Backgrounder: Regulations to Implement the Bank Recapitalization (Bail-in) Regime

The Canadian financial system is one of the safest and soundest in the world. In fact, Canadian banks were able to maintain their access to debt and equity markets through the 2008 global financial crisis while banks from many other nations were frozen out. Nine years later, Canadian banks continue to benefit from an effective and modern regulatory and supervisory regime.

The 2008 financial crisis highlighted the fact that some banks are "systemically important"— so important to the functioning of either the global financial system or to a domestic economy that their failure would impose unacceptable costs on the economy and financial system and, potentially, taxpayers. A central goal of the global financial reform agenda has been to ensure taxpayers are not on the hook to cover future losses by banks.

In response, Canada designated six "domestic systemically important banks" (D-SIBs):

  • Bank of Montreal;
  • Bank of Nova Scotia;
  • Canadian Imperial Bank of Commerce;
  • National Bank of Canada;
  • Royal Bank of Canada; and
  • Toronto-Dominion Bank.

In line with international standards, Canada has put into place measures to reduce the likelihood of failure for these banks and measures to reduce the potential impact of any failure on taxpayers. Canada's bank recapitalization regime will allow authorities to quickly convert some of a failing bank's debt into common shares in order to recapitalize the bank and help restore it to viability. This gives authorities an additional tool to deal with the unlikely failure of a major bank in a way that allows the bank to remain open and operating, while protecting financial stability and taxpayers. This regime also gives bank creditors and shareholders incentives to monitor banks' risks.

Legislation introducing the Bank Recapitalization (Bail-in) Regime received Royal Assent on June 22, 2016. The regulations pre-published today in the Canada Gazette, and guidance being released later today by the Office of the Superintendent of Financial Institutions on total loss absorbing capacity (TLAC), are important steps in implementing the bail-in regime.

The regulations set out key features of the regime, including that the rules would only apply to debt and shares issued by D-SIBs that are unsecured, tradable, transferable, and have original terms to maturity of at least 400 days. Such debt is held primarily by foreign and domestic institutional (fixed-income) investors, including asset and fund managers and large corporations, typically as a small portion of these investors' overall portfolios.

Canadians' deposits (including chequing accounts, savings accounts and term deposits such as Guaranteed Investment Certificates) are not subject to losses under the regime.

Through the 30-day public consultation that begins today and ends July 17, 2017, stakeholders will have the opportunity to comment on key elements of the regime. This includes: the scope of liabilities that would be subject to the bank recapitalization regime; the process and considerations that will be followed when carrying out a conversion; the disclosure requirements applicable to debt and shares subject to conversion; and the process to compensate investors who are made worse off as a result of recapitalization and accompanying resolution actions, relative to liquidation of the bank.

After stakeholder comments have been analyzed and considered, a final version of the regulations will be published. This is currently expected to be during the fall of 2017.

The Government maintains a broad suite of tools to manage a failing bank, whether systemically important or not. The new regime is intended to complement these tools by giving authorities an additional tool for use in the unlikely, extreme scenario of a D-SIB's failure.

The regime is consistent with international standards developed by the international Financial Stability Board and endorsed by the G20 in response to the global financial crisis. Many other jurisdictions have already taken similar steps to enhance their bank resolution toolkits, including the United States and all European Union member states (including the United Kingdom). As in other jurisdictions, the Canadian regime will also require systemically important banks to maintain sufficient TLAC (i.e. capital plus debt convertible into equity under the recapitalization regime) in line with internationally established TLAC standards.