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Bailing-out Trudeau’s Bail-in Regime

As published by the Victoria Standard: October 24, 2018.

The Liberal government recently announced a “bail-in regime” to protect Canada’s banking system from disasters like the 2008-2010 global financial crisis. Under the new plan, banks will supposedly rescue themselves rather than receive U.S.-style public bail-outs. Canada’s banks did not save themselves in that crisis and are unlikely to do so in the future.

Since America’s financial woes automatically harm Canada, a protective mechanism was long overdue and the first phase of the three-year plan took effect on September 23. It is worrisome that the current regime contains no penalties or cautions for bankers and financial advisors found investing depositor’s and client’s funds in the sort of high-risk derivative schemes that crashed the U.S. system. This oversight may be explained by the federal advisory role of influential bank lobbyists.

While the Canadian Deposit Insurance Corporation (CIDC) claims to safeguard over $770 billion in deposits, it does so in a selective manner that might worry those who still trust Canada’s overall banking system. General depositors literally lend to banks in exchange for security and a modest return. Collectively, depositors have a vast potential to organize and exert policy pressure on banks, a privilege currently reserved for shareholders.

Since all deposits and investment funds are automatically invested by chartered banks, they list these moneys as liabilities since the funds may be lost in the market. This includes corporate stock and high-yield bonds identified as unsecured long-term debt. In a crisis, Canada’s main chartered banks may now convert the unsecured debts of investor clients to equity but they are obliged to offer bank stock of equal value to those clients.

The bail-in regime originated as Harper’s response to the 2008-2010 financial crisis and like his predecessor, Trudeau is assuring Canadians that consumer deposits are safe from seizure in the event of a bank collapse. The CIDC claims that funds in chequing accounts, savings accounts and term deposits are all protected under the bail-in regime. By way of comparison, depositors in Cyprus, Slovenia and Italy recently suffered deposit losses during bank implosions.

The Canadian public generously but unknowingly lent over $114 billion to Canada’s charted banks during the global financial crisis of 2008-2010. As well, The Canadian Mortgage and Housing Corporation absorbed over $69 billion of bank mortgage liability, another thinly-disguised bailout by a publicly-funded crown corporation. Relatively unknown is the fact that Canada’s big banks actually borrowed large sums at low-interest rates from U.S. government sources during the 2008-2010 crash while Americans were losing their homes to foreclosure.

While individual savings and chequing accounts up to $100,000 are insured by the CDIC, the institution lacks the money to protect all depositors since it holds only $2.5 billion in funds derived from bank contributions. The CDIC actually claims that it will reach its lofty goal of insuring a full 1 per cent of bank deposits by 2025. The money must come from somewhere since there is no political will to raise bank contribution rates to a realistic level.

Mutual funds, stocks, bonds, GICs, foreign currency accounts, five-year term deposits or savings bonds are not protected by the CDIC. As well, there is a different insurance system for Registered Retirement Savings plans (RRSPs), Registered Retirement Investment Funds (RRIFs) and Tax-Free Savings Accounts (TFSAs). Fortunately for investors, Canadian bank failures have been rare.

The CDIC’s funding options demonstrate that this so-called the bail-in regime is ultimately a bail-out scheme reliant on public funds. It is unsurprising that the following aspect of the bail-in regime has been absent from official announcements. Were the CDIC unable to compensate all claimants, it is entitled to borrow money from private markets or federal government sources, otherwise known as the Canadian taxpayer. As well, the current borrowing limit of $27 billion could be increased by parliament.

Canada’s financial stability requires bolder action than merely re-arranging the sort of irresponsible policies that almost guarantee another crisis. Behind the complex financial terminology and soothing political assurances are cold facts about Canada’s banking industry. A chartered bank’s main goal is to enrich elite investors and minimize tax liability according to existing rules and laws. The rest is public relations. Therefore, a far higher level of accountability must be demanded when public funds are used to protect private profit.

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