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.