Bail in or Bail out?

For my previous two MP reports I have covered several concerns related to the recent 2016 Federal Budget and in turn have received some excellent feedback with many good questions and comments.  One question that I have received a large amount of interest in relates to page 223 of the federal budget that details the Liberal Government plan for the bank recapitalization “bail in” regime. The reason why this is such a frequently asked question is some citizens believe this recapitalization plan announced in the Liberal budget would allow banks to take money from depositors to be used for a bank bailout during a financial crises. Understandably the concern that major banks could take your money in such a manner has created a considerable amount of concern for many citizens. Before plunging into this issue further let us start by acknowledging that this is an extremely technical subject and some simplification has been applied to summarize the issue to fit into this week’s report.

The obvious question is does this proposed bank recapitalization “bail in” regime allow banks to take your money during a financial crisis? In order to answer this question it is important to understand what is actually being proposed and why. One of the lessons learned during the recent economic crises is that many banks that did fail (and fortunately none in Canada) were provided taxpayer financed bailouts with little consequence to the key decision makers at the bank in question who ultimately were responsible for many of the high risk decisions being made. For many taxpayers this lack of accountability was unacceptable. Further this type of a taxpayer financed bailout regime meant there were few consequences to senior bank managers who in many cases continued to collect extravagant bonuses almost as a reward for engaging in risky behaviour.

We know when a major bank fails it can have devastating effects on our economy and for local citizens. For this reason many banks are considered too large and too important to fail. However the challenge is how can accountability can be increased so that risky behaviour is not rewarded in the future by taxpayer financed bailouts?  The idea behind a formal bank recapitalization regime is that in the event of a financial crises major shareholders of the bank – in other words those who are investors in the bank, along with major creditors who have previously decided to do business with the bank in question, would see their investment in the bank converted from being a bank liability into common shares so the bank could continue to operate. In other words the owners of the bank, in effect being the shareholders and the major creditors, would be the parties who would see their investment converted into common shares until such time the bank returned to profitability. 

How does this benefit taxpayers? The simple answer is that for those citizens who deal at a bank, credit union or financial institution that did not engage in practices that compromised the viability of the institution in question they are not forced to financially subsidize and reward poor management that occurred elsewhere. Further for the bank management that did run an institution into insolvency they would be held to account by the shareholders and creditors of the bank in question. 

What about bank depositors? This is where the largest concern is for everyday consumers who bank with a major institution but are not shareholders or the primary creditors. As this policy discussion and related consultation has evolved in Canada for some time it should be noted that the stated position of the previous Government is that deposits from Canadian consumers would be excluded and protected from a Bank recapitalization regime. Although the current Liberal Government to the best of my knowledge has not made a similar policy commitment to exclude and protect depositors from these proposed changes it is in my view reasonable to conclude the intent would be the same and they will do so. As this legislation and further details are still pending on this subject I will confirm this speculation when possible. For more questions, comments or concerns on this or any topic please contact me dan.albas@parl.gc.ca or toll free at 1-800-665-8711.