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

The Canadian financial system is one of the safest and soundest in the world. 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 not. 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
  • 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.

The Bank Recapitalization (Bail-in) Regime

The Government maintains a broad suite of tools to manage a failing bank, whether systemically important or not. The new Bank Recapitalization (Bail-in) Regime is intended to complement these 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. As in other jurisdictions, the Canadian regime will also require systemically important banks to maintain sufficient total loss absorbing capacity (TLAC)—which is the capital plus debt convertible into equity under the recapitalization regime—in line with internationally established TLAC standards.

Canada's Bank Recapitalization (Bail-in) 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 preserving financial stability and protecting the interests of taxpayers. This regime also gives bank creditors and shareholders additional incentives to monitor banks' risks.

The Bail-In Regulations

The legislative framework for the bail-in regime received Royal Assent in June 2016. Draft regulations were pre-published for public consultation in the Canada Gazette, Part Iin June 2017. The final regulations published today in the Canada Gazette, Part II, along with guidance being released by the Office of the Superintendent of Financial Institutions on TLAC, represent key final 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 issued by D-SIBs that is unsecured, tradable, transferable, and has an original term to maturity of at least 400 days. Such debt is held predominantly by foreign and domestic institutional investors, such as asset and fund managers, typically as a small portion of these investors' overall portfolios.

The bail-in regulations do not apply to deposits, including chequing accounts, savings accounts and term deposits such as Guaranteed Investment Certificates, which will continue to benefit from the Canada Deposit Insurance Corporation deposit insurance framework. As such, deposits are not convertible under the regime.    

In addition to the scope of liabilities that would be subject to the regime, the regulations set out:

  • the process and considerations that will be followed when carrying out a conversion;
  • the disclosure requirements applicable to bank-issued instruments subject to conversion; and
  • the process to compensate investors who are made worse off as a result of a conversion and accompanying resolution actions, relative to liquidation of the bank.