On April 20th, the Federal Government introduced
legislation to implement a bail-in regime for domestic systemically
important banks (D-SIB). The regime is intended to reduce the
likelihood that one of these banks would require a government
bail-out in the event that the bank experienced significant losses.
The Office of the Superintendent of Financial Institutions (OSFI)
had previously designated the six largest banks in Canada, Bank of
Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce,
National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion
Bank as D-SIBs.
How bail-in will work
Under the proposed regime, D-SIBs will be required to maintain a
minimum capacity to absorb losses being a combination of capital,
and prescribed shares and liabilities that is specified for the
bank by OSFI. The legislation does not specify the minimum amount
but a prior consultation document indicated that a range of between
17% and 23% of risk weighted assets was being considered.
The draft legislation also provides that the shares and the
liabilities that will count against this requirement will be
prescribed by regulations to follow. However, again based on prior
consultations, it is expected that this will include all shares
issued by the bank, subordinated debt and senior unsecured debt
that is tradable and transferable with an original term to maturity
of over 400 days.
If OSFI believed that a D-SIB had ceased or was about to cease
to be viable, under the bail-in regime the government could
recapitalize the bank by converting all non-common shares,
subordinated debt and the prescribed senior liabilities into common
shares. Assuming that the minimum capacity to absorb losses
established for the bank was sufficient to address the losses that
had been incurred, the bank would return to viability with all
critical functions remaining intact and without the need for a
If bail-in were triggered, the Canada Deposit Insurance
Corporation (CDIC) would be appointed as receiver of the bank to
supervise the bank during a stabilization process that could last
as long as five years. As receiver, CDIC would also have the power
to take other steps to restructure the bank to support its return
it to viability.
The formula for converting shares and liabilities to common
shares will be established in regulations. In the earlier
consultation document, the government indicated that the number of
common shares that would be provided for each dollar of par value
of a claim that is converted would be tied to the conversion
formulas of any outstanding Non-viability Contingent Capital
instruments that the bank had issued and would respect general
rules regarding the priority of claims.
The legislation must now move through the normal parliamentary
process before it becomes law. The government chose to include the
amendments in legislation dealing with other aspects of its recent
budget. It is unclear at this point whether this will result in a
faster or slower timetable for passage of the legislation.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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