Banks are utilized daily and form a vital pillar throughout Canadian society by facilitating essential financial services. Their existence is so ingrained into society that the top six deposit-taking institutions within Canada are declared as “Domestic systemically important bank[s]” by the Office of the Superintendent of Financial Institutions (OSFI) in accordance with the Bank Act, Part X—Capital, Liquidity and Capacity to Absorb Losses.
This post will look at the powers granted by this portion of the Bank Act as explored through in-depth commentary within The 2023 Annotated Bank Act (Thomson Reuters, 2022).
Introduced in 2016, D-SIBs are designated to protect consumers from the damages of large banks collapsing. Part X authorizes the Superintendent to formally designate banks as D-SIBs and lays out a regime for mandating the maintenance of a minimum amount of regulatory capital and debt subject to the bank recapitalization (or “bail-in” conversion) powers. This forms the main purpose of Part X, which allows the Superintendent to carry out a bail-in conversion of a bank which is determined to have ceased—or is about to cease—being viable.
The process of a bail-in conversion permits the Canada Deposit Insurance Corporation (CDIC) to temporarily take ownership of the bank and convert some of the failing debt into common shares, thus recapitalizing the bank. Such a process is undertaken in accordance with a series of other regulations, including the Bank Recapitalization (Bail-in) Insurance Regulations, Bank Recapitalization (Bail-in) Conversion Regulations, and the Compensation Regulations. These regulations are referred to as the “Bail-in Regulations” within The 2023 Annotated Bank Act (Thomson Reuters).
To assist the bail-in regime, D-SIBs are required under the Bank Act to maintain a minimum capacity to absorb losses through additional instruments eligible for conversion under a bail-in conversion’s powers. Commonly referred to as the “Total Loss Absorbing Capacity” (TLAC), this requirement is set out in s. 485(1.1) and determined by order of the Superintendent.
At the conclusion of a bail-in conversion, the CDIC returns the bank to private control. For investors made worse off by CDIC’s actions than if the bank had been liquidated, there is a form of redress available through Compensation Regulations. The process essentially requires the CDIC to make an offer of compensation to relevant shareholders and creditors, and this offer is then reviewed by a third-party assessor appointed by the Governor in Council. The bail-in conversion processes and the regulations surrounding them seek to protect taxpayers by recapitalizing failing banks, or banks that are about to fail, through the timely intervention of the Superintendent and the CDIC. Such intervention is undertaken with the goal of preserving the legal entity and contracts of the bank and is instrumental in preventing large-scale financial disasters.
For more information regarding Part X, the Bail-in Regulations, and other facets of the Bank Act, pick up a copy of The 2023 Annotated Bank Act (Thomson Reuters, 2022).