Over the last four decades, financial
institutions in many countries have grown to an unprecedented
scale and degree
of concentration. In the 2008-09 financial crisis, a wholesale collapse of the
dominant banks might have portended a freeze of credit and capital
markets—without which a modern economy cannot function. Rather than entertain
that risk, policymakers in countries like the U.S., U.K., and continental
Europe used a combination of public funds and liquidity created by central
banks to rescue several major financial corporations. In other words, these
institutions were “bailed out”; the costs of their errors have since been
transferred in different forms to various stakeholders, including
salary-earners in both the public and private sectors, savers and pensioners,
debtors, and taxpayers.
The
“bail-in” alternative

That same year, Canada’s Conservative government
proposed a “bail-in” regime for Canadian banks as part of the 2013 federal
budget. In its 2016 budget, the current Liberal government
offered a virtually identical proposal, and even promised a concrete policy
framework to follow. On page 223:
“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’.”
A few key details are worthy of note here:
1. The word “creditors” is ambiguous; it may encompass not only
investors and bondholders, but depositors too.
2. Canada is not Cyprus. Unlike the Eurozone states, our country has
its own sovereign currency and central bank, which means our government needn’t
go cap-in-hand to a foreign central bank to borrow in its own currency. This
enables potential policy alternatives to the kind of “bail-in” that Cypriots
endured. For example, the Bank of Canada could theoretically pump liquidity
into insolvent banks by acting as the buyer of last resort for those banks’
bonds.
3. Canada has an insurance program covering various categories of
deposits up to $100,000 through the Canada Deposit Insurance Corporation
(CDIC). But the CDIC’s total holdings amount to a small fraction of the total
value of insured deposits across Canada. In the CDIC’s 2015 annual report, the ratio was $3.044 billion in
cash and investments held by the agency, plus a $20 billion borrowing limit, to
$684 billion in insured deposits.
4. The government’s “bail-in” proposal doesn’t actually rectify the
too-big-to-fail problem—in fact, it doesn’t even purport to do so. Rather, the
stated goal of the policy is to keep “systemically important” (i.e.
too-big-to-fail) institutions “open and operating”, and transfer the costs of
doing so from taxpayers to bank creditors.
Assuming the proposed “bail-in” regime takes
effect, would the full value of your deposits in Canada’s major banks be safe
in the event of another 2008-magnitude crash?
Maybe, but not certainly. At the very least, if you have a bank account in excess of $100,000 in any of the big Canadian banks, it might be a good idea to split it so that all of your deposits remain below the CDIC-insured limit.
Maybe, but not certainly. At the very least, if you have a bank account in excess of $100,000 in any of the big Canadian banks, it might be a good idea to split it so that all of your deposits remain below the CDIC-insured limit.