Authority of Ontario (FSRA), who have specific requirements to enhance the protection for the sector and its members. These requirements include Sound Business and Financial Practices, Liquidity and Capital Adequacy Requirements (including stress testing for ‘run offs’) and a Risk Based Supervisory Framework that is currently in Consultation.
Are my deposits insured differently at the Credit Union than at my Bank?
At The Energy Credit Union, eligible deposits in registered accounts have unlimited coverage through the Financial Services Regulatory Authority (FSRA).
At The Energy Credit Union, eligible deposits (not in registered accounts) are insured up to $250,000 through the Financial Services Regulatory Authority (FSRA).
At the Banks, generally, the CDIC protects eligible deposits up to a maximum of $100,000. Conditions may apply.
If you have any questions or concerns about your Energy Credit Union account, please do not hesitate to reach out to us. We’re here for you!