New federal legislation will implement a total loss-absorbing capacity (TLAC) requirement and a bail-in capital regime for Canada’s Domestic Systemically Important Banks (D-SIBs). The legislation, which is contained in the Budget Implementation Act, 2016, No. 1 (Bill C-15), was introduced in the House of Commons on April 20, 2016. It also includes major amendments to the resolution regime for all deposit-taking banks under the Canada Deposit Insurance Corporation Act (CDIC Act).

The new legislation provides for a statutory power to designate D‑SIBs (none of Canada’s banks are Global Systemically Important Banks (G-SIBs)). It should be noted, however, that OSFI has already designated Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank as D-SIBs, and one would assume that these existing designations will carry forward under the new legislation. From January 1, 2016, D-SIBs are subject to a Common Equity Tier 1 surcharge equal to 1% of risk-weighted assets (RWA). The 1% capital surcharge is to be periodically reviewed in light of national and international developments.

TLAC requirement

The substance of the TLAC requirement and of the bail-in regime will depend to a significant degree on the content of the associated regulations (not yet released) as well as on the way in which OSFI decides to exercise its discretionary authority. For example, a new section of the Bank Act (s. 485(1.2)) will provide that the required level of TLAC for each D-SIB will be set by OSFI after consultation with other regulatory stakeholders. In addition, the terms and conditions for qualification of debt and equity under the TLAC regime will also be provided for by regulation.

Bail-in regime

With respect to the bail-in regime, another new section of the Bank Act (s. 485.01) will provide for the making of regulations relative to the conditions that D-SIBs must meet in issuing, originating or amending prescribed shares or liabilities. What will constitute a “prescribed share or liability” is also a matter for regulations yet to be enacted. However, in a consultation paper issued on August 1, 2014, Finance Canada proposed that “long-term senior debt” issued by D-SIBs – defined as senior unsecured debt that is tradable and transferable with an original term to maturity of over 400 days – would be subject to the bail-in regime.

Concurrent amendments to the CDIC Act would authorize the CDIC to convert, or cause the D-SIB to convert, in whole or in part — by means of a transaction or series of transactions and in one or more steps — the prescribed shares and liabilities of the D-SIB into common shares of the D-SIB or of any of its affiliates. The consultation paper provided that the bail-in capital power would be exercisable upon a determination by OSFI that the D-SIB had ceased, or was about to cease, to be viable, and after a full conversion of the D-SIB’s non-viability contingent capital (NVCC) instruments.

Under the amendments, the CDIC would set the terms and conditions of the conversion, including its timing. This is consistent with the consultation paper which provided that the resolution authorities would have the flexibility to determine, at the time of resolution, the portion of eligible liabilities that was to be converted into common shares in accordance with the conversion power. Again, this power is to be exercised subject to regulations yet to be enacted. Conversion would not, however, relieve the CDIC of its obligations in respect of insured deposits.

The shares and liabilities which can be prescribed under the CDIC Act for purposes of the bail-in power are limited to instruments which are issued or originated on or after the day on which the implementing regulations come into effect and instruments issued prior to that day, if they are amended or extended after that day (CDIC Act, Section 39.2(11)) .

Section 39.23 of the CDIC Act will provide that a person subject to the bail-in regime is entitled to compensation to the extent that such person is in a worse financial position than they would have been had the D-SIB been liquidated under the Winding-up and Restructuring Act. Again, the manner in which compensation is calculated is left to the regulations, but it is clear that the CDIC will have considerable discretion in that regard.

Please check back for more blog posts on this topic as additional information becomes available.