# Canadian bank bail in revisited



## Rusty O'Toole (Feb 1, 2012)

You may recall that in the last budget it was proposed that Canadian banks be allowed a Cyprus style "bail in" if they ever ran out of money.

I just found out Canadian banks are not required to have any reserves at all. None! The reserve requirement was eliminated in 1992.

The Bank of Canada's assets exceed their liabilities by 0.532%. In other words a drop in value of their assets of 1% would wipe out their reserves and make them insolvent.

Sleep well.


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## cainvest (May 1, 2013)

And ....... not sure what the point is?

P.S. I will sleep well.


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## Rusty O'Toole (Feb 1, 2012)

The point is that Canadian banks are not required to maintain reserves. Therefore they have very little money in reserve. The slightest problem could cause them to become insolvent. But that is ok, if they run short they can take whatever they need out of your account.


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## HaroldCrump (Jun 10, 2009)

Rusty, you might be confusing reserve ratios with capital requirements.
It is the latter that determines a bank's ability to withstand operating losses, not so much the former.
The former is more of a monetary policy tool to regulate the money supply.


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## cainvest (May 1, 2013)

Rusty O'Toole said:


> The point is that Canadian banks are not required to maintain reserves. Therefore they have very little money in reserve. The slightest problem could cause them to become insolvent. But that is ok, if they run short they can take whatever they need out of your account.


The slightest problem huh ... no worries here, Canada will just print money and give it to them ... my acounts are safe! 

BTW, kind of odd this "slightest problem" hasn't occured yet ... or ever.


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## MoreMiles (Apr 20, 2011)

As I have mentioned in this thread, Canadian banks are not 100% safe. Some readers thought that I was nuts. It is sad that not too many people care about how our government drafting up this "firewall" so they don't have to bailout the banks. They are not stupid. So why are they doing it (ie, passing laws to protect themselves)?

http://canadianmoneyforum.com/showt...-invest-50-000-and-get-a-ROI-close-to-5/page6


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## none (Jan 15, 2013)

MoreMiles said:


> As I have mentioned in this thread, Canadian banks are not 100% safe. Some readers thought that I was nuts. It is sad that not too many people care about how our government drafting up this "firewall" so they don't have to bailout the banks. They are not stupid. So why are they doing it (ie, passing laws to protect themselves)?
> 
> http://canadianmoneyforum.com/showt...-invest-50-000-and-get-a-ROI-close-to-5/page6


Although I think the current conservative government is one massive turd I do applied this effort to take some of the financial risk off the taxpayer and on the business as it should be. Lots of big businesses are worse than unions with the amount of hand outs they continuously beg for.


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## andrewf (Mar 1, 2010)

Rusty, you just don't understand how the banking system works. You seem to have a predilection to see conspiracy and malice where it does not exist. None of what you mentioned regarding the Canadian banking system is secret. You're just not interpreting it correctly.

On the other hand, I won't convince you. So feel free to hold all your wealth in shiny metal bars if it makes you feel better. It's been a much better place to keep wealth since the start of 2013, right? What was the decline in buying power of an ounce of gold versus a Euro in a Cypriot bank?


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## Rusty O'Toole (Feb 1, 2012)

You are right, I don't understand how the banking system works. None of what I mentioned is secret and it is not a conspiracy. It is right out in the open if you know where to look.

The people of Cyprus did not get any warning when their banks failed even though they had been technically insolvent for months. It was business as usual, then after the banks closed on a Friday afternoon they announced that all accounts were frozen until further notice.

If there is any reason this can't happen in Canada I would like to know what it is. If it never happened before, that was in a different time under different laws.


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## HaroldCrump (Jun 10, 2009)

Rusty, you obviously did not read the links I posted above.
The reserve ratio does not determine the solvency of the bank - the capital requirements do.
The reserves are indeed part of the current assets, but a very small % of it.
It is mainly a monetary policy regulation tool.


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## sags (May 15, 2010)

The government of Canada DID change the law, to enable confiscation of deposits if needed. 

