Keep calm, Canada is no Cyprus

There is no need to freak out over ‘bail-in’ plan for banks

The notion that Canada’s government has quietly orchestrated a Cyprus-style response to an impending bank failure, and that the big banks are coming for your savings, is a thing of beauty, as far as conspiracy theories go.

It’s in a regulatory area that’s hard to understand, and so hard for most laypeople to immediately disprove without doing a little research first. And it has elements that appeal to both extremes of the political spectrum.

If you favour the left, you can go to the Centre for Research on Globalization and read Michel Chossudovsky on how a small section in the recent Canadian budget is part of a global scheme by the banking sector to consolidate political power. “Financial jargon serves to obfuscate the real intent which essentially consists in stealing people’s savings.”

Or if you favour the right, you can check out Judi McLeod’s article Is Canada the next Cyprus? at Canada Free Press. In that analysis, it’s all Barack Obama’s fault.

The headlines in the mainstream media are not much less hysterical. Ottawa crafts rules for Cyprus-style “bailin,” proclaimed a recent headline in the Toronto Star.

Brian Lilley of the Sun writes on his blog that “Canada has a new regime for possible bank failure and it looks exactly like Cyprus.”

And over at CBC.ca, you can read Neil Macdonald: “Ottawa is contemplating the possibility of a Canadian bank failure — and the same sort of pitiless prescription that was just imposed in Cyprus.”

Canada’s really not contemplating anything of the sort.

Here’s what has everybody so worried: on page 145 of the recent federal budget, “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 systematically 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.”

Granted, “certain bank liabilities” is neither clear nor precise. And this government does seem to enjoy slipping big news into the most tedious sections of the budget. But there is no reason to think that Canada is even close to becoming “the next Cyprus.”

It is prudent for Canada to have a plan for its big banks in the unlikely event of nearcollapse. So what is that plan? The government proposes that banks set aside rainyday assets, which they would then use to shore themselves up if the worst happened.

Unfortunately, Canada uses the inelegant term “bail-in” to describe this, which brings to mind the proposal for Cyprus to impose a 9.9-per-cent levy on uninsured bank deposits, and a 6.75-per-cent levy on insured deposits. Cyprus wisely chose not to go that route, so insured deposits will be protected, but many people are still losing money. No one is proposing that Canada impose a levy on bank deposits.

It shouldn’t need saying, but apparently it does: Canada is not Cyprus. The Cypriot banking sector is bloated and unstable in a way that Canada’s is not. And Canada, last I checked, is not part of the eurozone.

And in fact, the stated motivation behind the Canadian plan is to prevent the banks having to turn to taxpayers or depositors. The idea, as the finance department clarified last week, is that the banks would set aside something with which to rescue themselves.

Here’s how Bank of Canada governor Mark Carney described the general idea in a 2010 speech: “An example of a promising market-based mechanism is to embed contingent capital and bail-in features into unsecured market debt and preferred shares issued by financial institutions. Contingent capital is a security that converts to capital when a financial institution is in serious trouble, thereby replenishing capital without the use of taxpayer funds. Contingent conversions could be embedded in all future new issues of senior unsecured debt and sub- ordinated securities to create a broader bail-in approach.

“Its presence would also discipline management, since common shareholders would be incented to act prudently to avoid having their stakes diluted by conversion.”

That’s not “exactly like Cyprus.” It’s almost nothing like the response in Cyprus, which reacted to the imprudence of its banking sector by musing about massive taxes on all bank accounts, locking down banks and restricting transactions.

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime,” Kathleen Perchaluk, the finance minister’s press secretary, says in an email. “Under a ‘bail-in’ arrangement, a failing financial institution has to tap into its own special reserves or assets (which it has been forced to put aside) to keep its operations going.”

Nothing to do with consumer deposits. Yes, only deposits up to $100,000 are insured by the Canada Deposit Insurance Corporation. That isn’t new and it isn’t changing. But there isn’t some new scheme to steal your savings account.

Canada’s evolving plan might not be perfect. As the confusion last week showed, it would be wise for the government to explain precisely what it intends, what is likely and what is possible. If there is a lesson Canada can learn from Cyprus, it’s that contingency plans should exist and they should be transparent and predictable.

In the meantime, let’s all calm down.