Bail ins | General financial discussion | Discussion forum

It is formally known as the Taxpayer Protection and Bank Recapitalization Regime.

The August 2014 proposal for the regime is at Department of Finance: Taxpayer Protection and Bank Recapitalization Regime: Consultation Paper.

An analysis of the proposal by law firm McCarthy Tétrault is at McCarthy Tétrault: Department of Finance Releases Proposal for Canadian Bail-In Regime.

Department of Finance indicated, as key feature #10 of the proposal, that consumer deposits are not contemplated to be included:

10) Consumer Deposits

The Government is committed to ensuring that Canada's deposit insurance framework adequately protects the savings of Canadian consumers. In this regard, deposits will be excluded from the Taxpayer Protection and Bank Recapitalization regime. As announced in Economic Action Plan 2014, the Government plans to undertake a broad review of Canada's deposit insurance framework by examining the appropriate level, nature, and pricing of protection provided to deposits and depositors.

The commentary from McCarthy Tétrault agrees that it is not a Cyprus-style bail-in:

Eligible liabilities of D-SIBs subject to the conversion power consist only of “long-term senior debt,” which is senior unsecured debt that is tradable and transferable with an original term of over 400 days. Secured debt and deposits are specifically excluded. Therefore, the regime does not contemplate a “Cyprus-style” bail-in, whereby depositors could be asked to participate in the bail-in. Depositors remain specifically protected under the existing Canadian deposit insurance framework (which the Department of Finance indicates it will also review to ensure that depositors remain adequately protected). In addition, the proposed conversion power with respect to eligible liabilities will apply only to debt that is issued after implementation of the new bail-in regime, with no retroactive application to existing debt. There will be a transition period prior to the application of the regime.

At the time, McCarthy Tétrault noted that only these banks were considered to be D-SIBs (domestic systemically important banks):

[1] The Office of the Superintendent of Financial Institutions (OSFI) has designated the following banks as D-SIBs: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank.

Goodness! The most amazing thing, to me, is that the government has obviously spent time thinking about these possibilities and what to do about them. Some felt need must have prompted this, and worst-case scenarios have been constructed accordingly.

I appreciate your explanation, Norman, and think I more or less understand it.

What I think you are saying is that, with reference to the Big Six, designated bonds and preferred shares could be subject to a government decision to convert them to common shares (lower on the pecking order in the event of default). Further, if things got really really bad for said bank, the (converted, common?) shares could turn to dust.

In other words, powers exist to turn investments in banks into zip in extreme circumstances. This, I presume(?) is intended to perhaps allow said bank to continue to function in some limping way rather than fold up completely, and would (perhaps?) shore up deposits?

Please correct where I've not got it right.

Further, banks can choose not to participate, but they do that at their peril because they then have to find the money outside of this framework with which to meet regulatory requirements.

Is this set-up in place, then? or is it still under consideration? You mentioned Brian might have some of these preferred shares.

I wish this kind of info was more accessible in the media. It should form part of "financial literacy". It may be out there somewhere, but if it's in technical language, most of us will miss it entirely, me included. I suppose some people might want to pull their money out of bank stocks if they knew more. Do you know if anything like this applies to other industries?

thx.

Brian said

Thanks Norman1 - very interesting initiative to keep Cdn banks (namely the big ones) solid financial institutions. I bought NVCC shares of Royal Bk earlier in 2015 - and the references / background you provide is most useful - am glad of the measures to keep our major banks solid and good investments for shareholders.

This is just an innocent dumb question, Brian, not a challenge, because I don't understand.
Why would you think that these measures keep these banks as good investments for shareholders if they provide a mechanism to render shares into less solid format (preferred to common) or indeed could turn them into nothing? At least that's how I understand it from what Norman has added. I can see why they provide protection for depositors but not so much for investors.
And what do you make of the fact that it only covers the Big Six? I think some, like Peoples, are not on the stock market;; but I think that Oaken's parent is, for example. Are they not included because they are smaller and could be covered by CDIC and perhaps some other measure I am not familiar with, or are their bonds/shares inherently a different risk?

Loonie said

Goodness! The most amazing thing, to me, is that the government has obviously spent time thinking about these possibilities and what to do about them. Some felt need must have prompted this, and worst-case scenarios have been constructed accordingly.

I appreciate your explanation, Norman, and think I more or less understand it.

What I think you are saying is that, with reference to the Big Six, designated bonds and preferred shares could be subject to a government decision to convert them to common shares (lower on the pecking order in the event of default). Further, if things got really really bad for said bank, the (converted, common?) shares could turn to dust.

In other words, powers exist to turn investments in banks into zip in extreme circumstances. This, I presume(?) is intended to perhaps allow said bank to continue to function in some limping way rather than fold up completely, and would (perhaps?) shore up deposits?

Please correct where I've not got it right.
....

Not that bad. The power to cancel shares only applies to common shares issued before the bank got into trouble, unless the same bank got into trouble again later:

^[7] For greater certainty, this power would only be applied to common shares of the bank which were outstanding prior to the point of non-viability.

Yes, the government felt a need to correct a misconception among bank investors. The misconception was that, should a systemically-important bank become non-viable, the government would bail it out, like the car makers, and leave every depositor, bondholder, and creditor whole. That what the US government did for the US banks.

The political fallout from the consequences of allowing a systemically-important bank to fail would be tremendous. Consequently, investors expected Canadian politicians would bail it out, no matter what the financial cost, in order to preserve their re-election chances.

Loonie said
...
Do you know if anything like this applies to other industries?

How about Algoma Steel?

Been to and emerged from bankruptcy twice. Each time, existing shares were cancelled and new shares issued to creditors in place of the money owed. Not done by government but by an Ontario bankruptcy court.

The company is now known as Essar Steel Algoma. Their third visit to bankruptcy court started last month: CBC (Nov 9, 2015): Essar Steel Algoma seeks creditor protection

You're welcome, Loonie.

Loonie said

These are all sobering thoughts, for sure. I was close to deciding to get my feet wet with a modest investment in dividend-producers because the tax advantages for me would be significant, but now am scared again. 2% from Tangerine or 2.05 from Hubert's 1-yr cashable don't look so bad!

It's true that shares can go to zero at any time, but nobody ever suggests that with the Big Six. Normally, what we hear is how solid they are and how reliable the dividends.
... Seems unusually interventionist because it is a fundamental incursion on the rights of stockholders/owners.
....

The proposed regime doesn't increase the risk to shareholders in the bank.

The proposed power of the government to cancel common shares is available only in the unlikely event that a systemically-important bank becomes, or is about to become, non-viable. Should that occur, common shares of the bank would be dust anyways through a ruling from a bankruptcy court. Even the preferred shares would likely be dust as well.

I don't consider this to be an incursion on shareholder's rights. Shareholder rights have always been conditional on the corporation being solvent and in compliance with all the covenants on its debt.