They wouldn't have changed the law, unless there was considerable prior discussion about it. What prompted that discussion? Who had that discussion?

The whole world is awash in debt that simply can never be repaid, and someone is fearful of what that could mean for Canadian banks.


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## none (Jan 15, 2013)

That never happened. You're delusional.


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## james4beach (Nov 15, 2012)

I think several issues are getting mixed up in this thread. Here is my understanding of each of these issues. Also see this article for some information on bail-in scenarios.

Issue #1: bank reserve requirements with the Bank of Canada. True, "The Bank of Canada has abolished reserve requirements". This means that banks don't need to deposit reserves with the Bank of Canada. I don't fully understand the implications of this, but this is a central bank policy... it doesn't mean the banks don't have any money set aside. It means that they don't have to deposit it with the central bank, same in Australia, New Zealand, and Sweden.

Issue #2: Bank capital and reserves to cover losses. All banks have monetary resources available to cover losses, and provide a cash cushion in case of sudden withdrawals (run on the bank). More capital makes a bank safer. The best standard measure of bank capital under Basel III is Common Equity Tier 1 Capital (CET1), which is pretty much the same as 'tangible common equity'. This is the most conservative measure of bank capital. Canadian banks certainly have some; of course they have capital reserves. Trusted authorities in bank regulation say capital should be around 10% tangible common equity, and academics point more towards 20%. Canadian banks though have only around 3% (this percent is the inverse of the leverage multiple, 31:1). But guess what... the American banks also only have 3%. European banks have even less. In my opinion, our banks are undercapitalized. So are American banks, and European banks are even worse. But that doesn't make it OK. Canadian banks have to approximately triple their current CET1 capital amounts to even get close to safe capitalization, in terms of tangible common equity.

Issue #3: Bail-ins. This is a question of what happens in case a bank fails. A bank fails when capital is insufficient (as ours are!) and cashflow is insufficient to pay money they owe. When a bank fails, there is usually a shortfall when you compare assets to liabilities. At this point, somebody who loaned money to the bank (e.g. a depositor, GIC holder, bond holder, note holder) is going to suffer a loss because assets are insufficient to pay liabilities. You can't repay all lenders in full (depositors are lenders to the bank). So the question is, who will suffer a loss? "Bail-in" refers to the idea that depositors are going to suffer some losses. *Bail-in means depositors are not immune to sharing in losses*. Indeed, in Canada, there is no guarantee that all depositors will be fully repaid in all circumstances. A bail-in is possible and depositors certainly could suffer losses. Then again we have CDIC deposit insurance. Remember that not all deposits are CDIC insured.

Here's what I think would happen. Yes, if there's a bank failure, depositors will have to share in the losses (bail-in). CDIC insurance will cover insured deposits, and this protects individuals, ensuring that angry mobs don't run through the streets, finding banksters and hanging them from street lamps. The failure of CDIC to make good on its promise would be truly horrific and I can't imagine any government official being so stupid, or suicidal, to fail to uphold the CDIC promise. But there are other deposits that won't have CDIC insurance
- amounts exceeding 100k, such as condo reserve funds, business accounts
- large deposits held by many mutual funds, ETFs, and trusts
- amounts in US $
- deposits more than 5 years

Those deposits will incur some losses. Not total losses, but a partial loss... whatever the shortfall is between assets and liabilities. And this is why I really wish our banks were better capitalized, because I really don't want this happen because it's going to be ugly.

Make sure your deposits are CDIC insured.


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## james4beach (Nov 15, 2012)

Newspaper articles I found on the bail-in topic, like this one, seem to echo my conclusion. CDIC insurance will remain intact, during bail-in or whatever. However uninsured deposits are at risk of loss. Nobody is saying that uninsured deposits are protected from losses.

Also, for any of you reading this who are on the boards of companies, schools, universities, condos, churches, charities, non-profits:

Please dig into where your cash is stored and its deposit insurance situation. I bet you will find LOTS of uninsured deposits. This can be corrected by shuffling money under different CDIC issuer names, and moving money into safer alternatives like Government of Canada bonds.


