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December 20, 2015
2:42 am
mia
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Hello.
Would really like to see some discussion regarding The protection of bank deposits given that Canada now has made bank bail ins ( Cypus style) an option for Canadian banks in the event of bank financial trouble.
How to protect deposits, if Credit unions are any safer, how reliable would cdic protection be in such an event, how to assess safety of deposits in different banks or accounts, etc.

Would love to be able to explore options and hear others thoughts on this topic.

December 20, 2015
12:23 pm
Norman1
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It is formally known as the Taxpayer Protection and Bank Recapitalization Regime.

The August 2014 proposal for the regime is at Department of Finance: Taxpayer Protection and Bank Recapitalization Regime: Consultation Paper.

An analysis of the proposal by law firm McCarthy Tétrault is at McCarthy Tétrault: Department of Finance Releases Proposal for Canadian Bail-In Regime.

Department of Finance indicated, as key feature #10 of the proposal, that consumer deposits are not contemplated to be included:

10) Consumer Deposits

The Government is committed to ensuring that Canada's deposit insurance framework adequately protects the savings of Canadian consumers. In this regard, deposits will be excluded from the Taxpayer Protection and Bank Recapitalization regime. As announced in Economic Action Plan 2014, the Government plans to undertake a broad review of Canada's deposit insurance framework by examining the appropriate level, nature, and pricing of protection provided to deposits and depositors.

The commentary from McCarthy Tétrault agrees that it is not a Cyprus-style bail-in:

Eligible liabilities of D-SIBs subject to the conversion power consist only of “long-term senior debt,” which is senior unsecured debt that is tradable and transferable with an original term of over 400 days. Secured debt and deposits are specifically excluded. Therefore, the regime does not contemplate a “Cyprus-style” bail-in, whereby depositors could be asked to participate in the bail-in. Depositors remain specifically protected under the existing Canadian deposit insurance framework (which the Department of Finance indicates it will also review to ensure that depositors remain adequately protected). In addition, the proposed conversion power with respect to eligible liabilities will apply only to debt that is issued after implementation of the new bail-in regime, with no retroactive application to existing debt. There will be a transition period prior to the application of the regime.

At the time, McCarthy Tétrault noted that only these banks were considered to be D-SIBs (domestic systemically important banks):

[1] The Office of the Superintendent of Financial Institutions (OSFI) has designated the following banks as D-SIBs: Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and The Toronto-Dominion Bank.

December 20, 2015
12:38 pm
Loonie
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I really appreciate your research abilities and willingness to share, Norman, but have no idea what is meant by your last post. I don't have the background to understand the technical language. Is it possible to explain all this briefly in layperson's terms?
Thx.

December 20, 2015
5:13 pm
xxxx
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Thanks Norman1 - very interesting initiative to keep Cdn banks (namely the big ones) solid financial institutions. I bought NVCC shares of Royal Bk earlier in 2015 - and the references / background you provide is most useful - am glad of the measures to keep our major banks solid and good investments for shareholders.

December 20, 2015
7:19 pm
Norman1
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Loonie said

I really appreciate your research abilities and willingness to share, Norman, but have no idea what is meant by your last post. I don't have the background to understand the technical language. Is it possible to explain all this briefly in layperson's terms?
Thx.

Not sure it can be done briefly.sf-laugh

The Taxpayer Protection and Bank Recapitalization Regime is to give regulators the power to convert certain instruments (certain bonds and preferred shares, for example) of the domestic systemically-important banks into common shares should the bank become non-viable.

This is done by adding "contractual provisions providing for a full and permanent conversion of the instrument into common shares upon a trigger event." These are called Non-Viability Contingent Capital (NVCC) provisions.

Brian mentioned that he bought some Royal Bank shares that had such NVCC provisions. Those sound like the Royal Bank Series BK preferred shares.

The NVCC provisions can compel certain investors in the bank to turn their investment into common shares (buy into common shares) should the bank become non-viable.

NVCC provisions are optional. But, a subject bank that issues bonds without NVCC provisions will have those bonds excluded from their regulatory capital calculations.

The regime also gives the government the power to permanently cancel existing shares should the bank become non-viable. I suspect that would be exercised should losses burn through all the bank's retained earnings and existing shareholder equity.

December 20, 2015
10:16 pm
Loonie
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Goodness! The most amazing thing, to me, is that the government has obviously spent time thinking about these possibilities and what to do about them. Some felt need must have prompted this, and worst-case scenarios have been constructed accordingly.

I appreciate your explanation, Norman, and think I more or less understand it.

