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