Canada ready to confiscate deposits?

[oddballstocks]

A friend sent this to me: http://globaleconomicanalysis.blogspot.com/2013/03/canada-discusses-forced-depositor-bail.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29&utm_content=Google+Reader

 

The basic gist is in some new bill in Canada legislators slipped in a provision similar to what they did in Cyprus.  The regulators would be able to turn certain liabilities (deposits) at a bank into regulatory capital quickly in order to keep the bank solvent.

 

I never thought the Cyprus solution would be a one off, it's disheartening that Canada would be willing to put this in place "just in case".  I wonder how long it'll take for a similar provision to migrate south of the border? 

[Martian]

Garth Turner had an article on this today . http://www.greaterfool.ca/

[NormR]

I don't think they're talking about deposits.  I think they're talking about some form of convertible bonds or preferred shares.  At least such an idea was floated before.

 

So, it might actually help protect larger depositors (i.e. above the insured limit of $100k).  Mind you, the equity holders might see a nasty bit of dilution in a 2008-9 repeat.

 

On the whole, this is about orderly recaps in bad times, which is a good idea to consider before they hit.

 

In other words, I'd want to see the legislation before believing the hype on this particular story.

[oddballstocks]

Norm,

 

I understand your point, and I hope your right, but on a bank balance sheet deposits are liabilities.  So if they're thinking of turning liabilities into equity they're only left with a few options, deposits, or debt.  I'm sure debt would be the first step, but depositors could be the second.

 

I agree that seeing the actual legislation is probably the best step.  I'm not sure how Canadian politics works, but in the US there are tons of bills presented that never make it past an initial vote.

[NormR]

I understand your point, and I hope your right, but on a bank balance sheet deposits are liabilities.  So if they're thinking of turning liabilities into equity they're only left with a few options, deposits, or debt.  I'm sure debt would be the first step, but depositors could be the second.

 

I agree that seeing the actual legislation is probably the best step.  I'm not sure how Canadian politics works, but in the US there are tons of bills presented that never make it past an initial vote.

 

Keep in mind the Canada Deposit Insurance Corporation provides depositor protection in Canada.  They aren't going away.  So the sub $100k account is still fine.  The over $100k account was never protected.

 

It's been a while since a big bank collapsed in Canada but smaller ones have.  Some here might remember what happened to uninsured deposits in such cases.  IIRC, my dad was in one such dead bank/trust but got his money back because he was under the insured limit.   

[NormR]

I would add that I don't trust the Manitoba credit union guarantee at all.  They aren't backed by the CDIC, and pay high interest rates on savings accounts.  I expect that system to blow up at some point.  If you wanted to spot a mini-Cyprus in Canada, it might be one.

[Parsad]

Canada has their own currency unlike Cyprus.  They can issue their currency as much as they want, recap the banks, keep them solvent and continue to insure deposits to $100K per account name.  That $100K may be worth less, but the government can continue to print money and insure deposits.  Cheers!

[oddballstocks]

Canada has their own currency unlike Cyprus.  They can issue their currency as much as they want, recap the banks, keep them solvent and continue to insure deposits to $100K per account name.  That $100K may be worth less, but the government can continue to print money and insure deposits.  Cheers!

 

I understand Canada can print money, the US can as well.  The article is talking about the technical details on how a recap might work.  In the US we issued TARP shares which were maybe created with funny money (unsure).  In Canada it appears the approach is instead of a capital injection the government will turn liabilities into equity.  If a bank is levered I would imagine the debt would become equity first.  If a bank weren't levered their only liabilities would be deposits, in which case the scenario is similar to Cyprus.

 

I doubt this is intending to hit insured depositors.

 

I know in the US I was presented with an account through a brokerage where if I had my wife's name on the account behind the scenes the broker would shuffle banks so my cash could be insured into the millions.

[arbcon]

The language  in question is going in worldwide..not just in Euroland. Basically, it's the Swedish system with the twist that the depositors and not the state owns the newco bank. I don't like this development at all...to me it is the acknowledgement that the bad assets in the banks are greater than the reserves that governments have to deal with them.

[JEast]

My own skeptic mind says this is some type of global plan to pump the markets even more as folks start pulling their deposits out and into other assets.