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## james4beach (Nov 15, 2012)

Rusty O'Toole said:


> If there is any reason this can't happen in Canada I would like to know what it is.


The only very scary thing that happened in Cyprus was the government's original plan to allow losses in insured accounts (this would be like if the CDIC suddenly said, no we decided we actually won't honour the 100K guarantee). Then, the Cyprus government changed its mind and decided to uphold deposit insurance.

As far as I can tell, the only new thing that stems from the Cyprus case is that deposit insurance schemes everywhere (including CDIC) are now less trustworthy, because we saw how Cyprus almost invalidated theirs at the drop of a hat.

Ultimately this is a government decision. Parliament make laws. Could parliament decide, in the future, that CDIC won't make good on its promise? Of course this is possible. And if that happened many people would lose money that they thought was totally guaranteed, 100% safe against losses. *But even Cyprus didn't do this.*

New Zealand doesn't even have deposit insurance. This is ultimately a question about faith & trust. The Government of Canada certainly has the power to repeal CDIC deposit insurance, or weaken it, or add exceptions. Maybe foreign depositors lose their insurance (Iceland did that). What will Canadian politicians do? I have no idea, but I hope that deposit insurance will remain intact for domestic deposits.

This is a very good article on the Cyprus deposits situation.

Currently anyway, it's *un*insured deposits in Cyprus that are suffering losses. The same would happen in Canada or just about anywhere else in the world.

I should also point out... ultimately it doesn't really matter, because even if deposit insurance makes good on its promise, the losses can be taken from you in other forms. It could be deposit confiscation, higher taxes, or money printing and inflation. Some of these mechanisms are more fair than others. The real message, I think, is that when banks are reckless with high leverage and poor capital, when they fail, SOMEONE is going to lose money and it's a question of who. Currently our model in the western world is that when banksters lose money, all of us pay for it.


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## cainvest (May 1, 2013)

james4beach said:


> But there are other deposits that won't have CDIC insurance
> - amounts exceeding 100k, such as condo reserve funds, business accounts
> *- large deposits held by many mutual funds, ETFs, and trusts*
> - amounts in US $
> ...


So if a bank failure happened to ones bank (and related direct investment arm) and you own stocks (non-bank ones, some like BCE, ENB, POT, etc) and say some ETFs (like vanguard, ishares, etc) these will be unaffected right?


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## james4beach (Nov 15, 2012)

cainvest said:


> So if a bank failure happened to ones bank (and related direct investment arm) and you own stocks (non-bank ones, some like BCE, ENB, POT, etc) and say some ETFs (like vanguard, ishares, etc) these will be unaffected right?


I think the stocks would be unaffected - ignoring their share price fluctuations. That is, you still have X shares, yes.

Basic ETF should be unaffected too, that is ETFs that simply hold stocks & bonds. Again their assets will fluctuate with market price movements.

But some exotic ETFs could be affected, if they hold cash amounts in uninsured bank accounts. Candidates would be currency, commodities, leveraged, inverse, and exotic debt ETFs. So I'm not saying you would lose shares of your ETF. I'm saying that inside the ETF, some money would disappear (and the NAV, share price would drop) due to cash being lost in a bank failure. One real example: currencyshares such as FXY for holding Yen currency. They hold uninsured deposits with JP Morgan bank. If JPM fails, the ETFs such as FXY could plummet in price even if nothing changes with the Yen currency.

There are also mutual funds out there that store cash in bank deposits, and if that bank were to fail, the mutual fund would incur losses. So let's say a mutual fund has 95% in stocks and 5% in cash, but that cash is all deposited with bank Q, and bank Q fails. This is what I was alluding to in my list.

So a pure stock, or pure ETF (meaning it's 100% stocks or bonds and nothing else) should be immune to a bank failure, ignoring secondary effects on market prices. But there are so many funds out there that have some kind of bank deposit exposure.

