The Canadian government recently published for comment a consultation paper on a proposed bail-in regime applicable to Canada’s domestic systemically important banks (D-SIBs). The bail-in regime, formally referred to as a Taxpayer Protection and Bank Recapitalization Regime, would grant to the Government of Canada the power to permanently convert "eligible liabilities" of the D-SIB into common shares.

The power would also allow for, but not require, the permanent cancellation of the whole or a part of the existing common shares. This power could only be exercised if the regulator (the Superintendent of Financial Institutions) determined that the bank had ceased or was about to cease being viable and the full conversion of the bank's non-viability contingent capital (NVCC) instruments had occurred.

Affected debt

Eligible liabilities would be “long-term senior debt” – senior unsecured debt that is tradable and transferable with an original term to maturity of over 400 days. The conversion power will apply only to debt issued after implementation of the new bail-in regime, with no retroactive application to existing debt. Importantly, Canada has elected to exclude consumer deposits from the regime and reiterated that qualified depositors will continue to benefit from Canada’s deposit insurance scheme that protects the first $100,000 of Canadian dollar deposits held in a Canadian bank.

The regime would respect the hierarchy normally applicable to debt holders and equity holders in a liquidation by having the “eligible liability” holders be entitled to more common shares on conversion than holders of NVCC. All the conversions would be tied to common formulae.

New capital requirement

The proposed regime also makes D-SIBs subject to a new additional capital requirement, the Higher Loss Absorbency Requirement. The purpose of the new requirement is to ensure D-SIBs have sufficient loss-absorbing capacity to withstand severe, but plausible, losses and emerge from a conversion adequately capitalized with a buffer above target capital requirements. The Higher Loss Absorbency Requirement is a ratio of the bank's regulatory capital and long-term senior debt to its total risk-weighted assets. There will be a public minimum ratio that all D-SIBs must meet, but the government is reserving the right to impose higher ratios for some banks. The proposal is for the ratio to be set at between 17 per cent and 23 per cent of risk-weighted assets.

The bail-in regime would also require specific disclosures related to the conversion power for agreements related to an eligible liability and their accompanying offering documents. In addition, it provides for the inclusion of a contractual provision in any eligible liability through which holders provide express submission to the regime notwithstanding any provision of foreign law to the contrary.

Holding companies

The consultation paper notes that in certain other jurisdictions (US and UK) most financial institutions, unlike in Canada, have a holding company structure that dictates certain differences in their bail-in regimes. The paper asks for comment on whether Canada should consider adopting a holding company (or non-operating bank) structure. Canada actually did adopt legislation permitting the establishment of regulated bank holding companies several years ago. However, none of the D-SIBs has elected to take advantage of the holding company structure afforded under the legislation.

The Office of the Superintendent of Financial Institutions has determined that Canada’s D-SIBs are Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank.

The consultation paper can be viewed here.