Canadian savers may want to pay closer attention to the actions of the Government of Canada.
Savers around the world were watching the Cyprus scenario unfold last spring as depositors money was quite suddenly up in the air – and then much of it was gone. Canadian savers may want to know that the government there is making its own plans for a Cyprus style scenario. Talk about a Canadian Economic Action Plan!
In the event that a “too big to fail” bank were to approach collapse in Canada, it would appear that the money deposited in the banks could be taken and then used to keep the bank viable. The following words can be found on pages 144 and 145 of Jobs Growth and Long Term Prosperity – Economic Action Plan 2012 as tabled in the House of Commons by the Hon. James Flaherty, Minister of Finance on 21 March 2013. This is otherwise known as the budget.
Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.
The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation time lines will allow for a smooth transition for affected institutions, investors and other market participants.
Before drawing conclusions, what do these words say?
First – “systemically important banks”. This means banks that are perceived as being too-big-to-fail (TBTF). The Office of the Superintendent of Financial Institutions (OFSI) identified six banks in Canada as being systemically important in the spring of 2013. They are the Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal, the Canadian Imperial Bank of Commerce and the National Bank of Canada. This was a bit of a surprise to some observers, as it had been thought that only the RBC was TBTF.
Second – there is discussion of a “bail-in regime.” You should start getting nervous here. A bail out is when an outsider gives the institution in trouble more money so it can keep going. A bail-in is when money from within the institution is used for the bail out and then those whose money was taken are given something in return. Typically, those who have their money taken are offered shares in the institution in the hope that the institution will prosper again in the future and the shareholders can still have value. This was just done over the last few years in Spain. It did not work out too well.
Third – we see the words in the unlikely event that a systemically important bank depletes its capital. In other words, if a bank suddenly goes broke. This could be due to unforeseen loses such as a complex derivative contract that failed. See a simple explanation of derivatives at http://www.brokenmirrors.ca/?p=143
Fourth – there is the phrase the very rapid conversion of certain bank liabilities into regulatory capital. The words “certain bank liabilities” is a fancy way of saying deposits. When you deposit a hundred dollars in a bank, this shows up on their spread sheet as a liability. So what this phrase says is that bank deposits could be taken up and used by the bank and it could be converted into regulatory capital. Regulatory capital is another way of saying banks must keep a certain amount of money on hand for meeting daily requirements such as withdrawals for deposits. The minimum amount that must be kept on hand is determined by the regulator. In this case the regulator is OFSI.
So what does this all mean?
In short, it says that if a Canadian bank suddenly finds itself in financial trouble, money from depositors can be taken in a “bail in” and used to keep the bank solvent. Those who had their money taken would be given shares in the bank or some other form of compensation such as bonds.
Should you be worried?
The document does not say so, but in such desperate circumstances, it might be assumed that the deposits taken would be those that have more than $100,000. Account below $100,000 dollars are guaranteed by the Canadian Deposit Insurance Corporation. So, small account holders should be OK.
Canada is not alone in doing this. The UK, USA, New Zealand, Spain and the EU all have similar plans they discussed in December of 2012. See: http://www.brokenmirrors.ca/?p=327
This is economics for the rest of us! Enjoy the ride in the new economy.
(update of March 2013 article)