For example Central Fund of Canada (CEF.A), a gold & silver fund, holds $40 million of cash. This is likely uninsured. It's mostly in US$, and far above the 100K limit. They could easily lose millions $ in case of a bank failure... and there are many mutual funds in the same situation. In the case of CEF.A it would only drop the share price by 1%, but still, losing millions of dollars is really bad.


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## cainvest (May 1, 2013)

james4beach said:


> Basic ETF should be unaffected too, that is ETFs that simply hold stocks & bonds. Again their assets will fluctuate with market price movements.


So while etfs would generally be unaffected by a bank failure, what would happen in the case of an ETF company failure?
Also, which is more likely, a major bank or ETF company failure?


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## james4beach (Nov 15, 2012)

cainvest said:


> So while etfs would generally be unaffected by a bank failure, what would happen in the case of an ETF company failure?
> Also, which is more likely, a major bank or ETF company failure?


Quick answer: ETF company failure is no big deal, as long as the ETF actually contains assets and there wasn't fraud. I don't know what kind of failure is more likely.

ETF company failure (like a mutual fund co failure) is more or less a non-event, as long as the fund contains assets making up a net asset value (NAV). These funds are just a pool of assets so it doesn't really matter if the company managing them goes broke, as long as there wasn't fraud in their stated assets/liabilities. The stock holdings are still there and everything is just transferred under a new company.

Where you have to be careful are ETFs that don't have a NAV. For example, ETNs such as VXX and XIV have no assets, and no NAV. If the ETF company goes bankrupt, they will crash to zero. This is exactly what happened with Lehman Brothers ETNs.

The key question is, what assets does your ETF actually contain? Where does the net asset value come from? This is why it's essential to look at the audited financial statements.


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## fraser (May 15, 2010)

Has a Canadian bank ever failed? And if so, did a depositor loose their money?


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## sags (May 15, 2010)

I think the anser would be no Canadian bank has ever failed.

On the other hand, Canadian banks are now involved, probably through third parties, in financial creations that defy description and few people fully understand, including the banks themselves.

Hundreds of Trillions of dollars in derivatives around the world............of every shape and form............all tied to each other............with insurers and re-insurers.........counter parties.........off books............

The US government bailed out the banks, because to do otherwise would have meant a financial meltdown. Banks across the world would have collapsed as liabilities came due that were well in excess of their assets. 

We have all heard stories of the "whales" who deal in hundreds of billions of dollars worth of trades every day. 

When they get it wrong.........banks are brought to the edge and their CEOs are left wondering what happened.

I think the fear these days is not that a Canadian bank would go bankrupt because of domestic lending...........but more likely from complications of a financial meltdown that began somewhere else in the world.

Hopefully the fear is unfounded, and the banks have nothing they haven't publicly disclosed..........but how sure of that can we really be?


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## Eclectic12 (Oct 20, 2010)

sags said:


> I think the answer would be no Canadian bank has ever failed ...


Which according to wiki is false ...

Canadian Commercial Bank received it's parliamentary charter in 1975 and lasted a decade, failing in 1985. 
http://en.wikipedia.org/wiki/Canadian_Commercial_Bank

Similarly, Northland Bank was incorporated in 1974 and failed in 1985. 
http://en.wikipedia.org/wiki/Northland_Bank

Less recently, there's also Home Bank, which was incorporated in 1903 and failed in 1923.
http://en.wikipedia.org/wiki/Home_Bank

There's also the Bank of BC which Honk Kong Bank was allowed to buyout when it threatened to fail.
http://en.wikipedia.org/wiki/Bank_of_British_Columbia


Then too, the CDIC page also adds in about thirty-eight mortgage/trust companies that have failed since 1967.
http://en.wikipedia.org/wiki/Canada_Deposit_Insurance_Corporation


Cheers


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## cainvest (May 1, 2013)

Eclectic12 said:


> Which according to wiki is false ...
> 
> Canadian Commercial Bank received it's parliamentary charter in 1975 and lasted a decade, failing in 1985.
> http://en.wikipedia.org/wiki/Canadian_Commercial_Bank
> ...


