Bank Bail-In Provision, CDIC Financial Position: What Every Canadian Needs To Know About Budget 2016
The federal Canadian government unveiled its stimulus Budget 2016 on March 22, which included information about the majority Liberal party’s intention to implement a banking “bail-in regime.”
“To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as ‘too-big-to-fail.'”
The Canadian government is proposing a mechanism for Canadian banks very similar to the provisions currently in force in Europe for contingent convertible, so-called CoCo, debt, as previously featured with the Inquisitr.
Canadians’ bank accounts are recorded as liabilities on banks’ balance sheets, as a type of debt. The government is proposing that in the event of another financial crisis, such as was witnessed in 2008, banks could convert accounts to stock, in a similar way that CoCo bond issues have provisions for, and similar to what occurred in Cyprus in 2012/13 when the government allowed banks to convert about 40 percent of deposits over $100,000 (similar to what is protected in Canada by the CDIC) to shares, resulting in a portion of people’s savings, held in bank accounts they believed were safe, vanishing, as reported by Press For Truth and the Telegraph.
A goal of governments around the globe is to prevent taxpayer-funded bailouts of “too-big-to-fail” financial institutions again; the thing is, many taxpayers are also bank account holders.
Why does it have to be like this? Why can’t bank accounts be safe, while at the same time allowing banks to operate profitably, without periodically needing massive injections of cash and liquidity from taxpaying account holders?
A third factor in the banking-safety equation is the Canadian government, its currency, and the country’s place in the global economy. Justin Trudeau’s Liberal government intends to run deficits, funded by selling debt, for the foreseeable future, as reported by Zero Hedge, which, like CoCo debt, is intertwined with and has implications markets for debt sold by Canadian banks, which the Liberal government is proposing now have a predetermined bail-in provision where, if things get tough, doesn’t have to be fully repaid.
In short, to run the deficits that the Liberal government wants to run, to provide all the great services outlined in Budget 2016 that Canadians so dearly want and need, and which, in the end, may result in increases to Canadian productivity and GDP, Canadians are being told: “If we give you all this stuff, you have to turn it into higher Canadian GDP [creating a larger tax base and a more valuable Canadian dollar], or else, we might be forced to take 20 percent of your savings above a certain amount, like they did in Cyprus.”
The problem with this, as has been discussed with Press For Truth, who describes the CDIC as a “Ponzi scheme” and points out that in 2013, the corporation only had $2.5 billion set aside to cover investor losses, up to just over $3 billion in 2015. Three billion dollars covers 30,000 accounts worth $100,000 each.
The CDIC reports that in 2015, they insured $684 billion of Canadians’ savings; with $3 billion. A situation that is described as the CDIC not being able to “cover all Canadian deposits.”
So, Canadians need to understand that only CDIC-insured investments are protected by the government, and savings above $100,000 may be subject to bail-in events where a certain amount could disappear. And to keep in mind that the CDIC only has enough to cover about 0.004 percent of existing insured investments. And keep in mind that this process is already well underway in Europe.
Why do governments have debt? Why isn’t there enough money? One parable that may help shed light on this is the difference in pay received by U.S. garbage collectors in 2011: those employed by state governments averaged $19.27 per hour, those employed by local governments averaged $17.11 per hour, and those employed by private contractors averaged $16.05 per hour, as reported by the Houston Chronicle. The reasons behind these varied numbers are complex; one thing is certain, the $3+ premium paid to state garbage collectors adds to debt burdens.
Canada is renowned for its world-class social programs, including free health care for all citizens, and some of the highest-paid teachers in the world, as reported by the Toronto Star. Though, at different times through its history, Canada has run balanced budgets, social programs cost money. At least in part, that money comes from debt sold by the government.
Other examples of activities that increase Canadian national debt include government workers skipping work, small businesses double-booking, as reported by the Inquisitr, people claiming benefits they are not entitled to, and visiting doctors unnecessarily, among many others.
Examples of activities that decrease national debt include working, paying taxes, starting new businesses, writing books, publishing photography, and teaching others new skills, among many others. Feel free to add your examples of debt-adding and debt-reducing activities below.
One, perhaps over simplistic, yet not inaccurate, way to describe the proposed bail-in provisions for Canadian banks is aiming to protect Canadians from themselves.
[Photo by Simon Hayter/Getty Images]
