Despite efforts to develop a legislative regime to prevent Canada’s big banks from bailed out by taxpayers in the event of failure, it’s not entirely clear how such a mechanism would work in an actual failure scenario, says Moody’s Investors Service.
In a new report that looks at the efforts to adopt bail-in regimes in both Canada and Latin America, Moody’s says that, notwithstanding the legislative progress that has been achieved, how these measures will be used in practice remains somewhat uncertain.
The report notes that, in Canada, the federal Finance ministry proposed a bail-in regime for Canada’s domestic systemically important banks (D-SIBs) last summer, although it did not provide a target date to implement the proposal. In most of Latin America, legislation has yet to be proposed, but Moody’s expects those efforts to accelerate in 2015.
In the meantime, it questions just how well statutory bail-in regimes in Latin America and Canada will work. “Regulators will have to balance maintaining financial stability against bailing in creditors and avoiding moral hazard,” it says. “In the past, Latin American regulators generally have tended to focus on preventing contagion, which suggests they would prefer bail-out rather than resolution in the event of stress.”
Moreover, Moody’s says that the direct credit implications of any legislation won’t become apparent until after legislation is approved, regulatory frameworks are finalized, and regulators have to address actual bank failures.
“We expect legislation to pass in Brazil and Canada sooner than in other banking systems we rate. There’s likely to be a large amount of new bank resolution legislation globally in 2015,” say the report’s authors Gersan Zurita, a Moody’s senior vice president, and Farooq Khan, an associate analyst at the firm.