Yup, looks like that will have to change to "I think the answer would be no *major* Canadian bank has ever failed ..."


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## andrewf (Mar 1, 2010)

What's beyond me is that people believe a Canadian bank failure would follow the script from Cyprus rather than the US. Cyprus is a flyspeck country that doesn't have any control over its own currency. Its banks were unusually capitalized. Canada and the US are much more similar than Canada and Cyprus.


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## Retired Peasant (Apr 22, 2013)

cainvest said:


> Yup, looks like that will have to change to "I think the answer would be no *major* Canadian bank has ever failed ..."


To answer the other part of the question, I can't find anything that says a depositor lost CDIC covered savings.


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## Rusty O'Toole (Feb 1, 2012)

Latest word on the Cyprus bail in: depositors to take a 47.5% haircut on all deposits over the 100,000 euro insured limit.

http://www.incyprus.com.cy/en-gb/Top-Stories-News/4342/36358/agreement-close

But don't worry. Canadian bankers would never take advantage of their customers like that. Even though the government has already given them permission. Unless they really need the money.


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## none (Jan 15, 2013)

Rusty O'Toole said:


> Latest word on the Cyprus bail in: depositors to take a 47.5% haircut on all deposits over the 100,000 euro insured limit.
> 
> http://www.incyprus.com.cy/en-gb/Top-Stories-News/4342/36358/agreement-close
> 
> But don't worry. Canadian bankers would never take advantage of their customers like that. Even though the government has already given them permission. Unless they really need the money.


I don't see any problem with this. Putting money in the bank is no different than buying stock. It's a private company and uses the money you lend it to make more and you are compensated pitifully for it.

Money in Canada is insured also up to 100K (right?) so the simple solution is to just keep all your money in multiple institutions. 

Frankly I'm happy that they are being forced to go the preferred shares route so risk are transparent and not simply loaded on the back of unwitting taxpayers. The Canadian financial industry is already too much of a welfare industry.


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## Eclectic12 (Oct 20, 2010)

Rusty O'Toole said:


> Latest word on the Cyprus bail in: depositors to take a 47.5% haircut on all deposits over the 100,000 euro insured limit ...
> 
> But don't worry. Canadian bankers would never take advantage of their customers like that.
> Even though the government has already given them permission. Unless they really need the money.


I'm not sure how taking a haircut on deposits over the insured limit is "being taken advantage of".
By definition - if it's over the insured limit, there should not be an expectation that the full 100% is returned. 

The bigger question is will enough banks fail so that others won't buy them out. As near as I can tell - the pattern so far in Canada is another bank buys the failing one and covers the deposits. The numbers I can recall for the few failures were somewhere around 100% of insured and 95% of the deposits over the limit.


Cheers


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## james4beach (Nov 15, 2012)

Eclectic12 said:


> Then too, the CDIC page also adds in about thirty-eight mortgage/trust companies that have failed since 1967.
> http://en.wikipedia.org/wiki/Canada_Deposit_Insurance_Corporation


Peoples Trust is a mortgage/trust company. As I mentioned earlier, their assets are virtually 100% in Canadian mortgages. With 38 such failures in the above history (that's an average of 0.8 failures per year) it certainly wouldn't be unusual if Peoples Trust failed. Just saying.

I'm quite certain the CDIC will do its job and ensure depositors don't lose insured deposits. Still, I don't want to go through that situation if I can help it and that's why I won't lend my money to Peoples Trust.

Also I agree that Canada would likely follow the American model on any bank failures. Absolutely. And this is why I strongly advise against investing in bank stocks, because in each of those big American failures the equity went to zero - EVEN WITH A BAILOUT/AMALGAMATION. Repeatedly in the USA, bank equity got wiped out.


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## andrewf (Mar 1, 2010)

Uninsured deposits are certainly at risk. The government makes that explicit. But anything like a 50% write down is pretty incredible.

