The Cyprus Bail-In: Part Four – A Template for Canada

If you’ve been following this series, so far I’ve covered:

  • Part One.  The timeline of events as they unfolded in Cyprus to the present day.
  • Part Two.  The impact on the Cypriot people and decimation of the small/medium business segment.  This also looked at the corruption that got Cyprus into such a mess in the first place and the loopholes in the system that allowed the elites to withdraw their assets even as ordinary Cypriots were under oppressive capital controls.
  • Part Three.  The fact that bail-ins, as they occurred in Cyprus, will happen in other countries as the global financial crisis picks up steam.

In this final post of the series I want to focus on why Canadians should take the lessons of Cyprus to heart.  The reality is that the 2013 Canadian budget specifically called out how the bail-in model will be used if any Canadian banks get into trouble.

So What’s in the 2013 Canadian Budget?

I have linked to the entire 2013 Canadian budget here but the section that is relevant for our discussion today can be found on pages 144 and 145 in the section titled ‘Establishing a Risk Management Framework for Domestically Systemically Important Banks‘.  The entire section reads as follows:

Canada’s large banks are a source of strength for the Canadian economy.  Our large banks have become increasingly successful in international markets, creating jobs at home.

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 intends to implement a comprehensive risk management framework for Canada’s systemically important banks. This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and will work alongside the existing Canadian regulatory capital regime. The risk management framework will include the following elements:

    • Systemically important banks will face a higher capital requirement, as determined by the Superintendent of Financial Institutions.
    • 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.
    • Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail”.

To their credit, even the mainstream media reported on this with concern since, in bank parlance, deposits are considered liabilities.  Thus, the statement ‘rapid conversion of certain bank liabilities into regulatory capital‘ certainly could imply deposits would be used as part of this recapitalization – exactly what we saw take place in Cyprus.

Move Along.  Nothing to See Here

Immediately following this controversial section of the budget going viral, Finance Minister Jim Flaherty’s press secretary Kathleen Perchaluk issued the following statement to clarify:

The bail-in scenario described in the Budget has nothing to do with depositors’ accounts and they will in no way be used here.  Those accounts will continue to remain insured through the Canada Deposit Insurance Corporation, as always.

The [Canadian] bail-in regime is to protect both taxpayers from having to bail out banks and depositors from having to take a financial hit like we’ve seen in Cyprus.  If a bank is having severe difficulties, the bail-in regime would force certain debt instruments to be converted into equity to recapitalize the bank.

This clarification was immediately used to chastise all those who had reported with alarm on the language in the budget around the bail-in regime.  The mainstream media was satisfied with this clarification and essentially reported in unison: False alarm, nothing to see here, move along.

A Clarification Not Worth the Paper It’s Not Written On

The first thing to point out is that it is the budget that is read before, and passed by, parliament.  Once passed, these budgets form the basis for legislation.  Conversely, random statements by MP’s press secretaries don’t in any way shape the laws that ultimately go onto the books.  Such statements are, practically speaking, completely irrelevant.

That said, let’s analyze Kathleen Perchaluk’s statement.  The thrust of her statement is: “Those accounts will continue to remain insured through the Canada Deposit Insurance Corporation, as always.“.  Ok, two big problems with this:

  1. The Canada Deposit Insurance Corporation (CDIC) is woefully underfunded (like all national deposit insurance schemes).  In the event of a true crisis at one of the big six systemically important Canadian banks the CDIC is going to fold like a cheap lawn chair.  This is a topic I’ll be exploring further in a future post.
  2. Only funds below $100,000 are insured by the CDIC.  Thus, Kathleen’s statement does not in any way give comfort to those with accounts holding more than $100,000.  Since those deposits are, by definition, uninsured, they are specifically excluded from Kathleen’s reassuring statement.  This, to me, is more worrying than if no clarification had been made at all.  Recall that in Cyprus it was an identical situation where only uninsured deposits over €100,000 got hit.

