The Cyprus model for Canada’s big banks

- March 30th, 2013

I started asking on Monday, and again on Tuesday, whether the confiscation of money from private bank accounts could happen in Canada the way it has happened in Cyprus. My argument was that yes it could, especially given that Cyprus is a modern European nation and that the decision to dip into accounts was made by finance ministers and officials from countries such as Germany, France and Italy.

This was not a Robert Mugabe theft of cash. If it can happen there then it can happen here.

Little did I know that the answer was already in the budget on page 145 (155 of the PDF).

  • The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that,in the unlikely 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 timelines will allow for a smooth transition for affected institutions, investors and other market participants.
  • Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail.”

“Bail-in” is exactly how Eurozone officials described what happened in Cyprus (details here and here). In order for the country to get the bail-out from the EU, the banks needed to get a bail-in from their depositors. At first this meant every depositor and then just those with deposits over €100,000.
I asked officials from Finance Minister Jim Flaherty’s for comment on what this section means to them, here is the response from Flaherty’s Director of Communications Dan Miles.

“Bail-in arrangements are NOT ‘bail-out’ arrangements∙

Under a ‘bail-out’ arrangements, taxpayers money has to be used to save a failing financial institution∙

Under a ‘bail-in’ arrangements, a failing financial institution has to tap into their own special reserves or assets (which they have been forced to put aside) to keep their operations going∙

This keeps the financial institution in tract, without risking taxpayer money. This is what Canada is doing, in line with recent international agreements.”

No denial in there that depositors will be asked to pay up if Canadian banks fail. Some think that is a probability that will never happen but obviously the Finance Department thinks it could happen or it would not devise rules. The Big Six Banks were also recently told to up their capital requirements to prevent failure.

So unless Miles is not telling me something, the new regime in Canada is that deposits up to $100,000 will be insured through the Canada Deposit Insurance Corporation and anything else that you hold with a single bank will be up for grabs if that bank fails.

On one level it makes sense to say those who invested in the bank should be the ones who bail it out and not taxpayers. No one wants taxpayers to fund the bail out of big banks.

But is this what most people expect from their bank?

And what exactly would be up for grabs? Would a bank account with $150,00 in life savings see a good part of it seized? What about an RRSP I’ve built up through my bank for retirement? Having more than $100,000 in an RRSP is not out of order for a good saver or a self-employed person who needs to look after their retirement needs on their own.

And what about business accounts at that point, accounts that need to meet payroll?

As Jonathon Chevreau from Moneysense told me on Tuesday, diversify, diversify, diversify.

Canada has a new regime for possible bank failure and it looks exactly like Cyprus. One of our major banks failing may be unlikely but that doesn’t mean it is impossible.

Categories: Politics

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35 comments

  1. Bob Wierdsma says:

    My suggestion would be if the banks fail then perhaps the top CEO’s could take a 95% pay cut to cover the losses. Instead of a $500 Million Salary cut it to $4.5 Million which would still be far above the average Joe.

  2. Patrick says:

    Hide your money!

  3. Michael Cummings says:

    Why not ask him point blank, bill depositors money be stolen to bail-in a failing bank. So far all it says is that they have an emergency fund set aside that will be used in case this ever happens. Come on Brian I expected better from you. Stop speculating and get a clear answer.

  4. Nick says:

    It seems we need to start investing in shovels, zip lock bags and coffee cans. I suspect there will be run on them sooner rather than later.

  5. Bill Baerg says:

    This is as it should be. Why shouldn’t the depositors wealth be put at risk. Banks are in the risk business. Choose your bank wisely ! ! The taxpayer should not be on the hook for the insured up to $100,000 portion either but they virtually are in that the bank insurers only have a portion of the money needed if the banks started to fail. We have opted in, allowed, agreed to, a Fractional Reserve banking system. What the bill should do was allow a claw-back of wages and bonuses paid to all the banks management that is over double the average workers salary and going back at least 7 years. As far as assets for the stockholders, the assets will clear at some price which will determine the actual value of their holdings.

