If a member institution faces severe financial distress that authorities believe could lead to failure putting depositors and financial stability at risk, CDIC may intervene before the losses grow too severe.
It could do this by assisting the sale of the failing institution to a viable buyer. This avoids disruption of service and protects depositors, which promotes financial stability and public confidence.
Of the 43 failures handled by CDIC, nine involved an assisted transaction. In some cases, this course of action can result in less market disruption and lower costs to CDIC than reimbursement.
CDIC may assist a transaction in various ways depending on the circumstances. CDIC can provide this assistance on a stand-alone basis, to push through a private transaction, or in combination with any of its other resolution tools.
The primary requirements for an assisted transaction are:
- The willingness and cooperation of the failing bank’s management and board of directors to engage in a timely transaction.
- A willing and able third-party acquirer, with key terms and conditions in place.
- OSFI transaction review and recommendation by the Superintendent to approve the transaction to the Minister of Finance.
- Foreign regulatory approval of change of control if the failing CDIC member has foreign branch and subsidiary operations.
CDIC is responsible for ensuring that our members can fail safely and we collaborate closely with other federal financial safety net agencies when a member poses an unacceptable level of risk. In an assisted transaction, CDIC would rely on the results of its earlier examination work and be involved in transaction negotiations between the failing member and potential purchaser(s).
If CDIC supports a transaction, it can take one or more of the following measures:
- Acquire undesirable assets from the failing institution.
- Make or guarantee loans, or advances (secure and unsecured).
- Make or guarantee deposits.
- Acquire shares or subordinated debt.
- Enter loss-sharing or loss-protection arrangements.
How it works
At this stage, CDIC would be conducting a preparatory examination and special examination of the failing institution and would evaluate the interest of bidders and the likelihood that a transaction – rather than liquidation – would minimize CDIC’s exposure to loss.
As part of the transaction, CDIC may be called upon to aid the sale and would then negotiate the specific scope of the assistance. Agreement would be drafted, settled and executed during this stage.
Closing and Post-Closing
Upon closing, CDIC would provide any funding or other support required in the negotiated deal. CDIC and other federal agencies would also be ready to make public announcements regarding the deal and CDIC’s role, if appropriate.
What happens to deposits?
When a failed bank is purchased by another institution, deposits remain protected in accordance with the CDIC Act. There would be little to no disruption in service or access to funds for the acquired bank’s depositors. Pre-existing deposits would continue to be insured up to $100,000 in each of seven separately protected categories. Any deposits made at the new or merged CDIC member would be protected separately from pre-existing deposits held at the original institutions. If a CDIC member is purchased by a non-member company, the buyer must agree to continue its deposit-taking services. The CDIC member would continue to exist and deposit protection continues as before. There is no impact on depositors.