Document: Canada Considering Cyprus-Style 'Bail-In Regime'

Document: Canada Considering Cyprus-Style 'Bail-In Regime'

Even as news is surfacing that the Cypriot bank “bail-in” will now confiscate up to 62.5% of depositor funds, a new budgetary document from Canada’s finance minister suggests that America’s neighbor to the north may be considering a Cyprus-like bail-in system of its own.

A March 21st economic action plan tabled in the House of Commons by Minister of Finance James M. Flaherty contains the following language on pages 144 and 145:   

“The Government also recognizes the need to manage the risks associated with systemically important banks — those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy.  This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.

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.”

It is presently unclear how such a Canadian “bail-in regime” would work, or whether depositor funds would be seized to pay off bank liabilities. But the language stating that taxpayer funds would not be used to bail out systemically important Canadian banks leaves open the possibility that uninsured depositor funds could be confiscated, similar to the one occurring in Cyprus.

Some experts, like Fortune columnist Nina Easton, believe that a bail-in arrangement is preferred, because it saves taxpayers from bailing out broke banks.

“In some ways it’s a lesson we might want to take here,” said Easton on Fox News. “Rather than have taxpayers bailouts you have bailout from within the institution. I understand all the pain, but I don’t think it’s a bad idea.”

An editorial from Investor’s Business Daily expressed a similar sentiment.

“In one sense, the Great Cypriot Bank Raid of 2013 is a chilling omen of big government’s inevitable designs on private property. That said, depositors who gamble have only themselves to blame,” said the editorial. “In this respect, President Obama and members of Congress responsible for preserving the too-big-to-fail principle in the Dodd-Frank law could actually now learn a lesson from socialist Europe’s refusal to show mercy to failed bankers.”

Whether such a policy applied to Canada would trigger a run on Canadian banks, erode investor confidence, or spawn contagion in the U.S. or elsewhere is unclear. Still, the fact that a Canadian budget document includes the phrase “bail-in scheme”–even as Cypriot banks remain in crisis–is a sign that governments are paying attention to the lessons on display on the tiny Mediterranean island.