Most Canadians can avoid this issue by keeping their deposits within insurance limits and otherwise limiting their exposure to bank equity risk. It would be nice if CDIC raised the limit to something like $250k. I know some people who were scrambling in 2008 to open accounts all over the place to ensure their deposits were under the $100k limit at each institution.


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## Rusty O'Toole (Feb 1, 2012)

I think most Canadians would agree that when you deposit your money in a bank they should be responsible for keeping it safe. They should not be allowed to put in in their pocket if they run short.

All banks should be audited regularly, required to maintain adequate reserves, and if they allow their reserves to fall short the bank should be shut down, taken over by the appropriate government agency, and reorganized.

The bank management should be held responsible. Any loss should first be taken by the stockholders. Next by the bond holders. The depositors as customers of the bank should not be responsible for their losses.

If banks are properly managed and regulated there will never be a time the depositors have to take a loss. What has happened is that banks have been deregulated, and national governments mismanaged to the point where the old rules no longer hold water.

Everyone should be aware of this and guard their assets accordingly.


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## andrewf (Mar 1, 2010)

Rusty, you're confusing reserves for capital. They're not the same thing.


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## Robillard (Apr 11, 2009)

Rusty,

I'm not sure what you think the Office of the Superintendant of Financial Institutions (OSFI) does, but they basically do all the auditing of Canadian banks that you are demanding. If Canadian banks had inadequate capital positions, OSFI would be all over them like a dirty shirt.


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## fraser (May 15, 2010)

I do not have the knowledge to determine if our banking regulations are in need of review. I think that it is somewhat difficult for me as a layman to make a judgement call on their financial situation or exposure to risk. I have yet to hear of one depositor who has lost money from a bank failure in Canada.

I do however think that there is a much more immediate area of concern -that being the regulated and the unregulated securities markets. Provincial securities regulations are lax and their enforcement activities are weak to say the least. This is compounded by a lack of RCMP resources and thoe resources are most often unskilled in forensic accounting. In Alberta there have been many people who have invested in the exempt securities market and lost their entire savings, homes, etc. Some are in the unfortunate position of being liable for large tax bills resulting from cashing in RSPs. The experience in BC is similar. The securities commissions are acting too late and their punishment is often meaningless. The horse has bolted so closing the barn door has no impact.


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## Adam M. (Aug 7, 2013)

Do you know about "shadow banking " ?


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## sags (May 15, 2010)

I read the EU recently passed their bank "bail in" legislation.

There may be nothing to it all...............but on the other hand, when governments across the world pass similar "bail in" legislation at the same time, it gets one to wondering why they felt it suddenly prudent to do so.

If it is nothing...........why bother stirring up the population over nothing?


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## andrewf (Mar 1, 2010)

Link?

Bank bail-ins for non-insured depositors is a Good Thing. I don't understand the hubbub.


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## james4beach (Nov 15, 2012)

Yes if you have uninsured deposits, they're supposed to be at risk of loss. No problem there. That's the whole point of deposit insurance.

The reason everyone got freaked out about bail-ins was that the original proposal had insured depositors taking a loss, too. This is what lawmakers in Cyprus originally wanted to do. It's like saying "CDIC is going to pay you 80% of your money and you will lose the other 20%"

Now whether the Canadian government would ever consider a bail-in where insured depositors lose, I don't know. Cyprus did consider it. And when Cyprus considered it, everyone in Europe suddenly realized their own governments could do it too. Cyprus back tracked but I think this incident illustrated how this is just the whim of government.


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## Adam M. (Aug 7, 2013)

Adam M. said:


> Do you know about "shadow banking " ?


http://www.bankofcanada.ca/2013/06/publications/speeches/shedding-light-shadow-banking/


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## andrewf (Mar 1, 2010)

Cyprus felt it had no choice--it couldn't print more Euros. Canada can always print more CAD. It's apples and oranges, and the Cyprus situation is not at all instructive for us here.


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