Taxpayer Protection and Bank Recapitalization Regime

The Taxpayer Protection and Bank Recapitalization Regime, or what is more commonly known as the Canadian bank bail-in law, sounds like a scary piece of legislation.  The Internet trolls have been all over the bail-in law, trying to convince you that your bank balance is in jeopardy.  Instead of telling where you can read about the law, they will tell you about a website that has an article about the law.
    I am willing to bet that most of the people that are worried about the bail-in law are probably more or less sane individuals.  They are just being fed misinformation or not really listening what is being said.  Even a web page with an article with all the facts will have people complaining that their government is putting all of their bank accounts in danger, it is just so much easier to only read the title of an article and go right down to the comments and start ranting.


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What is the Bail-in Law?

The Bail-in law is a statutory conversion power which would allow for the permanent conversion of eligible liabilities of a non-viable bank into common shares.  Only unsecured debt that is tradable and transferable and has an original term to maturity of 400 days or more, would be subject to conversion.
    The tradable and transferable verbiage is important.  This insures that your bank accounts, GICs and term deposits are not subject to the Bank Recapitalization Regime.


Who Loses with a Bail-in?

Who loses the most if a bank is considered not viable and is subject to bank recapitalization includes;

  • Common share stock holders.
  • Preferred share stock holders.
  • Owners of short and long-term bonds issued by the bank.


Why have a Bail-in Law?

Reasons to have a Bail-in law include;

  • To reduce moral hazard.
  • To ensure shareholders and bond holders take the first hit, instead of taxpayers.
  • To develop a framework of events in case of a bank failure.
  • To further insure the deposits of the bank's customers.

Who is hurt by the Bail-in Law?

To a small degree the banks themselves could be hurt, by making it slightly more expensive to issue long-term bonds, due to the increased risk that they might be forced to be converted into equity of a non-viable bank.  Shareholders would have a slightly higher likelihood of suffering if the bank was on the brink of failure, because it would be easier politically, to have the shareholders and bond holders take a hit, then it would be to let the taxpayers take a hit.
    For the most part, the Bail-in law is a bankruptcy proceeding on steroids, but instead of taking months, it would happen rather quickly.



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What will the Bail-in Law not do?

If another financial crisis happens, and what are the odds that another one won't happen, then the Federal government will more than likely step in before a bank crashes and help recapitalize the banks if it appears that they might be in trouble.  No government, no matter how far left or how far right they are, will let the country's banking sector completely collapse without at least trying to recapitalize it first.  It's a good thing too, a banking sector that is afraid or unable to lend money to growing businesses or to lend to families that want a mortgage is a recipe for an economic disaster.  You may not agree with me on that, but look at the countries that were run by politicians that were more interested in getting a thirty second sound bite in, instead of trying to stop the spread of a stock market meltdown into the general economy.  We were so lucky to be living in Canada at the end of the last decade.
    So why even have the Bail-in law then?  To ensure that if everything else fails, the shareholders and bond holders get wiped out first, instead of depositors and tax payers.


Taxpayer Protection and Bank Recapitalization Regime Consultation Paper - PDF fin.gc.ca
Taxpayer Protection and Bank Recapitalization Regime Consultation Paper - website fin.gc.ca
Key Features of the Taxpayer Protection and Bank Recapitalization Regime - Budget 2015