CDIC has a number of tools to assist or resolve a failing member institution. Since its creation in 1967, CDIC has handled the failure of 43 of its member institutions.
Which tool is used would depend on the circumstances of a particular situation.
Factors such as the size and complexity of the bank, its franchise value, as well as the current availability of any private sector solutions, would be key considerations in deciding which tool to use.
The tools that CDIC could use include:
Reimbursement of insured deposits:
In certain cases, a failed bank is closed, all contracts are terminated and its critical financial services are no longer available, including access to accounts.
So that insured depositors have their money as quickly as possible, CDIC would automatically launch its rapid reimbursement process. This means that:
- Insured depositors do not have to file a claim.
- CDIC would reimburse insured deposits up to $100,000 per insurance category.
- Payments to the depositor would be completed via cheque.
The reimbursement process varies according to the relationship the depositor has with the failed bank. In many cases, depositors have a direct relationship through “demand deposits” which is money held by a Member Institution that the depositor can withdraw at any time on demand e.g. savings, chequing accounts, joint accounts and mortgage tax accounts. Payouts for these types of deposits would be executed within days from the date of failure.
Deposits in valid trusts are protected to $100,000 per beneficiary.
In the case of brokered trust deposits,CDIC would contact broker-trustees to inform them of the specific reimbursement process, including payment instructions. CDIC would then remit insurance payments to broker-trustees within seven days of receiving the required information. Payment would be based on CDIC calculations and deposit information at the failed institution.
CDIC would temporarily hold registered deposits in RRSPs, RRIFs and TFSAs while it works with the Canada Revenue Agency to ensure they remain tax-sheltered. CDIC would contact these depositors directly to inform them of next steps including how to transfer insured registered deposits to a new institution without negative tax consequences.
Deposits not eligible for CDIC coverage
Depositors with funds that are not protected by CDIC would be able to file a claim with the liquidation firm when it is appointed by the courts.
Liquidation and payout is a tool that would likely only be used in the case of small to medium-size banks, not domestic systemically important banks (D-SIBs).
Where a buyer(s) exists, CDIC can take control of a failing bank for a short period of time to complete its sale, merger or restructuring. The sale would ensure that insured deposits are protected. With the approval of the government, a forced sale would be used when shareholder consent of the transaction is not expected or the time to obtain consent would take too long.
There are two types of forced sales:
- All shares are transferred to CDIC and it becomes the sole shareholder to facilitate the sale
- CDIC is appointed receiver to sell all or some of the failing bank’s assets and liabilities to the buyer
For more info, consult our backgrounder on the Forced Sale resolution tool.
A bridge bank is a tool that is available when an institution fails and there is no buyer or private-sector solution on the horizon. It is meant to “bridge” the gap between when an institution fails and when a buyer or private-sector solution can be found.
CDIC can use this tool to transfer all or part of the failing bank’s business to a bridge bank, which is temporarily owned by CDIC.
Similar to a forced sale, the transfer would ensure that insured deposits are protected. As owner, CDIC would likely appoint to the bridge bank a new board of directors and chief executive officer to handle the restructuring and to stabilize the bank. Once stable, the bridge bank would be sold to the private sector.
For more info, consult our backgrounder on the Bridge Bank resolution tool.
CDIC can provide financial assistance to its members, including loans, guarantees, deposits, or loss-sharing agreements or by acquiring shares. CDIC can provide this assistance on a stand-alone basis, to assist in a private transaction, or in combination with any of its other resolution tools.
In 2016, Parliament introduced an amendment to the Canada Deposit Insurance Corporation (CDIC) Act to add the “bail-in power” to the Corporation’s resolution tools. This tool is only for use in respect of Canada’s six largest banks, known as Domestic Systemically Important Banks (D-SIBs).
The bail-in power would allow CDIC to take temporary control and convert some of a failing D-SIB’s debt into common shares to recapitalize the bank and help restore it to viability. The bail-in regime builds on CDIC’s existing toolkit and provides another tool for CDIC to keep a failing D-SIB open and operating so it could continue to serve its customers.
Bank customers’ deposits are not part of the bail-in power and bail-in does not reduce the deposit protection offered by CDIC.
This means that customers’ chequing accounts, savings accounts and term deposits such as GICs would not be affected if the bail-in power is used with a failing D-SIB. Losses that arise due to the bank’s failure would be covered by the bank’s shareholders and certain investors, not by taxpayers or depositors.
After the completion of the bail-in conversion and any restructuring necessary to stabilize and return the failing D-SIB to viability, CDIC would return the bank to private control.
The Canadian bail-in regime aligns with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes, a set of international standards developed following the global financial crisis to enable resolution authorities to resolve financial institutions in an orderly manner without taxpayer exposure to loss, while maintaining continuity of their vital economic functions.
For more info, consult our backgrounder on Bail-in.
Regulations for the bail-in regime can be found here:
- Bank Recapitalization (Bail-in) Issuance Regulations
- Compensation Regulations
- Bank Recapitalization (Bail-in) Conversion Regulations
- Guidelines to ensure that D-SIBs have sufficient loss absorbing capacity to support their recapitalization in the unlikely event of a failure.
Where CDIC uses one of its resolution tools to resolve a failing financial institution, it is expected that the shareholders and creditors of the financial institution will be in a better financial position than if the financial institution had simply been liquidated (or wound up).
However, if that were not the case, the CDIC Act provides an important safeguard to ensure that creditors and shareholders of the financial institution are compensated where they have been made worse off as a result of CDIC’s actions than they would have been in a liquidation.
This protection is consistent with international standards and best practices.
This safeguard applies in respect of all of CDIC’s member financial institutions and most of its resolution tools, including bail-in.
For further information on the compensation regime, consult our backgrounder.