  6. terry says:

    when wil people get enough of harper answer when he stats picking in their bank accounts

  7. Steve says:

    Other then paying some bills why keep any money “on loan” at any bank as they virtual pay nothing to take the risk. The risk is growing exponentially as the feds of the world increase the fiat paper supply to keep things calm & controlled. For me, I have “restructured” & advise others do so prudently. Eventually the control the fed / bank have on gold & silver will falter as we are witnessing delivery shortfalls, depleting inventory, other govs / states requesting repatriation & if a little demand kicks in the massive shorts by the above will slaughter them & prices will rise dramatically as people finally figure out the massive Ponzi scheme to protect banks & connected big companies

  8. Andy Robbins says:

    So the banks, instead of stealing peoples money through the middleman of the government will be stealing it directly from their accounts. Thanks to Flaherty, who never balanced a budget in his career. Better be careful about publishing truth there Mr. Lilley or Kory Teneckye is going to through you out on the street with us environmental radicals and Idle No More protestors. How happy are those who voted for the CONs going to be when they find their bank accounts raided? That’s what you get when you vote for fascists!

  9. centurion says:

    Banks charge us to “handle” our own money. There was a time when one could choose to use a bank or not, there is no choice today. Banks began with the notion that your money would be protected by the banks impenetrableness, and that one could earn interest. Today the interest rates are pathetic and all the fees gobble them up anyway. Banks are more like handing your drunken mother your paycheck money for safe keeping. Everytime you spend it, your penalized one way or another in transaction fees. The mother bank dips liberally into each account charging fees and gives no real return or safety. Banks are really robbers.

  10. Nick says:

    Most of the posters on here sound as if they could live off their own coffee can for years. Did it ever occur to you that Canadians, generally speaking, trust banks and that in their minds, this could never ” happen here”? Get a grip fellas, it is your money, handle it as you will, but don’t be surprised if one day you go to get it, and if it isn’t all gone, there won’t be nearly as much as there should be. The line for the shovels, bags and coffee cans starts righ here. Who wants em?

  11. GoLeafs! says:

    If “depositors” are also “investors”, then banks should make that clear when accounts are opened. If we depositors are now taking such risks, the I want a higher interest rate on my deposits and they can shove their service fees up their greedy a$$es.

  12. Phil Miller says:

    Obviously the owners (the shareholders) of the banks that fail shouldn’t be the ones who lose money……instead it should be the bank’s customers, ordinary Canadians.

    Makes perfect sense in Harper-Con-Land

  13. Timothy Hickey says:

    We should encourage a major expansion of Credit Unions in Canada.

    Further, every MP who sits with the Conservatives, and cares about the Will of the People in this country, and has an ounce of courage, should abandon the governing Party and sit as Independents so that this budget is not passed, and a General Election is called! The Will of a Real Majority of the People of Canada should be required before any slippery politics such as Flaherty’s inclusion of this Bail-in in the Budget is allowed!

    Every riding in this country will be represented by a Non-Partisan, “Courageous Canadians” committed to transferring the power of decision-making to a Real Majority of Canadians!

    Change is coming!

  14. Rob C says:

    Terry 3:13
    And who do suggest as an option to the CPC at this time. They are the lesser of the two evils .

  15. John says:

    Yeah, I’m thinking you guys should get you bags and shovels. While you’re at it get your automatic weapons and move onto a compound like the lunatics in the states. Sounds like a new version of the sky is falling.

  16. RS says:

    I posted a comment earlier that I guess wasn’t allowed. I guess I’d just say I disagree with the conclusions drawn from the situations in the article. It’s very simple: if you’ve got money, watch it; if you’ve got lots of money (e.g. more than $100K) spread it out among different institutions so it’s within the insured limit; and if the number of institutions gets ridiculous because you have tons and tons of money, well, remember that placing your money anywhere is an investment to which you’re responsible for doing your homework on or paying a financial advisor to do it for you. The alternative to this understanding is to be for big bail-outs, which I don’t think anyone is for. I was a little frustrated in my first post because it felt like the article was just inciting people for the sake of inciting them, not based on the reality that having a basic level of financial literacy is an essential life skill.

  17. JOE HUEGLIN says:

    There is a very simple way to ease concern.

    Youll`notice as you read not all but only `certain liabilities` are to be open to `conversion` into `regulatory capital`.