What I think you are saying is that, with reference to the Big Six, designated bonds and preferred shares could be subject to a government decision to convert them to common shares (lower on the pecking order in the event of default). Further, if things got really really bad for said bank, the (converted, common?) shares could turn to dust.

In other words, powers exist to turn investments in banks into zip in extreme circumstances. This, I presume(?) is intended to perhaps allow said bank to continue to function in some limping way rather than fold up completely, and would (perhaps?) shore up deposits?

Please correct where I've not got it right.

Further, banks can choose not to participate, but they do that at their peril because they then have to find the money outside of this framework with which to meet regulatory requirements.

Is this set-up in place, then? or is it still under consideration? You mentioned Brian might have some of these preferred shares.

I wish this kind of info was more accessible in the media. It should form part of "financial literacy". It may be out there somewhere, but if it's in technical language, most of us will miss it entirely, me included. I suppose some people might want to pull their money out of bank stocks if they knew more. Do you know if anything like this applies to other industries?

thx.

December 20, 2015
10:23 pm
Loonie
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In response to OP, there are other threads here that deal with solvency of the credit union system. They are worth seeking out and reviewing.

In addition, I remember reading somewhere (I think it was on the website of one of the MB credit unions) that their record in tough times had been exemplary - e.g during Great Depression, but I recognize that that is hearsay at the moment as I can't find or remember the citation. Times were, of course, different then for a number of reasons.

December 20, 2015
10:33 pm
Loonie
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Brian said

Thanks Norman1 - very interesting initiative to keep Cdn banks (namely the big ones) solid financial institutions. I bought NVCC shares of Royal Bk earlier in 2015 - and the references / background you provide is most useful - am glad of the measures to keep our major banks solid and good investments for shareholders.

This is just an innocent dumb question, Brian, not a challenge, because I don't understand.
Why would you think that these measures keep these banks as good investments for shareholders if they provide a mechanism to render shares into less solid format (preferred to common) or indeed could turn them into nothing? At least that's how I understand it from what Norman has added. I can see why they provide protection for depositors but not so much for investors.
And what do you make of the fact that it only covers the Big Six? I think some, like Peoples, are not on the stock market;; but I think that Oaken's parent is, for example. Are they not included because they are smaller and could be covered by CDIC and perhaps some other measure I am not familiar with, or are their bonds/shares inherently a different risk?

December 21, 2015
9:08 am
Bill
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Investors of any kind, whether bonds or shares of any class, have to realize their investments can go to zero anytime, it's just a given risk, so nothing really new there. It seems to me the provisions allow a bank to convert mandatory payments (bond interest, preferred share dividends) into optional (common share dividends) ones, that's all. It would help preserve capital in times of stress and give the bank more time to turn things around and still meet its reserve requirements re deposits. But the above clearly says the provisions have no impact on consumer deposit obligations of a bank.
mia, I do know that CDIC is designed for specific failures, so it should be enough if a bank failed. I'm assuming there's enough to bail out even a Royal Bank, not just the smaller banks. But obviously it wouldn't be near enough if there's a widespread collapse in the financial system. I think. Also, remember that the financial system tends to step in, e.g. a bank or credit union failure is often absorbed by the industry by other banks or credit unions stepping up and taking over the failed institution's business, i.e. it's in the financial institutions' interest to keep faith in the system so they cover for each other when bad things happen to one or a few of them. Now if a number of those events start to happen then you've got to start thinking about a systematic failure and about converting your wealth from electronic blips to more tangible assets.

December 21, 2015
9:41 am
xxxx
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Loonie - not sure that I see any real change for depositors as such - they already have the CDIC coverage for 100K for their deposits whether in a major bank or the very small institutions like Peoples. Nothing else is really "guaranteed" in the investment world - same comment as made by Bill.
My point is that robust oversight and regulation by OSFI, BoC etc. helps to strengthen the financial system - and the Canadian financial system is considered one of the strongest in the world - so any further capital requirements particularly for the largest banks are beneficial to investors in bank shares - guess indirectly we could say that depositors can also have more confidence re their deposits in excess of $100K because the banks are operating effectively with sufficient capital, high profitability etc. etc.

December 21, 2015
10:57 am
Loonie
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These are all sobering thoughts, for sure. I was close to deciding to get my feet wet with a modest investment in dividend-producers because the tax advantages for me would be significant, but now am scared again. 2% from Tangerine or 2.05 from Hubert's 1-yr cashable don't look so bad!

