What Happens in a Failure

Disclaimer: This section provides further details on how CDIC could effect a bail-in conversion. How CDIC ultimately effects a bail-in conversion would depend on the circumstances at the time, and as such, CDIC may choose to implement the bail-in tool differently than set out in this section.

Execution of the bail-in tool

Introduction

The CDIC Act provides CDIC with the legal power to use the bail-in tool (i.e., effect the conversion of the bail-in debt of a Domestic Systemically Important Bank (D-SIB)), with further details set out in the relevant regulations (see Bail-in Framework).

While every bail-in situation would be unique, this section outlines how CDIC could implement the bail-in tool during the various resolution stages.

Business as usual

D-SIBs will be able to start issuing bail-in debt when the bail-in regulations and OSFI’s Total Loss Absorbing Capacity (TLAC) guideline come into effect on September 23, 2018. D-SIBs will have until November 1, 2021 to meet their minimum TLAC requirements.

Through their resolution planning, D-SIBs are expected to demonstrate that they could be resolved in an orderly manner while ensuring the continuity of critical financial services. As part of this work, D-SIBs will be expected to be operationally prepared to implement a bail-in conversion, including maintaining information on bail-in debt (such as the relevant CUSIP/ISIN numbers1 or similar identifiers and other instrument-specific information).

CDIC is working with the D-SIBs to ensure these plans are realistic, credible and implementable.

Heightened risk

In the period during which a D-SIB faces severe financial difficulties, CDIC would prepare for a potential resolution by undertaking any necessary preparatory activities, as outlined in the Guide to Intervention for Federally Regulated Deposit-Taking Institutions.

Resolution weekend/stabilization/restructuring2

Bail-in Announcement

CDIC would make a public announcement as soon as possible after the Governor-in-Council (GIC) order directing CDIC to undertake a bail-in conversion (see Resolution Stages). At a minimum, CDIC would announce the following:3

In some circumstances, CDIC may be able to announce the conversion amount and conversion terms when making this initial public announcement.

It is also expected that, shortly after the GIC order is made, the Superintendent of Financial Institutions would announce that the conditions for conversion of any Non-Viability Contingent Capital (NVCC) instruments have been met, triggering automatic conversion of all such instruments into common shares in accordance with their contractual terms.6

Impact on Trading

The D-SIBs have issued securities and other financial instruments7 that are qualified, registered and traded in multiple jurisdictions. As a result, D-SIBs are subject to continuous and periodic disclosure requirements which would continue to apply in resolution.

D-SIBs would be expected to comply with securities law and listing requirements to the extent possible during a bail-in resolution. In the event that securities law requirements and listing requirements are not met, the relevant securities regulators and/or exchanges may cease trade, halt or suspend a D-SIB’s securities or other financial instruments from trading (either on an exchange and/or over the counter (OTC)). In that case, trading would likely not resume until the D-SIB can meet securities law and listing requirements.

Throughout the resolution process, CDIC would maintain regular contact with market authorities and coordinate actions to the extent possible.

Timing of Bail-in Conversion

While the bail-in regulations set out certain conversion parameters that CDIC must follow when effecting a bail-in conversion, the CDIC Act provides CDIC with the flexibility to determine the portion of bail-in debt to be converted into common shares (conversion amount), as well as the timing of conversion.

CDIC would endeavour to make decisions related to bail-in conversion as quickly as possible in the circumstances.

To effect a bail-in conversion, CDIC would need to determine:

  • How much bail-in debt to convert to absorb the losses that led to the D-SIB entering resolution and ensure that the D-SIB is adequately recapitalized (conversion amount); and
  • The number of common shares bail-in debtholders would receive in exchange for their bail-in debt (conversion terms).

To inform these decisions, CDIC would conduct various valuations in respect of the D-SIB with the assistance of external valuation experts. Depending on the circumstances of the failure, valuation work may have commenced prior to the D-SIB’s entry into resolution.

In some circumstances, CDIC may be able to make these decisions and announce the conversion amount and conversion terms in a fairly short period of time.

In others, it may take longer for CDIC to make these decisions and the timing would be dependent on the circumstances. The time required to make these decisions would depend on a number of factors, such as the cause of the D-SIB’s failure, the amount of time CDIC would have had to prepare prior to the D-SIB’s entry into resolution, and whether the D-SIB’s failure is isolated or part of a larger systemic disruption.

Where CDIC has determined the conversion amount and conversion terms at the time of making the initial public announcement or shortly thereafter, CDIC would announce these at the same time. Where CDIC has not yet determined the conversion amount or the conversion terms at the time of making the initial public announcement, depending on the circumstances, it may provide an estimate of the range of the amount to be converted and potential timing for making the determination.

