CDIC Financial Assistance
A component of CDIC’s resolution tools is the ability to provide financial assistance to member institutions (MI) in satisfaction of CDIC’s objects. The financial assistance powers are set out in Section 10 of the CDIC Act and can be grouped into the following categories:
- Asset purchases
- Asset guarantees
- Funding and liquidity support (loans, deposits, liability guarantees)
Who is eligible?
Financial assistance may be provided to a CDIC member institution. It may also be provided to a third-party acquirer, to facilitate a sale involving a CDIC member institution.
The provision of financial assistance must be in accordance with CDIC’s objects, as set out in Section 7 of the Canada Deposit Insurance Corporation Act (CDIC Act). More specifically, the use of financial assistance must be in line with CDIC’s mandate to provide insurance against loss on deposits at Member Institutions and to promote the stability of the financial system in Canada while minimizing CDIC’s exposure to loss.
What are the forms of CDIC’s financial assistance?
Recapitalization is the process of injecting new capital into a Member Institution, as a temporary measure when a MI is facing losses. Recapitalization can be done through investment in a number of instruments, including:
- Common shares
- Share warrants
- Preferred shares
- Subordinated debt (including convertible debt)
CDIC can acquire assets, either directly or through an asset management vehicle1 thereby providing funding to a MI. This limits a MI’s potential losses and provides it with liquidity to promote continued lending. CDIC, or the asset management vehicle, would administer the assets and divest of these assets at an opportune time in the future.
Asset purchases would typically be used alongside other restructuring measures, such as recapitalization or in an assisted sale.
CDIC can guarantee a minimum asset value on a member institution’s assets, such as a loan portfolio(s) or a subset of a member institutions’ non-performing loans. By absorbing all or a portion of a MI’s future losses, the use of guarantees minimizes the impact of loan defaults and limits a MI’s losses.
Funding and liquidity support
CDIC has different measures to provide funding and liquidity support. In certain circumstances, CDIC can provide loans, with or without security to an MI experiencing temporary liquidity stress to allow the MI to meet its obligations as they come due. Alternatively, CDIC can provide liability guarantees of certain types of instruments issued by a MI to support access to a specific funding market.
How would financial assistance be used?
In order to intervene, CDIC will assess whether extending the financial assistance is consistent with its objects. CDIC would tailor the terms and conditions for the financial assistance to best achieve its objects.
Decisions to provide financial assistance will be approved by CDIC’s Board of Directors and may involve consultation with the federal financial safety net agencies.
CDIC has available funding to support and stabilize troubled MIs. CDIC would provide disclosure on the financial assistance provided in its Annual Report and financial statements.
Further to its objects, CDIC would seek to minimize its losses on the financial assistance. However, in certain situations, CDIC may seek a Governor in Council exemption from its loss minimization object.
1 Governor in Council approval is required to establish an asset management vehicle.