The notion that Canada鈥檚 government has quietly orchestrated a Cyprus-style response to an impending bank failure, and that the big banks are coming for your savings, is a thing of beauty, as far as conspiracy theories go.
It鈥檚 in a regulatory area difficult to understand, and so difficult for most laypeople to immediately disprove without doing a little research first. And it has elements that appeal to both extremes of the political spectrum.
The headlines in the mainstream media are not much less hysterical.
Here鈥檚 what has everybody so worried: On page 145 of the recent federal budget, 鈥渢he government proposes to implement a 鈥榖ail-in鈥� regime for systemically important banks.
鈥淭his regime will be designed to ensure that, in the unlikely event that a systematically 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.鈥�
Granted, 鈥渃ertain bank liabilities鈥� is neither clear nor precise. And this government does seem to enjoy slipping big news into the most tedious sections of the budget.
But there is no reason to think that Canada is even close to becoming 鈥渢he next Cyprus.鈥�
It is prudent for Canada to have a plan for its big banks in the unlikely event of near-collapse. So what is that plan? The government proposes that banks set aside rainy-day assets, which they would then use to shore themselves up if the worst happened.
Unfortunately, Canada uses the inelegant term 鈥渂ail-in鈥� to describe this, which brings to mind the proposal for Cyprus to impose a 9.9 per cent levy on uninsured bank deposits, and a 6.75 per cent levy on insured deposits. Cyprus wisely chose not to go that route, so insured deposits will be protected, but many people are still losing money.
No one is proposing that Canada impose a levy on bank deposits.
It shouldn鈥檛 need saying, but apparently it does: Canada is not Cyprus. The Cypriot banking sector is bloated and unstable in a way that Canada鈥檚 is not. And Canada, last I checked, is not part of the eurozone.
And in fact, the stated motivation behind the 91原创 plan is to prevent the banks having to turn to taxpayers or depositors.
The idea, as the finance department clarified this week, is that the banks would set aside something with which to rescue themselves.
鈥淚ts presence would also discipline management, since common shareholders would be incented to act prudently to avoid having their stakes diluted by conversion,鈥� said Bank of Canada governor Mark Carney in outlining the idea in a 2010 speech.
That鈥檚 not 鈥渆xactly like Cyprus.鈥� It鈥檚 almost nothing like the response in Cyprus, which reacted to the imprudence of its banking sector by musing about massive taxes on all bank accounts, locking down banks and restricting transactions.
鈥淭he 鈥榖ail-in鈥� scenario described in the budget has nothing to do with consumer deposits and they are not part of the 鈥榖ail-in鈥� regime,鈥� says Kathleen Perchaluk, the finance minister鈥檚 press secretary, in an emailed statement. 鈥淯nder a 鈥榖ail-in鈥� arrangement, a failing financial institution has to tap into its own special reserves or assets (which it has been forced to put aside) to keep its operations going.鈥�
Nothing to do with consumer deposits. Yes, only deposits up to $100,000 are insured by the Canada Deposit Insurance Corporation. That isn鈥檛 new and it isn鈥檛 changing. But there isn鈥檛 some new scheme to steal your savings account.
Canada鈥檚 evolving plan might not be perfect. As the confusion last week shows, it would be wise for the government to explain precisely what it intends, what is likely and what is possible. If there is a lesson Canada can learn from Cyprus, it鈥檚 that contingency plans should exist and they should be transparent and predictable.
Meanwhile, let鈥檚 all calm down.