So, I must respectfully disagree with the conclusion of the mainstream media.  Kathleen Perchaluk’s statement simply does not address the risk of a Cyprus-style confiscation of uninsured deposits at Canadian banks during a bank failure.

The Key to It All

So, the language in the budget is pretty concerning.  It seems to specifically say that the same mechanism that occurred in Cyprus could be applied here.  But where is this methodology of stealing deposits coming from?   Why does it seem to be coordinated between countries?

The answer is in the above quoted section of the budget where it says:

This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions…

It would seem that this document from the Financial Stability Board (FSB) is key to understanding the true intent of the language in the Canadian budget.

You can get the entire document for yourself here.  I provide my analysis of the document below.  I can’t begin to stress how important it is for Canadians to understand this.  Adoption of this framework by the Canadian government guarantees that what happened in Cyprus will happen here in the event of a failure at one of our major banks.

What is the Financial Stability Board (FSB)?

So just what is the Financial Stability Board?  You can hit their website here but essentially the FSB is an international working group of central bankers whose goal is to propose and promote methods for consistent regulation of the financial sector.  Virtually every country’s central bank belongs to the FSB.

Canada is particularly well represented on the FSB with our Central Bank, Department and Finance and the Office of the Superintendent of Financial Institutions all being members.  In addition, the outgoing Governor of the Bank of Canada, Mark Carney, has chaired the FSB since 2011.

What is the Key Attributes of Effective Resolution Regimes for Financial Institutions?

This 2011 FSB document presents a framework for how to address failures at systemically important banks.  This document has been ratified by all members of the G20 (including Canada) meaning that these countries all agree that the principals laid out in this document are the correct way of handling future bank failures.  Canada has re-affirmed its commitment to abide by this framework by stating explicitly in the 2013 budget that this is the model it will use moving forward to deal with any banking crises.

Understand this FSB document and you understand Canada’s official policy on bank failures and whether Canadian depositors are at risk.

The document itself is very clearly laid out.  There are over a dozen sections that specifically talk about imposing loses on unsecured creditors.  Rather than iterate through these ad nauseam, let me simply show you the smoking gun that ties everything together:

Bail-in within resolution
3.5 Powers to carry out bail-in within resolution should enable resolution authorities to:
(i) write down in a manner that respects the hierarchy of claims in liquidation (see Key Attribute 5.1) equity or other instruments of ownership of the firm, unsecured and uninsured creditor claims to the extent necessary to absorb the losses; and to
(ii) convert into equity or other instruments of ownership of the firm under resolution (or any successor in resolution or the parent company within the same jurisdiction), all or parts of unsecured and uninsured creditor claims in a manner that respects the hierarchy of claims in liquidation;

I’m not sure how this could be any more clear.  3.5(i) clearly states that uninsured creditors (i.e. deposits not covered by CDIC) are to absorb losses.  3.5(ii) grants the ability to convert  these same uninsured deposits into shares in the bank.

These two things are EXACTLY what happened in Cyrus.  Uninsured deposits were made to absorb losses both directly and through conversion to worthless shares in the Bank of Cyprus.


People who insist that the Canadian budget does not sanction Cyprus style uninsured deposit confiscations are just plain wrong.  Both the language in the budget and the referenced FSB document clearly indicate that bail-in by imposing losses on uninsured deposits is the preferred approach to resolving failures of systemically important banks.

And, the FSB’s document is not just some pie-in-the-sky proposal – the G20 has already agreed that this is the model to use moving forward.  It clearly lays out the blueprint for exactly what happened in Cyprus.  Cyprus wasn’t a one off – it was following the new global formula for dealing with bank failures.  That same policy is now Canada’s model for resolving bank failures.

As the international crisis continues to unfold we now know exactly what to expect.  If you have uninsured deposits in a Canadian bank those funds are at risk and will be confiscated in the event that bank fails.  There is no gray area here.  It isn’t a maybe.  Your uninsured deposits will be made to absorb the losses in the event your bank fails.