 

The preppers are going to have a field day with this new trend :)

 

Cheers

JEast

[rukawa]

Well we do having a housing bubble in Canada. But the big banks are not heavily exposed AFAIK. The CMHC (Canadian version of Freddie/Fannie except its not a private company) is. But I don't think we will experience the problem that the US has experienced. Housing may go nowhere for 10-15 years but a financial crisis due to housing is less likely because we don't have non-recourse mortgages. Basically we have a regulatory system that is more pro-bank, more risk averse and less competitive than the US.

[Aberhound]

The first stated purpose to protect the taxpayers is stupid. The reverse will occur. A loss in confidence however caused will now more likely cause a loss of deposits which will cause banks to reduce loans which causes asset values to contract rendering losses to the government owned mortgages held by the CMHC. The new rule does not protect taxpayers, it harms them. Anyone owning preferred shares in the TBTF Canadian banks should reconsider as you are not being paid for systemic risks.

 

A better way to protect the taxpayers and depositors would be to state that shareholders and bondholders get converted to equity before any depositor loses a penny. More deposits would mean that the bonds and shares are less risky meaning that such a rule would be good for bondholders and shareholders. This is the old rule consistent with my favourite legal maxim: "Often it is the new road, not the old one, which deceives the traveler".

 

The Privy Council understands this. There must be some greater reason.

 

The second stated reason, to prevent deposits favouring the TBTF banks, is a good reason as it will help keep the deposits in the smaller banks and credit unions. Canada suffers from a lack of competition in the banking sector so the rule increases competition and helps prevent runs on the small banks and credit unions. This does not seem to be a sufficient problem to be the greater reason so I am mystified.

 

 

 

[SharperDingaan]

Your friend is talking about Canadian Additiional Tier1 and Tier 2 regulatory capital, as defined in the OSFI 2013 CAR Guideline. FI's are permitted to issue CoCo bonds, that immediately convert into common equity based on some predefined regulatory trigger. The bonds are low cost 'engineered' equity, & exist to absorb losses &/or permanently boost regulatory capital in the event the bank gets into trouble. 

 

As in any company, when a company is near default - that business's risk transfers to its lowest ranked bond holders, as the business's equity has essentially been wiped out. If there are CoCo bonds there is an automated debt/equity swap that recapitalizes the company.

 

http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/capital/guidelines/CAR_chpt2_e.pdf

http://lexicon.ft.com/Term?term=cocos

 

SD

 

[ERICOPOLY]

Housing may go nowhere for 10-15 years but a financial crisis due to housing is less likely because we don't have non-recourse mortgages.

 

Neither did Florida though.  However there may be other reasons why you won't have a problem, but the non-recourse issue doesn't seem to be the source of the problem in the US (if it was, then why wasn't Florida spared?).

[EdWatchesBoxing]

IMO, housing is not a market that will just stay "flat" for 10-15 years.

 

A mortgage securitization guy mentioned that non-recourse stuff as a reason that it's "different" here in Canada. Then again, they're dependent on the CMHC CMB program to make money.

[Kiltacular]

A mortgage securitization guy mentioned that non-recourse stuff as a reason that it's "different" here in Canada. Then again, they're dependent on the CMHC CMB program to make money.

 

EdWatchesBoxing,

 

I tend to side with Ericopoly on the specific notion that recourse mortgages won't prevent disaster (though I have no idea about Canada's housing situation).

 

What happens when the public gets crushed with housing (as opposed to, say, owners of commercial real-estate) is that they scream bloody murder.  And that means politicians will get voted out unless the previously existing conditions are waived. 

 

Most people don't have enough other assets against which recourse achieves anything anyway.  If they did, the average person would just pay cash for their home (you know, the stock market is risky and all that...).

 

And, of course, a guy who makes his living selling securitized mortgages "has" to believe what he said.  Munger's incentive caused bias or the much more poetic Upton Sinclair's comments:

 

"It is difficult to get a man to understand something, when his salary depends on his not understanding it."

[Aberhound]

ALberta has no recourse mortgages but I don't see a greater propensity to borrow compared to Vancouver. I guess the cultural preference to have a bigger house than your neighbours prevails over the cultural aversion to debt.

[EdWatchesBoxing]

In Alberta, if it's a high LTV insured mortgage, I've read that it becomes a recourse mortgage. Can anyone verify?