Delivery of Common Shares

Flexibility

The CDIC Act provides CDIC with the flexibility to determine the process of conversion, including whether the conversion would take place over a period of time, and/or in one or more steps.

Process

CDIC would leverage existing processes and systems within central securities depositories8 to deliver common shares in respect of a bail-in conversion. This means that, in most circumstances, bail-in debtholders would not be required to come forward to CDIC and provide details before receiving common shares.

For example, CDIC would instruct the D-SIB to issue the requisite number of new common shares, based on the conversion terms, and to allocate them to the relevant depositories where bail-in debt is registered. Instructions would also be provided for the depositories to:

  • write down the bail-in debt (i.e., to zero in the case of a full conversion or to the appropriate proportion in the case of a partial conversion); and
  • allocate shares to participants, which would result in the bail-in debtholders being allocated their new shares.

The amount of time required to effect this conversion would depend on a number of factors, including the number and location of instruments affected, and may vary between depositories.

Ownership Restrictions9

The Bank Act prohibits any person from acquiring a significant interest in a bank (more than 10% of a class) unless the person first receives the approval of the Minister of Finance.10, 11 Shareholders are responsible for complying with these ownership restrictions. The Bank Act further provides that a person who breaches the legal ownership restrictions is prohibited from exercising any voting rights in respect of any shares that the person beneficially owns in the bank.

In the case of a bail-in resolution, CDIC would remind bail-in debtholders of these legal ownership restrictions before and at the time of delivering the common shares, through public communications and through central securities depositories. However, bail-in debtholders who receive shares upon conversion of their bail-in debt (as well as other shareholders) would be responsible for verifying their position and complying with the ownership restrictions under the Bank Act. CDIC would not have the ability to monitor holdings and as a result would not be in a position to notify bail-in debtholders if they are in breach of these restrictions.

Exit

After the completion of the bail-in conversion and other necessary restructuring measures, CDIC would return the bank to private control. Common shareholders would regain full control and voting rights.
Shareholders and creditors that were affected by CDIC’s actions to resolve the D-SIB may be entitled to compensation.

Bail-in execution illustrative timeline

The illustrative timeline below outlines the various steps that CDIC could take in implementing the bail-in tool, as well as potential actions by other stakeholders. Note that this timeline focuses only on the operational elements of a bail-in conversion, and not on all the other actions that CDIC may be undertaking.

(Click to view enlarged image / 107 KB)

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Footnotes:

1 In order to be eligible for bail-in conversion, bail-in debt needs to have a Committee on Uniform Security Identification Procedures (CUSIP) number, an International Securities Identification Number (ISIN) or other similar identifier that facilitates its trading and settlement (see Bail-In – What is Included?).

2 During resolution, D-SIBs may be subject to other applicable laws, including securities laws.

3 The elements listed focus specifically on the bail-in tool; it is expected that CDIC would make announcements on other topics (e.g., governance of the D-SIB, details regarding any financing arrangements, provision of any guarantees, access to payment systems, etc.).

4 This only applies to preferred shares and subordinated debt without NVCC features issued prior to September 23, 2018 (see Ability to Impose Losses on Other Instruments).

5 The total amount is not necessarily the amount of the D-SIB’s bail-in debt that CDIC would decide to convert (conversion amount) (see Timing of Bail-in Conversion).

6 Alternatively, NVCC instruments may have been subject to conversion prior to the making of the GIC order where a trigger event has occurred.

7 This includes, but is not limited to, common shares, NVCC preferred shares, NVCC subordinated debt, non-NVCC preferred shares or subordinated debt, senior debt, covered bonds, etc.

8 Canada (as well as most jurisdictions) relies on an intermediated holding system. When issuing securities and other financial instruments, banks generally create a global certificate for the issuance and register the global certificate in the name of the relevant central security depository. The banks then deposit the global certificate into the depository, which allocates positions in the global certificate among the depository’s participants based on the banks’ instructions. Participants in the depository maintain accounts for their clients, who can be investors or other intermediaries. Given that D-SIBs have securities and other financial instruments that are issued in multiple jurisdictions, they deal with a number of depositories (e.g., CDS Clearing and Depository Services Inc. (CDS) in Canada, the Depository Trust Company (DTC) in the United States, etc.).

9 Please note that this covers only legal prohibitions, not investors’ internal investment policy or mandate restrictions.

10 With the prior approval of the Minister of Finance, a person or group could acquire up to 20% of the voting shares and 30% of the non-voting shares of a D-SIB.

11 In addition to these restrictions, subject to certain exceptions and conditions, the Bank Act also prohibits the registration of a transfer or issue of any shares of a bank to any government or governmental agency of Canada or any province of Canada, or to any government of any foreign country, or any political subdivision, or agency of any foreign country.

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