New law proposed to shift bank failure risk from taxpayers
Ottawa proposes 'bail-in' regime to force creditors to prop up failing banks
Canada will introduce legislation to implement a "bail-in" regime for systemically important banks that would shift some of the responsibility for propping up failing institutions to creditors.
The proposed plan outlined in the federal budget released on Tuesday would allow authorities to convert eligible long-term debt of a failing lender into common shares in order to recapitalize the bank, allowing it to remain operating.
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The plan is in line with international efforts to address the potential risks to the financial system from institutions that are deemed too big to fail, the budget document said.
The issue was at the heart of the 2008 global credit crisis, with various governments having to bail out systemically important institutions.
Canada, which escaped the crisis relatively unscathed, did not have to rescue any of its banks though they got billions in support during the crisis and the recession that followed. The government said it will introduce framework legislation for the plan, along with enhancements to Canada's bank resolution toolkit.
When the Harper government floated the idea of a bail-in regime in 2014, Moody's cut its ratings on Canadian banks.