Canadian Bail-In: When Canuck Depositors Get Smoked Will The CDIC Be Any Help?

Image Via http://thebouncybanker.blogspot.ca/2011/09/first-great-bank-run-of-2011.html

Not long after the Cyrpus”bail-in” happened markets were spooked when Dutch finance minister Jeroen Dijsselbloem (a.k.a Diesel-BOOM or just D-Boom for short) called it “a template” for future rescue actions.

Notwithstanding that in recent days ECB head Mario Draghi has backed away from the “bail-in as template” position, the “template” seems to have already found its way across the pond – to Canada and popped up in the proposed budget  (PDF) in an innocuous sounding paragraph on page 155:

“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. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail- in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.”

In the wake of the alarm emanating from this, both officials and government apologists (like Garth Turner) have downplayed and admonished any “hysteria” from this:

Even some people who certainly should know better,..have been sucked into the vortex of rumour, misinterpretation and doomsterism…The hysteria is unfounded because the premise is wrong. The government is not proposing legislation of allow the confiscation of bank accounts to ‘bail-in’ a failing bank so taxpayers need not do the job. That’s absurd in a country where we have a crown corporation insuring deposits.

(emphasis added)

First, while Turner simply dismisses it, it does need to be reiterated and stressed that when you deposit your money into the bank you are lending the bank your money. As my friend Aram Fuchs of Fertilemind Capital commented when we discussed this recently, “too many people simply don’t understand that when they put their money into a savings account, they’re lending money to the bank and it becomes the bank’s liability”.

Does that make your money one of those “certain liabilities” that can be “rapidly converted” to recapitalize a failing bank? We don’t know, the language is nebulous.

Next, CDIC is not some kind of “magic bullet” that makes all deposit risk for the middle class go away (this is really what Turner is getting at. Nobody cares if “rich people” get bent over to bail out a bank that blows itself up, as long as “normal people” are unscathed).

Bail-in’s would only be employed in the event of a systemic banking crisis, and in the event of one, the CDIC is woefully underfunded to handle it. So much so that the purported comfort one should take from “knowing” that their deposits are insured are largely illusory.

I looked at the CDIC previously, in 2007 and found that they had 1.4B in assets and were permitted by charter to borrow 6B more to cover 437B of deposits. That was enough money to cover roughly 1.6% of deposits

Taking a look at it today, they have 2.4B in assets and the total insured deposits have grown out to 622B, which is 0.3% of insured deposits. Their borrowing limit has been upped to 18B now, but still, if they max out their credit limit and add in all their assets they can still only cover 3% of insured deposits.

In the Cyprus bail-in, it looked like somewhere between 7% and 11% of total insured deposits were required to shore up the banks, but once the insured deposits were exempted, and the politically connected moved their money out ahead of the bail-in, it looks like they needed anywhere between 60% and 100% of whatever was left.

If a systemic banking crisis were to hit Canada, that would pretty well mean we’d have to recapitalize a lot more than 3% of deposits. Even if they only need somewhat more than the 0.3% that their actual assets can cover, when you’re in the middle of a cascading banking crisis, who are you going to borrow money from?

Either the Canadian government will have to guarantee any credit, which does put the taxpayer on the hook for it, or else the central bank will have to print money which will be inflationary, eventually (probably “eventually” enough that anybody warning about it will be ridiculed as a “doomer whack job”).

Given Draghi’s and Jim Flaharty’s  (via his press secretary) refutations of the “new normal” involves confiscating wealth from people stupid enough to put some savings aside, always recall Otto Von Bismarck’s famous maxim: “Never believe anything until it has been officially denied three times”, as the inventor of the modern welfare state, he would have known.