Protect yourself.  Get you money out and into hard assets or, at the very least, open accounts at separate financial institutions.  CDIC will insure up to $100,000 per financial institution.  So, while opening two accounts at RBC and putting $100,000 in each will result in only $100,000 insured, opening one RBC and one BMO account and putting $100,000 in each will result in the full $200,000 being insured.

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  • The Cyprus Bail-In: Part Three – A Template for the…


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13 thoughts on “The Cyprus Bail-In: Part Four – A Template for Canada

  1. Very interesting find.

    My feeling is that if CMHC were to get tapped out (which I agree is entirely possible), the banks would not be required to put up so much capital so as to propagate the crisis to the banks. So, I would not expect that CMHC failure could lead to deposit confiscation.

    But, that said, if the money doesn’t come from the banks it will have to come from the Canadian taxpayer. So, regardless of how it plays out we, the people, wind up paying for it.

    • The money doesn’t “have to come from somewhere”. A failed bank could be Nationalized. Obligations to creditors would be negotiated down, and the creditors would take the hit – as they should! There are no guarantees when loans are issued – only collateral. That involves risk to the creditors, but in our new fraud ridden system, out Governments are saying to creditors “your investments are 100% guaranteed”, and will backed by the savings of (mostly) retirees. In the past we let them fail or we Nationalized, but it was the Fat Cats that took the hit for criminal or incompetent actions on the part the Corporations they invested in – as it should be!

  2. After reading this I can’t help but say: Encore, Encore. Can we have a part five please? Your last paragraph about what to do leaves me unsatisfied. Allow me to explain.

    Moving to hard assets eliminates government risk to a degree. Consider physical gold. Laws can be enacted to make it illegal to hold physical gold and gold based transactions can have a levy or tax applied. In general though it’s does reduce confiscation risk. At the same time it introduces other risks (like Concentration risk).

    Where I am going with this is that I think that people should take this “new” risk that you have explored here and use it make adjustments to their portfolio to compensate for it. The problem is we don’t have enough information to make that evaluation yet. The missing piece of information is the risk to typical investments held by Canadians.

    For example, you indicated that one could spread deposits around at different banks under the insured limit. This can be achieved through various means: GICs or bank mutual funds that are CIDC insured (I’ve provided a list at the bottom). The problem is, it is not the norm for Canadians to have over 100k in a savings account or GIC. It is invested for higher returns. If you are suggesting switching from typical investments to this GIC/savings model there are risks here too. The biggest being no growth if this crisis doesn’t materialize in Canada. If it does come to Canada, there is still a risk that accounts from different institutions can be consolidated into one bank as happened in Cyprus.

    To get back on point, before making a change to a portfolio or the structure in which it is held we need more information. To evaluate this “confiscation” risk we need to understand how investment accounts are treated. Can stocks/etfs/mutual funds be confiscated? What is the mechanism? Are those sold at market value? Is a stock considered a bank deposit? If investment accounts are at risk does moving to a smaller brokerage offer protection? What about an offshore investment account? (with its own set of risks and costs)

    I’d really like to get your take on this.


    Mutual Funds that are CIDC insured:
    Banks have wrapped up CDIC insured savings accounts in a mutual fund paying approximately (~1.25%). Typically no early withdrawal charge applies here as it does with many mutual funds. I’ve listed the symbols below:
    Dundee Bank DYN500
    TD Bank TDB8150
    Manulife Bank MIP510
    ICICI Bank IBN100
    CIBC ATL5000
    Royal Bank RBF2010
    Scotia Bank DYN1300
    Laurentian Bank BTB100
    National Bank NBC100

  3. Wow, this is great information. I had no idea there where CDIC insured mutual funds. Definitely a useful tool for dispersing funds to increase CDIC insured deposits.

    But, to your central question: What are the risks to other types of assets (GICs, stocks, ETFs, mutual funds)?

