http://www.greaterfool.ca/2014/08/03/baleful/Government Launches Public Consultation on a Taxpayer Protection and Bank Recapitalization Regime
http://www.fin.gc.ca/n14/14-099-eng.asp
“In the highly unlikely event of a bank failure, the new regime will enhance the stability of Canada’s world-class financial system by shifting the burden of recovery and resolution from taxpayers to financial institutions and their shareholders and creditors. It will thereby ensure that market participants clearly understand their obligations and bear the consequences of the risks they take, and that taxpayers are not on the hook to bail them out.”
—Joe Oliver, Minister of Finance
On the surface, the story is that Joe Owe has launched a consultation process on bank bail-ins. ... As you recall, it was a ‘bail-in’ process that rescued failing banks in Cyprus over a year ago when monetary authorities ordered that depositors’ money be siphoned off and used to prop them up. The outrage was universal. No wonder. Nobody saw it coming.
So a ‘bail-in’ is the opposite of a ‘bail-out,’ in which governments use taxpayer dollars to prevent the collapse of a financial institution – as was done during the crisis of 2008-9. The idea is that the risk should not be borne by the public, which is cool. But what happens in a country like Canada where we have but five major banks, who own everything except tat parlors and dog-walking agencies? The economy as we know it probably couldn’t survive the collapse of RBC or BeeMo.
So here we are. The feds have finally (18 months later) released the rules for bail-ins that might be needed here, in a country with ‘systemically-important banks.’ Here are the highlights:
* If a Canadian bank starts to wobble, the feds can ask CDIC (which provides deposit insurance) to set up a ‘good bank’ and transfer over to it all of the viable assets of the failing bank, including deposits. This state-owned bank could run for five years.
* The remaining assets would stay in the ‘bad bank’, which would be liquidated.
* Ottawa would cancel all of the outstanding shares of the troubled bank. Yes, cancel them. Poof.
* People owning bonds issued by the bank could also have their assets cancelled, and converted into common shares.
* This would include new ‘bail-in’ bonds, which are now being offered or designed, by the banks
* Deposits (including those insured to $100,000) would be excluded. Good. But, “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.” Let’s see what that comes up with.
So, no Cyprus-style theft of your money if Scotiabank goes paws-up. But the implications for those owning bank securities are not so clear – which is a big deal, since there’s hardly an RRSP or pension plan in the land that does not have exposure to the Fat Five. ...
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