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Wednesday, March 27, 2013

Canada Plans for its own Cyprus Scenario

Savers around the world have been watching the Cyprus scenario unfold as depositors money is quite suddenly up in the air. Canadian savers may want to know that the government there is making its own plans for a Cyprus style scenario.  Talk about a Canadian Economic Action Plan! 
Canadian Government Action Plan Logo

In the event that a “to big to fail” bank were to approach collapse in Canada, it would appear that the money deposited in the banks could be taken and then used to keep the bank viable.  The following words can be found on pages 144 and 145 of Jobs Growth and Long Term Prosperity – Economic Action Plan 2012 as tabled in the House of Commons  by the Hon. James Flaherty, Minister of Finance on 21 March 2013.  This is otherwise known as the budget.

Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation time lines will allow for a smooth transition for affected institutions, investors and other market participants.

Before drawing conclusions, what do these words say?

First – “systemically important banks”. This means banks that are perceived as being too-big-to-fail (TBTF). The Office of the Superintendent of Financial Institutions (OFSI) identified six banks in Canada as being systemically important within the last week.  They are the Royal Bank of Canada, the Toronto-Dominion Bank,  the Bank of Nova Scotia, the Bank of Montreal, the Canadian Imperial Bank of Commerce and the National Bank of Canada.

This was a bit of a surprise to some observers, as it had been thought that only the RBC was TBTF.

Second – there is discussion of  a “bail-in regime.”  You should start getting nervous here.  A bail out is when an outsider gives the institution in trouble more money so it can keep going. A bail-in is when money from within the institution is used for the bail out and then those whose money was taken are given something in return.  Typically, those who have their money taken are offered shares in the institution in the hope that the institution will prosper again in the future and the shareholders can still have value. This was just done over the last few years in Spain. It did not work out too well.  See

Third – we see the words in the unlikely event that a systemically important bank depletes its capital.   In other words, if a bank suddenly goes broke.  This could be due to unforeseen loses such as a complex derivative contract that failed.  See a simple explanation of derivatives at
Fourth – there is the phrase the very rapid conversion of certain bank liabilities into regulatory capital.  The words “certain bank liabilities” is a fancy way of saying deposits. When you deposit a hundred dollars in a bank, this shows up on their spread sheet as a liability.  So what this phrase says is that bank deposits could be taken up and used by the bank and it could be converted into regulatory capital.  Regulatory capital is another way of saying banks must keep a certain amount of money on hand for meeting daily requirements such as withdrawals for deposits. The minimum amount that must be kept on hand is determined by the regulator. In this case the regulator is OFSI. 

So what does this all mean?

In short, it says that if a Canadian bank suddenly finds itself in financial trouble, money from depositors can be taken  in a “bail in” and used to keep the bank solvent.  Those who had their money taken would be given shares in the bank or some other form of compensation such as bonds.

Should you be worried?  

The document does not say so, but in such desperate circumstances, it might  be assumed that the deposits taken would be those that have more than $100,000.  Account below $100,000 dollars are guaranteed by the Canadian Deposit Insurance Corporation. So, small account holders should be OK.

Canada is not alone in doing this. The UK and the USA have a similar plan they discussed in December of 2012.   See
This is economics for the rest of us!  Enjoy the ride in the new economy.


  1. Banks have been converting liabilities, i e deposit moneys into assets, i e taking them in fees and other legally sanctioned schemes for hundreds of years. In fact that is how banks operate. Europeans have seen bank saving consistently raided in this fashion. In Canada and the US we do it differently: we make certain that the value of money constantly erodes (Check out the CPI to find out what a Nixon era dollar is worth today and plan to be shocked). Today banks contribute to dollar value erosion most effectively by creating and trading in instruments like default credit swops which are entirely artificial assets which no actual underlying value and when caught short, as they notoriously were four years ago, demanding the shortfall be made up by the likes of AIG who in turn look to the federal governments to provide quantitive easing, another was of saying pay he bill. The only way the feds can do that is by printing more money. Which is what they have done.

  2. I concur on the nickle-and-dime approach combined with inflation as a form of silent theft.

    What will be different if this develops will be that accounts get a full scale raid instead of the usual fees.

    This, BTW, is the 100th annivesary of the US Fed. A dollar in 1913 is now worth about 5 cents!

  3. Honest Ex-Banker,

    Is there a similar plan that deals with brokerage houses? Would western governments nationalize a portion of outstanding stock shares in each account?

  4. Hmmm, tough question. Not sure in Canada - have seen no plans here. I cannot say for sure, but I think such an idea would be the death knell for the stock market. The powers that be in various central banks and finance ministries are almost always fanatically committed to keeping stock markets at high levels. This is part of the reason we see the US Fed carrying on with its money printing or QE programs. A such, I cannot see then going after a portion of stock market shares. :-)