Efforts to shore up the Canadian banking system in response to the global financial crisis took another step on Wednesday with the publication of regulations that implement key features of the bank recapitalization (bail-in) regime introduced in 2016 for Canada’s domestic systemically important banks (D-SIBs).
The bail-in regime is intended to protect the overall financial system from the risk of a bank failure, without resorting to a taxpayer bailout.
Published in the Canada Gazette, the regulations detail how a bail-in would work in the event that a bank runs into financial trouble.
“The regime provides authorities with an additional tool to deal with the unlikely failure of a major bank, in a manner that preserves financial stability while protecting the interests of taxpayers,” the Department of Finance Canada says in a news release.
The bail-in regulations published in the Canada Gazette are in line with draft rules released in June 2017, say Fitch Ratings.
“This strengthens Canada’s existing bank resolution framework as it provides for the conversion of certain liabilities into common equity of the bank for the six designated D-SIBs,” the New York City-based rating agency says in a news release.
Additionally, the regime excludes covered bonds from being bailed-in, which, “increases the protection for covered bondholders against a hypothetical issuer default,” Fitch says.
As a result, covered bonds programs issued by the Canadian banks will be even less sensitive to potential rating downgrades of their issuer.
Fitch says it will be reviewing all Canadian covered bond programs in the coming weeks, taking into consideration the effect of the new bail-in regime.
Also Wednesday, the Office of the Superintendent of Financial Institutions (OSFI) released its final Total Loss Absorbing Capacity (TLAC) guideline for Canada’s D-SIBs.
TLAC requirements “are designed to ensure a D-SIB has sufficient loss absorbing capacity to support its recapitalization in the unlikely event of a failure. This additional loss absorbing capacity would facilitate an orderly resolution of a bank and allow it to remain open and operating without requiring public funds, or threatening financial stability,” OSFI says in a news release.
The new requirements would take effect in September, and banks will have to start disclosing their TLAC ratios for the fiscal first quarter of 2019. However, banks would have until Nov. 1, 2021 to fully comply with the rules.
OSFI has also revised the capital rules to incorporate banks’ investments in TLAC instruments.
“Together with the capital adequacy requirements guideline and the leverage requirements guideline, the TLAC guideline provides a robust capital framework to ensure Canada’s largest banks remain well-capitalized at all times, including in stressed conditions,” says Carolyn Rogers, assistant superintendent, regulation sector, OSFI, in a statement.