What is a bail-in regime?
During the global financial crisis in 2007/2008, there was significant turmoil in the global financial system and a number of banks in other countries became financially distressed and either failed or received financial support from their governments so they could continue operating. Since then, there have been a series of new international banking rules put in place to help reduce the risk of another financial crisis occurring and to make banks stronger so that it is less likely that a bank would fail. One of the measures that countries around the world are implementing is a “bail-in regime”.
Canada is joining this international effort by proposing a bail-in regime where certain long-term debt obligations of a large bank would be converted into equity in the unlikely event that the bank depleted its capital and was in danger of failing. This would be done so that bank shareholders and creditors would be responsible for recapitalizing a bank in financial difficulty rather than the government, taxpayers, or bank depositors.
Some people have said that the bail-in regime would allow the government to seize the deposits of bank customers. We saw this happen in Cyprus a few years ago. Is that true?
No. The government has made it very clear that bank customers’ deposits will not be part of the bail-in regime. In August 2016, the Department of Finance launched consultations to review the federal financial sector framework. In its consultation document, Supporting a Strong and Growing Economy: Positioning Canada’s Financial Sector for the Future (page 21), the government states that customer deposits will not be subject to the bail-in regime.
Are there concerns that a bank in Canada would fail?
Not at all, but it is always wise to take steps to make it even more unlikely that that would happen. Canada’s banks were well capitalized, well managed, and well regulated going into the global financial crisis, and remain so to this day.
Being well capitalized allows banks to continue lending and provides a cushion against loan losses, which tend to increase during economic downturns.
Following the global financial crisis, a series of global banking regulations were put into place to protect against the types of bank failures that we saw in other countries. Included in these global regulations are increased capital requirements. These robust capital requirements mean that banks have to have more capital on hand, further reducing the remote chance that a bank in Canada would fail.
What is the federal government doing to put a bail-in regime in place for Canada?
The government’s 2016 budget introduced a legislative framework for a bail-in regime for Canada’s domestic systemically important banks. This regime will protect Canadian taxpayers in the unlikely event of a large bank failure by reinforcing that bank shareholders and creditors are responsible for the bank’s risks. Regulations and guidelines setting out further features of the bail-in regime are currently being developed for consultation.