Ottawa clarifies Cyprus-style ‘bail-in’ language in federal budget

The federal government is trying to reassure Canadians that it isn’t making plans for a Cyprus-style cut into consumer bank accounts in the “unlikely event” of a bank collapse in Canada.

“The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime,” Finance Minister Jim Flaherty’s press secretary Kathleen Perchaluk said in a statement.

The clarification came this week in response to the “bail-in” regime outlined in the recent federal budget. It understandably raised some eyebrows, particularly in the wake of what happened in Cyprus when it money was taken from deposits to deal with the tiny European country's banking crisis.

A "bail-in" happens when an organization has to find money from within to solve a crisis. That's the opposite of a bailout – as we saw with American financial institutions and car companies during the 2008-09 financial crisis – when emergency capital come in from outside sources, such as government.

On page 141 of the recent federal budget it states: “The Government proposes to implement a ‘bail-in’ regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.”

In the follow up statement this week, Perchaluk said Ottawa’s move is in line with recent international agreements, but that Canadians shouldn’t worry about losing their funds.

“Under a ‘bail-in’ arrangement, a failing financial institution has to tap into its own special reserves or assets (which it has been forced to put aside) to keep its operations going,” Perchaluk stated. “The ‘bail-in’ regime would only kick in during the extremely unlikely event that a major bank in Canada begins to fail. This keeps the financial institution intact, without putting taxpayers at risk.”

In the budget, Ottawa said it will consult with “stakeholders” on how best to implement a Canadian bail-in regime using timelines that, “will allow for a smooth transition for affected institutions, investors and other market participants.”