New federal legislation will implement a total loss-absorbing
capacity (TLAC) requirement and a bail-in capital regime for
Canada's Domestic Systemically Important Banks (D-SIBs). The
legislation, which is contained in the Budget Implementation Act, 2016, No.
1 (Bill C-15), was introduced in the House of
Commons on April 20, 2016. It also includes major amendments to the
resolution regime for all deposit-taking banks under the Canada Deposit Insurance Corporation
Act (CDIC Act).
The new legislation provides for a statutory power to designate
D‑SIBs (none of Canada's banks are Global Systemically
Important Banks (G-SIBs)). It should be noted, however, that OSFI
has already designated 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, and one would
assume that these existing designations will carry forward under
the new legislation. From January 1, 2016, D-SIBs are subject to a
Common Equity Tier 1 surcharge equal to 1% of risk-weighted assets
(RWA). The 1% capital surcharge is to be periodically reviewed in
light of national and international developments.
The substance of the TLAC requirement and of the bail-in regime
will depend to a significant degree on the content of the
associated regulations (not yet released) as well as on the way in
which OSFI decides to exercise its discretionary authority. For
example, a new section of the Bank
Act (s. 485(1.2)) will provide that the required
level of TLAC for each D-SIB will be set by OSFI after consultation
with other regulatory stakeholders. In addition, the terms and
conditions for qualification of debt and equity under the TLAC
regime will also be provided for by regulation.
With respect to the bail-in regime, another new section of the
Bank Act (s. 485.01) will provide for the making of
regulations relative to the conditions that D-SIBs must meet in
issuing, originating or amending prescribed shares or liabilities.
What will constitute a "prescribed share or liability" is
also a matter for regulations yet to be enacted. However, in a consultation
paper issued on August 1, 2014, Finance Canada
proposed that "long-term senior debt" issued by D-SIBs
– defined as senior unsecured debt that is tradable and
transferable with an original term to maturity of over 400 days
– would be subject to the bail-in regime.
Concurrent amendments to the CDIC Act would authorize the CDIC
to convert, or cause the D-SIB to convert, in whole or in
part — by means of a transaction or series of
transactions and in one or more steps — the
prescribed shares and liabilities of the D-SIB into common shares
of the D-SIB or of any of its affiliates. The consultation paper
provided that the bail-in capital power would be exercisable upon a
determination by OSFI that the D-SIB had ceased, or was about to
cease, to be viable, and after a full conversion of the D-SIB's
non-viability contingent capital (NVCC) instruments.
Under the amendments, the CDIC would set the terms and
conditions of the conversion, including its timing. This is
consistent with the consultation paper which provided that the
resolution authorities would have the flexibility to determine, at
the time of resolution, the portion of eligible liabilities that
was to be converted into common shares in accordance with the
conversion power. Again, this power is to be exercised subject to
regulations yet to be enacted. Conversion would not, however,
relieve the CDIC of its obligations in respect of insured
The shares and liabilities which can be prescribed under the
CDIC Act for purposes of the bail-in power are limited to
instruments which are issued or originated on or after the day on
which the implementing regulations come into effect and instruments
issued prior to that day, if they are amended or extended after
that day (CDIC Act, Section 39.2(11)) .
Section 39.23 of the CDIC Act will provide that a person subject
to the bail-in regime is entitled to compensation to the extent
that such person is in a worse financial position than they would
have been had the D-SIB been liquidated under the Winding-up and
Restructuring Act. Again, the manner in which compensation is
calculated is left to the regulations, but it is clear that the
CDIC will have considerable discretion in that regard.
Please check back for more blog posts on this topic as
additional information becomes available.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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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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