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April 18, 2018 | Fail Bail

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

When the lights went out ten years ago, Wall Street banks folded like cheap suits. A financial crisis turned into a credit crisis that swept the world. I remember talking to the guy who managed the local grocery store in Oakville. “We’ve been told there may be no shipments next week,” he said, shocked. “Head office told us they can’t finance the loads.” So suburbanites were close to not having their Bran Flakes and organic broccoli, thanks to collaterized debt obligations and scuzzy financiers in America.

That’s the world now. A digitized, seamless, integrated interconnected web of mutual interdependence both comforting and terrifying. Money has gone virtual and the financial institutions which control those channels control our lives. If the web went down, with no electronic banking, ATMs, credit card authorizations or online shopping, you’d have to get by with the cash in your pocket.

So, how much is on you right now? How much currency do you keep at home?

Right. Screwed. And this is why no big bank can be allowed to fail. Which brings us to bail-ins, and what happened on Wednesday. Ottawa just published the final set of actions – two years in the making – that would materialize if RBC, BeeMo, Scotia, TD, CIBC or the National Bank went paws-up. That could be the result of a devastating housing collapse or a run on bank deposits caused by panicked consumers. It could be a domino effect from a global economic event. Maybe a war.

So, what would happen?

First, let’s deal with what you do not need to fear, and what some people have been trying to milk in order to line their own pockets. Here. For example, is Toronto-based gold flogger BMG Group’s scary take on what a bank bail-in would mean:

“Those at risk of a bail-in in the event of a failure are subordinated debt holders, bondholders, preferred shareholders and any accounts in excess of $100,000 not covered by CDIC insurance. Their bonds, preferred shares, deposits etc. would be converted to capital to re-capitalize the banks. According to the financial statements of the CDIC, they insured some 30% of total deposit liabilities, or $684 billion, as of April 30, 2014. The remaining 70% not insured would primarily be large depositors, including both large and small businesses, and other banks and financial institutions.”

So, says BMG, if you own bank preferreds shares (or an ETF holding them) or have more than $100,000 sitting in accounts at any one bank, your wealth could be seized by the government and turned into common shares in the bank with the money being used to help rescue that institution. Obviously the shares would be near-worthless.

And here is the almost-always spectacularly incorrect and very popular web site Zerohedge, also telling you to be scared:

Deep inside the announcement, in the section discussing “tax fairness and a strong financial sector”, we have official confirmation that Canada has just become the latest country to treat depositors as the bank creditors they are, and as such, they too will be impaired, or “bailed-in” the next time a Canadian bank needs to be rescued. This new “bail-in” regime is spun as benefitting taxpayers; what isn’t mentioned is that most of those taxpayers who will be “protected” also happen to be the impaired depositors (also known as creditors) in these soon to be bailed-in banks, which begs the question: just who or what is being protected here?

Finally, here’s Canada’s resident right-wing nutbar, Ezra Levant. In this crazed video he says the bail-in is Trudeau’s plan to steal your family’s money (actually it was Harper’s idea, but whatever…):

Now that we’ve gotten that out of the way, what is the truth?

Pretty simple. If a bank fails deposits will not be seized, even for big guys (as happened in Cyprus). No preferred shares will be forced to convert into common stock. No ETFs that own those preferreds will be impacted. You wouldn’t lose your chequing account funds, nor the money in your RRSP, TFSA or anything else [email protected] got you into. Sadly, your mortgage or HELOC would not be cancelled, either. Yes, shares in that bank would collapse on the stock market and stockholders would be Hoovered dry, but the institution would be recapitalized nonetheless.

Banks will be required to have enough capital in reserve, plus sufficient debt which is convertible into equity, to survive. If collapse happened, bank regulators would force conversion of those assets into common stock, allowing the bank to remain open and preventing any burden falling on taxpayers (that’s  called a ‘bail-out’).

So, unless you owned a high-yield bail-in bond, there’d be no impact should the earth open and swallow the CIBC. Here is how the feds see this structured:

The regulations set out key features of the regime, including that the rules would only apply to debt issued by D-SIBs (the banks) that is unsecured, tradable, transferable, and has an original term to maturity of at least 400 days. Such debt is held predominantly by foreign and domestic institutional investors, such as asset and fund managers, typically as a small portion of these investors’ overall portfolios.

The bail-in regulations do not apply to deposits, including chequing accounts, savings accounts and term deposits such as Guaranteed Investment Certificates, which will continue to benefit from the Canada Deposit Insurance Corporation deposit insurance framework. As such, deposits are not convertible under the regime.

Now, will one of our banks fail? If the answer’s ‘never’, you know where to invest.

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April 18th, 2018

Posted In: The Greater Fool

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