    Your Member of Parliament over the next two weeks are free to be in your Riding .

    Hopefully you agree with me that individual savings ought to be excluded from being used to `bail in` banks, will speak to your M.P.s and ask that they speak for us in this matter.

    Hope you are enjoying the weekend.

    Joe

  18. Byron Christopher says:

    Imagine that. First greed, now sleaze from the banking industry. And with the blessings of a Conservative government … who would have thought?

  19. Chris says:

    I like how some people panic and suggest that this means Harper will now be able to take money from your account. Anyone who believes this is best to just stop reading anything as their mind is clearly not developed enough for ratiional thought and they will cause themselves considerable pain by trying to figure out situations like this. I would like to suggest watching “Treehouse” on the TV as an alternative way to stimulate their brains. They will be filled with much less panic that way.
    Let’s first look at other options:
    If a bank is going under, let it just go under? What will happen to your money in this case? Should the government, (in case you don’t get it, the government gets their money from you and me), then cover peoples losses? This would be about the worst way to handle this situation. It would have the biggest long term effects. If the government didn’t get involved, how about everyone just loses their money or the bank claimed bankruptsy and everyone fights over pennies on the dollar? Let’s all agree that letting the bank go under is a terrible idea.
    How about bailing the bank out with government money? Again, remember, the government gets it’s money from us. This is money from all taxpayers in the country. Well, if I wasn’t paying taxes, I would really like this option, but unfortunately I get hammered every year with taxes so I’m pretty against this idea.
    Let the banks borrow from bank accounts? Well, this way at least the intent is to save the bank without putting people not involved with that bank at risk. Personally I think this is the best option. Solution? Keep money at several different banks. Once your savings get up to around $100000 at one bank, split it between a couple. Limit your risk.
    I’d like to point out also that the Canadian banking system is one of the srongest on the planet. I would also like to point out that our economy is doing great compared to the rest of the world. The reason for this is because of our natural resources. People who are against Harper pushing for developement of the oilsands should keep this in mind. What do you think is driving our economy? Your politeness? No, it’s oil and it is one of our few advantages, economically, over most of the world.

  20. Sean Fordyce says:

    The suggestion that RRSPs can just be taken is not accurate for the most part. The deposit insurance limit covers deposits at the bank. It has nothing to do with many RRSP investments as most of those are not sitting in the bank in cash.

    GICs are covered with terms up to 5 years (can be reinvested).
    Mutual funds are managed by the bank but are not deposits a bank could draw on in its own failure and therefore investments in mutual funds would not go with the bank except any portion that is invested in shares of that bank. Mutual funds at other banks would also face losses if any of the banks failed. Stocks would depend not on the health of the managing financial institution but on the companies they are in.

    Big scare here but the facts are not right. Very few, if any have over $100k in cash on deposit at their bank.

  21. Sean Fordyce says:

    OK I checked the GIC’s are limited to $100k at each bank– so the key is to not have more than $100k at each bank. But it is not the total of RRSP investment– it is just that portion that is on deposit so mutual funds, stocks etc. do not count as they are not protected anyway but also not subject to health of the managing bank.

  22. Quigs says:

    Are we sure that the $100,000 backed by CDIC is safe from bail-ins?

    From the 1/2 answers Brian got:

    “Under a ‘bail-in’ arrangements, a failing financial institution has to tap into their own special reserves or assets (which they have been forced to put aside) to keep their operations going∙

    This keeps the financial institution in tract, without risking taxpayer money.”

    According to the CDIC English home page:

    ” If your financial institution is a CDIC member and it fails and your savings are eligible for CDIC coverage, you will get up to $100,000 of your savings back.”

    The way I read that is if a bank fails and gets liquidated and there isn’t enough meat on the carcass after it’s been picked over to refund your deposit CDIC will make up for your losses. The bail-in looks like a way deposits can be raided before bank failure occurs “to ensure that,in the unlikely 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.” My spidey sense tells me that bail-in confiscation doesn’t trigger CDIC and is irrelevant when banks start sniffing around my feeble little account for reserves.

  23. Michael Graham says:

    Got Gold?

