Canada Prepares For Coming Bank Failures With New Bail-In Legislation In Budget

On March 22, the Canadian government submitted its budget for the new fiscal year that will not only run a deficit for 2016-17, but will also break promises made during the election campaign by the new Prime Minister's party to follow through with a balanced budget. Yet perhaps what is even more detrimental to the people of Canada is that hidden deep within this new budget is legislation calling for bail-in procedures should the banks become insolvent and need re-capitalization.

And sadly, even this may be occurring even sooner than the Canadian people think.

This is because a large number of banks are now finding themselves unable to receive payments due for billions of dollars (Canadian dollars) in loans made to oil companies in the wake of falling prices that have caused several domestic producers to not only lose money, but in some cases having to shut down operations altogether.

Introducing a Bank Recapitalization "Bail-in" Regime

To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”.

The Government is proposing to introduce framework legislation for the regime along with accompanying enhancements to Canada’s bank resolution toolkit. Regulations and guidelines setting out further features of the regime will follow. This will provide stakeholders with an additional opportunity to comment on elements of the proposed regime.

Bail-in Regime for Banks

Canada’s financial system performed well during the 2008 global financial crisis. Since that time, Canada has been an active participant in the G20’s financial sector reform agenda aimed at addressing the factors that contributed to the crisis. This includes international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”. Implementation of a bail-in regime for Canada’s domestic systemically important banks would strengthen our bank resolution toolkit so that it remains consistent with best practices of peer jurisdictions and international standards endorsed by the G20. - Zerohedge

In addition to the formal government's deficit spending demanded by the new Prime Minister in the next fiscal year budget, several provinces within Canada are already in their own financial straits, with Ontario, Alberta even begging their citizens to voluntarily help pay down the debt by contributing money outside of taxes they already provide.

According to recent statistics from earlier this month, Canada's six largest banks are on the hook for over $100 billion in energy sector loans and credit lines that are in danger of going into default as oil prices continue to hover below $40 per barrel. And with the Canadian dollar still far below par against the global reserve currency, any hopes of an economic recovery remain very slim, with each coming day only increasing the potential for Canada to be the next country to implement a bail-in from its depositors.