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September 20, 2018 | The Big 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.

Do you figure RBC could fail? It’s the country’s fattest bank – a financial behemoth with fingers stuck everywhere. Savings. Loans. Investments. Insurance. Mortgages. Capital markets. Global finance.

This mother has 1,200 branches, 80,000 employees and more than sixteen million clients. And it rakes in the cash. Net profits of about $1 billion a month. No wonder its stock has risen about 60% in the past three years.

But wait. What if a 2008 happened again? What if the housing market collapsed and zombie moisters defaulted en masse on their loft mortgages, going to live under bridges or at mom’s? What if equity markets globally crumbled because of a trade war, protectionism, populism defeating globalism and an unprecedented mountain of debt collapsing on consumers and economies? Plus the orange guy.

Could a bank like the Royal fail? If we all got scared and swarmed to take our money out, could it survive? After all, it may have assets of $1.2 trillion, but the bulk of those are in the form of deposits from ordinary schmucks and businesses. They can be gone in days, or hours. Could it withstand a storm?

Some people say it’s impossible, and point to the fact Ottawa had to buy out entire bank mortgage portfolios a decade ago as evidence of bank fragility.It’s also a common belief that a bank-in-trouble means serious grief for anyone with money there. “The funds on deposit are no longer the property of the depositor,” says an ‘investment’ company flogging gold bullion. “Instead the depositor becomes an unsecured creditor or lender to the bank. Banks pay you interest, but their real purpose is to use your funds to earn a spread. They put your funds at risk in the global markets through lending, syndication and trading.”

All this becomes more relevant in a few days when the first “bail-in bonds” go on sale to investors, issued by (of course) the Royal Bank.

What’s a bail-in?

The opposite of a bail-out. Unlike what Washington did after the 2008 meltdown on Wall Street – shoveling boatloads of taxpayer money into banks to keep them alive and save the financial system – a bail-in means a failing bank would be rescued by its own investors. Bailing-in got a bad rap after depositors in Cyprus-based banks were forced to hand over their cash when those institutions wobbled. So all the financial loonies and charlatans among us (there are many) say the bail-in legislation first proposed by Harper then passed by Trudeau would end up stealing your cash, wiping out your bank preferred shares, or trashing your ETF owning bank debt.

Of course, this is crap.

True, Ottawa has designated six banks as Too Big To Fail. They’re called ‘systemically important,’ which means if one of them chokes, we’re all pooched. It’s also true that federal regulators (CDIC, the deposit insurance agency, and OSFI, the bank cop) now have the authority to actually take control of a bank if they see fit, for as long as five years. And in doing so, yes, they can order that certain securities and assets be turned into bank shares, raising cash to help rescue (maybe) the institution.

But clearly this does not involve your GIC, savings account, RBC mutual funds, chequing account, corporate bond, bank preferred shares, term deposit or any ETF holding these or bank stock itself. Ain’t gonna happen, no matter what some wild-eyed YouTube moron from Calgary tells you.

The powers Ottawa has assumed are incredibly broad. Effective this coming Sunday, the government has the legislated authority to take over any of the Big Six, kick out the board of directors, sell off assets or divisions, actually seize control of all the shares, rendering them worthless, or dilute them by converting assets into stock. Wow.

But here’s a key point that CDIC makes: “The bail-in power will not be retroactive. This means that only instruments that are issued, or amended to increase their principal value or extend their term to maturity, on or after September 23, 2018 will be eligible for bail-in conversion. The bail-in power will not apply to existing instruments…”

Therefore this statement, by the gold-humpers, is complete fiction: “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.”

And this brings us back to RBC, now first out of the gate with its shiny new Bail-In Bonds. It’s part of the global effort to ensure another 2008 doesn’t happen or, if it does, to try and save the system and not hollow out taxpayers. These bail-in securities will, by definition, be riskier than regular garden-variety bank debt because they can be converted into (worthless) equity in an emergency. So for that reason they will offer a premium return – yet to be spelled out.

Would I buy them?

In a heartbeat. No bank will fail.

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September 20th, 2018

Posted In: The Greater Fool

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