The pub­lic bail-out be­hind Trudeau’s Bail-in Regime

The Victoria Standard - - Commentary - MOR­GAN DUCHESNEY

The Lib­eral gov­ern­ment re­cently an­nounced a ‘bail-in regime’ to pro­tect Canada’s bank­ing sys­tem from events like the 2008-2010 global fi­nan­cial cri­sis. The first phase of the three-year plan, first pro­posed by the Harper Con­ser­va­tives in 2013, took ef­fect on Septem­ber 23.

Un­der the bail-in regime, banks will cover a large part of their own debts, rather than re­ceive U.S. style pub­lic loans. In a cri­sis, Canada’s main char­tered banks will pay their cor­po­rate debts by con­vert­ing the un­se­cured funds of in­vestor clients to eq­uity. They are, how­ever, obliged to of­fer bank stock of equal value to those clients with the as­sump­tion that the new stock will even­tu­ally be valu­able.

It is in­ter­est­ing to note that while 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.

Cana­dian banks fared bet­ter than their U.S. coun­ter­parts dur­ing the 2008-2010 cri­sis, but the Cana­dian Mort­gage and Hous­ing Cor­po­ra­tion tem­po­rar­ily-ab­sorbed over $69 bil­lion of Cana­dian bank mort­gage li­a­bil­ity, a thinly-dis­guised bailout by a pub­licly-funded crown cor­po­ra­tion. Rel­a­tively un­known is the fact that Canada’s big banks also bor­rowed large sums at low-in­ter­est rates from U.S. gov­ern­ment sources dur­ing the 2008-2010 crash, funds that were un­avail­able to in­di­vid­ual Amer­i­cans fac­ing fore­clo­sure.

The new bail-in 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 mort­gage and de­riv­a­tive schemes that crashed the U.S. sys­tem. This over­sight may be ex­plained by the ac­tiv­i­ties of pow­er­ful bank lob­by­ists who seek to in­flu­ence fed­eral of­fi­cials on the pas­sage of laws favourable to elite in­vestors.

In the event of a ma­jor fi­nan­cial melt­down, the ma­jor­ity of Cana­di­ans must rely on the Cana­dian De­posit In­sur­ance Cor­po­ra­tion (CIDC) to safe­guard their over $770 bil­lion in de­posits. While CIDC pro­tec­tion is se­lec­tive, Trudeau has as­sured Cana­di­ans that con­sumer de­posits are safe from seizure in the event of a bank col­lapse.

In­di­vid­ual sav­ings ac­counts and chequing ac­counts up to $100,000 are in­sured by the CDIC, but the in­sti­tu­tion lacks the money to pro­tect all de­pos­i­tors since it holds only $2.5 bil­lion in funds de­rived from bank con­tri­bu­tions. Un­for­tu­nately, mu­tual funds, stocks, bonds, GICS, for­eign cur­rency ac­counts, five-year term de­posits and sav­ings bonds are not pro­tected by the CDIC. There is also a dif­fer­ent in­sur­ance sys­tem for Reg­is­tered Re­tire­ment Sav­ings plans (RRSPS), Reg­is­tered Re­tire­ment In­vest­ment Funds (RRIFS) and Taxfree Sav­ings Ac­counts (TFSAS).

The CDIC says it will reach its goal of in­sur­ing a full 1 per cent of bank de­posits by 2025. The main chal­lenge to reach­ing this mod­est num­ber is the fact that the money comes from bank con­tri­bu­tions and there is scant po­lit­i­cal will to raise con­tri­bu­tion rates.

The CDIC’S fund­ing op­tions demon­strate that the so-called bail-in regime is ul­ti­mately a bail-out scheme re­liant on pub­lic funds. Were the CDIC un­able to com­pen­sate all claimants from its bank fee fund, it is en­ti­tled to bor­row up to $27 bil­lion from pri­vate mar­kets or fed­eral gov­ern­ment sources, other­wise known as the Cana­dian tax­payer. Since mar­ket rates are higher than those at the Bank of Canada, the choice is ob­vi­ous.

A far higher level of ac­count­abil­ity and pub­lic ed­u­ca­tion is nec­es­sary when pub­lic funds are bor­rowed to pro­tect those de­pos­i­tors harmed by oth­ers’ risky pri­vate spec­u­la­tions.

Cana­dian de­pos­i­tors lit­er­ally lend to banks in ex­change for the se­cu­rity of their funds and a mod­est re­turn, but the pri­mary busi­ness of char­tered banks is en­rich­ing elite in­vestors and min­i­miz­ing tax li­a­bil­ity ac­cord­ing to ex­ist­ing reg­u­la­tions. Col­lec­tively, de­pos­i­tors have a vast po­ten­tial to or­ga­nize and ex­ert pol­icy pres­sure on banks, a priv­i­lege cur­rently re­served for share­hold­ers. Or­ga­niz­ing and en­hanc­ing de­pos­i­tor in­flu­ence is a wor­thy goal that might face stiff share­holder re­sis­tance.

Max­i­mum prof­itabil­ity within the ex­ist­ing global fi­nan­cial sys­tem is the main goal of Canada’s bank­ing in­dus­try. This re­quires po­lit­i­cal in­flu­ence and strong pub­lic re­la­tions. Canada’s fi­nan­cial sta­bil­ity re­quires bolder ac­tion than merely re-ar­rang­ing the sort of ir­re­spon­si­ble poli­cies that al­low pow­er­ful fi­nan­cial in­sti­tu­tions to pay a pal­try in­sur­ance fee, seize in­vestor as­sets and pass de­pos­i­tor pro­tec­tion to a pub­lic in­sti­tu­tion.

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