Bailing-in Banks

March 25, 2016

MP Eleanor McMahon, Burlington, ON

GA, MP Eleanor.

I note the following paragraph in the new budget:

INTRODUCING A BANK RECAPITALIZATION “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 creditorsare 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.

Please note the following:
1.  “Bailing in” bank shareholders is a very good thing.
2.  Including bank depositors with shareholders is a very bad thing.  Depositors place their funds in banks in trust, with “trust” being the operative word.    If there is any one thing a bank depositor thinks he is doing when he trusts the bank, is that his money is safe.
3.  The above “bail-in” wording does not make it clear that depositors’ money is not to be included in the term “creditors”.
4.  Please see that the bill as passed excludes depositors’ funds from any “bail in” provision.
5.  As a separate. closely related, matter, I have recommended for decades that, if a bank is “too big to fail”, it should be required to buy an insurance policy that is too big to ignore; and that such a “policy” could be in the form of a regulatory requirement for a risk-free capital reserve of, say, 25-30%.
I will be interested in your comments on the above.
Yours very truly,
Frank Gue, B.Sc., MBA, P.Eng.,
2252 Joyce St.,
Burlington, ON L7R 2B5
905 634 9538.

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