    This is a question that has bothered me for some time. Let’s say I’ve got a bunch of assets in the discount brokerage (TD Waterhouse, RBC Direct, etc), what happens to those funds if that parent company gets into trouble? The honest answer is that I don’t know. Do I have a direct claim on the assets held in a brokerage account if the brokerage firm fails? What is the hierarchy of claims (i.e. where am I in the pecking order)? I just don’t know. Heck, what happens to holders of an ETF if the ETF company fails – do you have any direct claim on the underlying stock? Again, I don’t know.

    And, I agree with you that this information is VITAL to building your portfolio. How can you build a portfolio within your risk profile if you don’t understand all the risks of the various asset classes?

    As someone who has used brokerages, ETFs, mutual funds for years, I can’t answer these basic questions and that is a huge red flag.

    So, I think I have a topic for a future post and a lot of reading to do.

    Stay tuned – I will tackle this subject down the road but have some other posts I want to get cranked out first (the CIA sponsored coup in Iran in 1953 to overthrow the democratically elected government is first on that list).

  4. Another thing that you may want to look in to, is that the insurance of the $100,000 is only as strong as the reserves in the CDIC (or CUDIC in the case of Credit Unions). When queried, regulators have stated that if the reserve runs dry, they have the option to consider alternatives for funding a collapse (ie. they don’t feel obligated to have the government pay extra, if the reserve funds don’t cover the losses).

    Ficom (BC’s Financial Regulator) has made comments in the past that the B. C. Government does not guarantee deposits of credit unions. This means the B. C. Government has no legal obligation to cover losses to credit union depositors. The $100,000 insurance relies on the viability of CUDIC and its deposit insurance fund and the member credit unions. The Province of B. C. has the discretionary ability to provide temporary monetary assistance but is not obligated to provide any funds.

    • Hi Bob,

      I am of two minds when it comes to CDIC or CUDIC.

      1) On the one hand, I agree with you completely. These schemes are woefully underfunded and will not be viable in the event one of the big 6 banks truly went belly-up. This is a topic I will be devoting a future post to.

      2) On the other hand, the ‘system’ wants to avoid a full scale panic. Forcing losses on insured deposits would guarantee a complete system breakdown as the bank runs would be unstoppable. Thus, I feel, as happened in Cyprus, that the uninsured deposits are most at risk. It would be unlikely they would want to go after insured deposits. I personally believe, in the worst case, uninsured deposits would be wiped out and the government would nationalize or otherwise bailout the remaining shortfall to avoid forcing losses on insured deposits. If this is the case, the viability of CDIC doesn’t matter since the Government of Canada acts as the ultimate backstop. Of course, in this scenario the insured depositor still pays, just through taxation instead of deposit confiscation.

      • I agree with those statements – however, I bring up the point as I’ve seen correspondence between fund managers and Ficom, where Ficom heavily implies/states that beyond the CUDIC funds available, the government would not offer any further assistance. It’s a statement that doesn’t typically get projected very far, due to the potential consequences.

        For example: BC’s Credit Unions are under provincial legislation, which claims 100% guaranteed deposits. Because of this, some CU’s, such as Vancity, have some single accounts that total roughly $1bn each (Union accounts, I believe). If these depositors/account managers were told that their $1bn deposit was not, in fact, fully covered, the depositors would reconsider how they manage the funds. Their reconsideration would be rather unfortunate for Vancity, in ways that may eventually lead to the draining of the CUDIC, and a testing of the governments resolve on the matter.

        • The concern is valid. And, I agree that, as with the FSB document, this information on CUDIC is intentionally not given wide distribution. If people knew the reality of these things the system would fall apart overnight.

          Let’s hope we never have to find out what happens when one of these insurance schemes fails. But, I fear we may, in the not too distant future, have to deal with just such a scenario…

  5. Question:-
    How were the Brokerage Houses affected:- How were stocks held in street form affected? How is cash in the brokerage houses affected?
    By the Cypress Bail-in?


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