Canada Introduces Bank Bail-in Regime to Bail Out Failing Banks

Following the EU’s footsteps, the Liberal Government of Canada is introducing the bank bail-in regime.

This on page 223 of the Just-in (no pun intended) 2016 budget:

Introducing a Bank Recapitalization “Bail-in” Regime

To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”.
Translation: In the event a bank fails and in order to save it, authorities would allow the assets of the bank’s creditors to be absorbed into the bank’s capital in exchange for common shares of the failing bank which aren’t going to be worth much.

Here are a few subtle but critical details which are not communicated in the same breath:

  • The holders of the so called long term debt can be the bank’s bondholders, and, more critically, the depositors who happen to be you. Remember the money you deposited in a bank is no longer your asset. It becomes the asset of the bank and you are an unsecured creditor of the bank’s overall liabilities.
  • While the reason for the bail-in regime is ostensibly to avoid another bail-out using taxpayers’ (yours, in a socialized way) money, now you are directly on the hook for bailing out a failed bank if you happen to have a bank account with the institution.

In case you are basking in confidence that something as unthinkable as a banking collapse won’t happen to your country, perhaps a few factoids might convince you otherwise:

  • When the banks failed in Cyprus in 2012, some 40% of the deposits over $100,000 got converted into useless shares of said banks.
  • Bail-ins of various forms are already happening in Italy, Portugal and Austria, all in the past year.
  • The CDIC insurance only covers deposits under $100,000. Even so, the insurance has a grand total of $3 billion insuring $684 billion of Canadians’ savings in the banking system (link). You do the math.

Bank bail-in

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