In Budget 2013, Finance Minister Jim Flaherty proposed the establishment of a risk management framework for systemically important banks. At first glance, the proposal looks fairly innocuous (See Pages 144-145 of the Budget document available here) because the Minister is simply proposing that the Government of Canada “intends to implement a comprehensive risk management framework” for the Big Six banks. The framework will include higher capital requirements, a “bail-in” regime that will convert “certain bank liabilities” into regulatory capital and more oversight from regulators.

Many Canadians (aided and abetted by certain vested interests) began to conclude that the Canadian Government is calling for insured bank deposits to take a haircut in the event of a major bank failure. That does not appear to be the case. Bail-in simply refers to a partial conversion of certain unsecured debt into equity under specific conditions. A 2011 paper titled Contingent Capital and Bail-In Debt: Tools for Bank Resolution put out by the Bank of Canada has some ideas on the liabilities that can be converted into equity [emphasis mine]:

There is some debate about the scope of the liabilities that should be subject to such bail-in conversion, but a focus on senior, unsecured debt instruments would be relatively straightforward. This particular scope of application would leave secured creditors, insurable depositors, short-term securities holders and a bank’s counterparties unaffected by bail-in provisions.

In other words, deposits in a bank up to CDIC insurance limits will likely be safe during a bank failure. In fact, The Financial Post is now reporting that a Finance Ministry spokeswoman clarified that “the bail-in scenario described in the budget has nothing to do with depositors’ accounts and they will in no way be used here.”

One would think that a bail-in mechanism for banks is a good thing because recapitalizing too-big-to-fail institutions with tax payer money (a.k.a bail outs) while leaving bond, preferred-share and sometimes even equity investors with little or no losses will incentivize reckless risk taking. After all, who wouldn’t love to gorge on a free lunch if someone else gets a stomach ache?

UFile Giveaway

Thanks to UFile Online, I have ten (10) online coupons that are good for filing your family’s tax returns (valued at $24.95 plus tax) to giveaway. Entering is real simple — Just leave a comment in this post and don’t forget to include a valid e-mail address. If you are reading this through your favourite RSS Reader or via-email, you have to click on the headline, get through to the website and scroll down to the bottom of the page and type in your comment.

Some quick rules:
(1) No purchase necessary. A skill-testing question may be required.
(2) Deadline for entries is 11:59 p.m. EDT on Friday, April 5, 2012.
(3) One entry per person please.
(4) I treat your privacy very seriously. Your email will be used for the sole purpose of contacting you if you happen to win.
(5) I’ll pick ten (10) entries at random and announce the winner after the deadline. All decisions are final.

This article has 35 comments

  1. Matthew Lausch

    Great post!

  2. Excellent article as always! Great blog!

  3. Always enjoyed your blog. Thanks for the post!

  4. I guess maybe I’m more than a little naive, but I find it remarkable that seemingly many people (in Cyprus) don’t understand that their deposits should be at risk, and that they should have some stake in how prudent their banker is. Just saying.

  5. Interesting article. A suivi to see how it plays out. Some have concluded that the government policy would allow it to seize deposits to offset the possible failure of a bank a la Cyprus.

  6. I always enjoy reading your posts.

  7. I have always enjoyed your blog and this is yet another great article!

  8. Thanks for the post. Please enter me in the draw.

  9. I would be interested in receiving a copy of UFile for 2 reasons:

    1- I do my own taxes and have created excel spreadsheets to replicate Federal and Québec tax calculations. Therefore, it would be interesting to try an actual tax package.

    2- I am a shareholder of Thomson Reuteurs. I would be curious to see the quality of their product.

    Hope that’s enought to convince you to make me the winner!

  10. Studio Tax all the way! It’s free and really good.

  11. I actually use Ufile as my yearly tax software, but have never touched the online filing site.

  12. Great blog. Been reading your blog for years and have truly benefited from the information!

  13. Longtime reader, one-time winner. Love the site. I’m glad you’re posting more regularly again.

  14. Thanks for your writing, I find it very informative for us Canadians.

  15. CDIC insured deposits should rank senior to all obligations of the bank. Senior management bonuses and employment security should rank junior to common stock holders.

  16. Always interesting to read your blog and well-informed opinions.

    Please count me in for the draw.

  17. Regular reader of your blog. Thanks

  18. Sign me up!

  19. Thanks for the article, there’s been a lot of wild talk around this in the last week. Keep up the good work! Also, UFile is great, I’ve used them for several years now.

  20. Good to know bank deposits should be safe up to insured limits; one less thing to worry about!

    Please enter me in your draw. Thanks.

  21. It’s not clear what the consequences of greater capital requirements would be. I thought, in my very basic understanding of economics that in effect removed money from the economy…

  22. I’ve been using UFile for years. Great product.

  23. One entry for me please. I like UFile.

  24. Fooled us. I’m not interested in the program, but I saw the comments count and thought I was missing out on a heated discussion about bail-ins.

    Classic bait and switch eh?

  25. Keeping the Faith

    Love the blog and once again great post!

  26. Thanks for using your platform to clarify this issue. I was shocked at how quickly this idea spread and how certain the proponents were. Likely because they wanted it to be so (confirmation bias).

  27. Kevin Johnston

    Glad to see your posts are back after a hiatus in January. I would like to try UFile.

  28. Well I don’t need the software , now show me the need to cut CPP for 60 year olds this year to 36% from 30% ,for most that means $900 less per year-$27000 less if you make it to 90. Just like cutting the Div. Tax credit every year ,Gov will show some Bs paperwork saying we need to do this or that because they can’t control spending.

  29. Hi there!
    Yes, the bail-in discussion is something we should have…

    Looking forward to giveaway too 🙂

  30. UFile is my tax program/site of choice.

  31. Please enter me in the draw.

  32. Fear leads to paranoia. How long until UFile supports Bitcoins? 🙂

  33. Please include me in the UFile drawing. Thanks! 🙂

  34. Great site. Please enter me in the draw.

  35. Thanks for entering the giveaway! We are now closed for entries and I’ll contact the winners shortly. The winners are picked at random from the website.