It's true that shares can go to zero at any time, but nobody ever suggests that with the Big Six. Normally, what we hear is how solid they are and how reliable the dividends. I suppose that what this measure introduces is a scheme whereby there is a plan to make them go to zero under certain circumstances. Seems unusually interventionist because it is a fundamental incursion on the rights of stockholders/owners. As I understand it, and perhaps I'm wrong, the point of being stockholder as opposed to bondholder, for instance, is that one has a say in the decisions of management. For most people that is a meaningless say, as there are much bigger players out there, but it seems that these rights are undermined by this policy. Perhaps it is a way of bolstering what CDIC can provide, on the depositor side.

December 21, 2015
2:53 pm
Norman1
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Loonie said

Goodness! The most amazing thing, to me, is that the government has obviously spent time thinking about these possibilities and what to do about them. Some felt need must have prompted this, and worst-case scenarios have been constructed accordingly.

I appreciate your explanation, Norman, and think I more or less understand it.

What I think you are saying is that, with reference to the Big Six, designated bonds and preferred shares could be subject to a government decision to convert them to common shares (lower on the pecking order in the event of default). Further, if things got really really bad for said bank, the (converted, common?) shares could turn to dust.

In other words, powers exist to turn investments in banks into zip in extreme circumstances. This, I presume(?) is intended to perhaps allow said bank to continue to function in some limping way rather than fold up completely, and would (perhaps?) shore up deposits?

Please correct where I've not got it right.
....

Not that bad. The power to cancel shares only applies to common shares issued before the bank got into trouble, unless the same bank got into trouble again later:

[7] For greater certainty, this power would only be applied to common shares of the bank which were outstanding prior to the point of non-viability.

Yes, the government felt a need to correct a misconception among bank investors. The misconception was that, should a systemically-important bank become non-viable, the government would bail it out, like the car makers, and leave every depositor, bondholder, and creditor whole. That what the US government did for the US banks.

The political fallout from the consequences of allowing a systemically-important bank to fail would be tremendous. Consequently, investors expected Canadian politicians would bail it out, no matter what the financial cost, in order to preserve their re-election chances.

December 21, 2015
5:47 pm
Norman1
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Loonie said

...
Is this set-up in place, then? or is it still under consideration? You mentioned Brian might have some of these preferred shares.
....

I don't think the Taxpayer Protection and Bank Recapitalization Regime is in place yet.

It was part of the 2015 federal budget, according to McCarthy Tétrault article Budget 2015: Financial Institutions Update.

However, this December newswire article Financial Sector Update for 12/11/2015: BNS.TO, NA.TO, RY.TO, CM.TO, LB.TO, TD.TO, BMO.TO quotes Standard & Poor's Ratings Services as saying the regime could be implemented by 2016. With the change in federal government in the October elections, they are not so sure now. The regime does not seem to be a priority for the new Liberal government.

So, I don't think the required legislation has even been introduced into Parliament yet.

December 21, 2015
6:17 pm
Norman1
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Loonie said
...
Do you know if anything like this applies to other industries?

How about Algoma Steel?

Been to and emerged from bankruptcy twice. Each time, existing shares were cancelled and new shares issued to creditors in place of the money owed. Not done by government but by an Ontario bankruptcy court.

The company is now known as Essar Steel Algoma. Their third visit to bankruptcy court started last month: sf-surprisedCBC (Nov 9, 2015): Essar Steel Algoma seeks creditor protection

December 21, 2015
10:58 pm
Loonie
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Thanks, Norman. very helpful.

December 22, 2015
9:49 am
Norman1
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You're welcome, Loonie.

Loonie said

These are all sobering thoughts, for sure. I was close to deciding to get my feet wet with a modest investment in dividend-producers because the tax advantages for me would be significant, but now am scared again. 2% from Tangerine or 2.05 from Hubert's 1-yr cashable don't look so bad!

It's true that shares can go to zero at any time, but nobody ever suggests that with the Big Six. Normally, what we hear is how solid they are and how reliable the dividends.
... Seems unusually interventionist because it is a fundamental incursion on the rights of stockholders/owners.
....

The proposed regime doesn't increase the risk to shareholders in the bank.

The proposed power of the government to cancel common shares is available only in the unlikely event that a systemically-important bank becomes, or is about to become, non-viable. Should that occur, common shares of the bank would be dust anyways through a ruling from a bankruptcy court. Even the preferred shares would likely be dust as well.

I don't consider this to be an incursion on shareholder's rights. Shareholder rights have always been conditional on the corporation being solvent and in compliance with all the covenants on its debt.

December 22, 2015
12:57 pm
Loonie
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I see. I think I have the total picture now. Very interesting.

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