  24. Bitcoin Bill says:

    Buy Bitcoins!! Protect your Money!!
    http://Www.cavirtex.com

  25. peter fish says:

    In every country but Iran, North Korea and Cuba there is a central bank that is linked to the RothChild bank system. This is a fact, they central banks are all private and are not audited. there is a black curtain of what is behind them, and WHO !

    Anyone that wants to be in any really high position in the world knows this, sort of, but nobody knows more than this…

    If you count up every countries debt, I mean every country, province, city… it equals more money than all the economies and real work and goods on the planet. This is impossible most would say, how could every major country being in extreme debt ?

    China is not who the world is in debt to, it’s a smoke screen, they are not that rich, and only rose out of poverty in the last couple decades, they are an excuse.

    Somewhere, somehow there is some people that have managed to make so much money, that ALL the worlds economies and assets wouldn’t even come close to matching it, but somehow behind this curtain this money seems to be made by making nothing of any value, and held by nobody.

    It’s hard for most people to see, but when you have all of Europe in Debt, all of North America, all of Asia, all of Africa, it starts to make sense. THey only safe place to keep trillions and trillions of dollars is in making sure countries owe you money, that’s what we have become.

    The people at the top know this, and at one time it worked, allowed Britan to borrow and move money to defeat France.. they lent money to hitler and Britian at the same time, now they are scared it will collapse to the best thing is to make a new world order we are all under and Debt is the only way you can hide at least half of the money on the planet…

    Consider it.

  26. GoLeafs! says:

    Thanks for clearing it all up for us Chris. Good to know we have an intellectual giant like you around to help us. We can sleep better knowing that it could never happen here. BTW, I think you left out one option…jailing the greedy, stupid bankers who risk and lose our money as well as the politicians who are supposed to be overseeing them.

  27. Jacob Breen says:

    Do you understand why banks are failing in the first place? And who is responsible? Because any solution to this problem has to account for that to be taken seriously.

    The reason financial institutions all over the world are suddenly becoming insolvent is that they invested heavily in bad packages of misrepresented debts. They spent billions of dollars (our money) on assets that were ultimately worthless, because big financial managers fixed their books with the complicity of the regulatory agencies, who were totally crooked. Now these people have made off with billions, and we’re stuck with collapsing banks and being told that we have to foot the bill for the humungous profits of the 0.01%. And what’s your contribution? “what else can we do?” you wail.

    Well, what do you think we do when we catch someone red-handed robbing our house, dude? Do we let him go and tell our kids, “Sorry, no supper tonight”. No. You take the ill-gotten goods back. Where does the money come from? It comes from the people who took it, obviously. It comes from the billionaires who got it by illegal means. We tax the shit out of these people to remind them that crime doesn’t pay and when they break laws there will be consequences. Your plan of letting them escape with their loot only emboldens them to continue stealing from us.

  28. Mike McCormick says:

    Harper’s high tax and spending budget has lots of surprises hidden in the weeds. We still haven’t been provided with many of the details from last year’s budget.

  29. George Carlin says:

    If the Bank of Canada issues the currency, why does Harper’s government borrow from the private banks and charge the interest to taxpayers? Seems like a Ponsi scheme. No?

  30. George says:

    M Miles’answer sounds extremely dishonest because he refers to the selling or conversion of bank ASSETS into capital.
    Normally this would be ok except for the fact that given the current state of the economy, we all know much of these assets would not be sold at a profit but at a loss so there would be no capital gain.

    Secondly, notice how the budget text does not mention bank assets at all, it states the conversion of LIABILITIES into regulatory capital. It seems to me the only way to convert a liability into capital (without involving an asset) is to default on that debt, a process which is very differrent from M Mile’s noble proposition of selling an asset at a profit.

    I think the bottom line is that governments must decide who will foot the bill to save the banks from the coming crisis (which they know will happen or they wouldn’t be preparing for all this) but if they allow bank “investors” (bondholders, shareholders) to take a haircut then the whole mess will propagate from country to country in an uncontrollable manner, as just happened to Cyprus banks from the haircut they took on greek debt. So they would rather have the losses as geographically “contained” as possible and that means having local depositors foot the bill.

