The Boundaries of Bank Funding: The Case of Canadian Cash ETFs

Banking regulations can shape the asset-management landscape in an underappreciated way. We document that banking regulations push asset managers liquid holdings away from bank savings accounts and toward money-market assets. The case of Canadian HISA ETFs shines light on the mechanism.

These ETFs, launched in 2013, gather investors’ funds and invested in high-interest savings accounts. When policy rates rose sharply after the pandemic, HISA ETFs became a surprisingly effective way for households and institutions to earn competitive deposit-like returns. Funds poured in.

Then, in late 2023, OSFI reaffirmed how banks under Basel III must treat deposits from ETFS and asset managers broadly. The result is a clean quasi-experiment. Banks with HISA ETF lowered the yields offered to HISA ETFs who then responded by moving holdings toward money market securities.

We describe what HISA ETFs do, their quick expansion, the regulatory concerns behind OSFI’s stance, and how regulations ultimately shifted HISA ETFs into holding money-market securities. This episode reminds us that banking regulations ensure the sound liquidity of banks, but it also highlights broader implications for the liquidity management decisions of other financial institutions.