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 sheds light on the mechanism. These ETFs, launched in 2013, gather investors’ funds and invest them 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 more broadly. The result is a clean quasi-experiment. Banks holding HISA ETF deposits lowered the yields offered to HISA ETFs, which then responded by moving holdings toward money-market securities. We describe what HISA ETFs do, their rapid expansion, the regulatory concerns behind OSFI’s stance, and how regulations ultimately shifted HISA ETFs toward 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.