    It is just really insulting that they try to present this as “beneficial” to the taxpayer. Who cares how we are going to pay for this? Wether through higher taxation (taxpayer funded bailout), higher inflation (central bank funded bailout) or direct confiscation (depositor funded bailout), we are going to pay for this one way or another. Thank you Mr Flaherty, because of your insight, we will have the privilege to go down on deck like the musicians on the titanic rather than like some scrambling rats trapped in the hull.

  31. SweetDoug says:





    ———————————————————————————————————
    Bill Baerg says:
    March 30, 2013 at 3:00 pm

    This is as it should be. Why shouldn’t the depositors wealth be put at risk. Banks are in the risk business. Choose your bank wisely.
    ———————————————————————————————————
    I’ll tell you why Bill:

    Because WE’RE the depositors. NOT the investors. We assume NO liability to the banks. It’s why we get 0.02% on our money. We are to assume NO risk.

    We are last on the line of confiscation, if ever.

    Behind the shareholders, the stock owners, the bond holders, and all the rest, that come first.
    NOT LAST.

    This now changes EVERYTHING, meaning, what it means to BE a bank.
    But you are absolutely, correct in the outcome, such that we should “Choose our banks wisely.”

    Why is there no mention of this from the dirty $‡Ï†®@†$ of banks?
    Do you people think that the banks had no input on this, that it was created in a vacuum?

    Don’t make me think you’re that stupid, for thinking that I’d be that stupid, to think like that.

    The banks think we’re that stupid.

    Where is this “conversation?

    EVERYTHING changed overnight and the muppets are just supposed to cary on, like nothing happened.

    Depositors are not last in line: They are NOT in the line for liability, when these institutions fail.

    ———————————————————————————————————
    By creating this legislation, the Government of Canada has just abrogated deposit insurance AND the idea of private property in Canada.
    ———————————————————————————————————
    This is financial tyranny and corporatism. They are privatizing the profits and publicizing the loses.

    Will we see a “conversation” from the banks how we, the depositors are suddenly moved to be first in line to forfeit ‘our investment’, behind the rest of the stakeholders?

    Of course not.

    This is the harbinger of doom for us.

    The cries of “fairness” and “sharing the burden” will ring out when the banks fail in Europe.

    Canada is part of the IMF and the WB. They have already come to us and asked us to buy their bonds. Harper told them to take a leap.

    When our banks, through shadow banking and derivative exposure, go belly-up with the EU banks, this is why they have slide this legislation in to the Budget.

    Prepare people.

    •∆•
    V-V

  32. Not buying it says:

    Scenario like that are not impossible, that’s exactly way I believe in the right of citizens to bare arms , regardless of where, Canada or the US.

  33. PeterPainter says:

    If I had time to write 3000 characters I would but I don’t, so let’s keep it short. Take all your money, anything denominated in dollars that is, all of it, except other tangible assets like land and artwork, and buy bullion. Don’t buy certificates. Each ounce of gold is sold a hundred times over using certificates, so you will never see the stuff if there is a bank failure. Only buy bullion, gold, silver, platinum. The real thing that you can hold in your hand. To be safe you don’t have much time, because if the banks fail everybody will want precious metals and there won’t be any available by then. If the dollar fails the same thing will be true. The dollar is already failing. Precious metals are also getting tighter to purchase because the supply is getting smaller. Get it done today.

  34. SweetDoug says:





    PS to the above:

    The key to the above paradigm shift in what it means to now be a depositor, is that the banks must now come clean to justify WHY this action was taken.

    If the banks are so squeaky clean, as everyone in Canada portrays, why then, this?

    Depositors, traditionally received low interest rates, as they were the very ideal of liquidity and lack of risk, and at the top of the ladder in times of trouble.

    Given the new paradigm, and the now new risk associated with being a depositor, would one not think that a full disclosure by the banks and an appropriate interest for the risk premium we are now being asked to bear, be forthcoming?

    I won’t hold my breath.

    Never believe anything, until it’s officially denied.

    •∆•
    V-V

    •∆•
    V-V

  35. hagbard says:

    How about people like me who sold their house, put their money in the bank to buy another, and are renting till they find that house? They’re going to come along and steal it? We’re headed back to the dark ages where the nobility (politicians, banksters, mega-corps) can steal from the serfs at will. I’m open to suggestions on safer options.

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