Last week, the Department of Finance (DoF) and the Office of the Superintendent of Financial Institutions (OFSI) released more preliminary information on the rules for how an insolvent Canadian Bank would be re-capitalized. I have written about this before but thought I would touch on it again as it is very important. Although complex, I will try my best to keep it short and to the point (I should probably use point form so as not to be too long-winded).
These rules were brought upon the global banking industry after the credit crisis by the world's global banking regulator, the Bank for International Settlements (BIS). The rules are commonly called "the Bail-in regime" and their intent is to protect tax payers from re-capitalizing a failed bank and instead force the current security holders (various levels of Fixed Income securities and the Equity/Stock) to take the losses.
Here is how it is supposed to work in Canada (and most other places in the world, save for Italy apparently...more on that at the end): :
Upon a triggering event, the actual bail-in works like this:
In a nutshell, that is how bail-in is supposed to work. There is public consultation set for July 17, 2017 and it is expected that these new regulations will be implemented in the 1H18.
Why is this so important to us at High Rock?
For these reasons, High Rock has not (and likely will not, unless there is an arbitrage or enormous opportunity) owned any NVCC, Bail-in or Common Stock of a Canadian DSIB. And I can tell you that even within the Pref market, we do not just buy Pref shares ad hoc or buy an ETF on the Pref market. Our clients/mandates own very specific non-bank Preferred shares, and not just because we didn't want to own NVCC, but that is a discussion for another day. Remember, we focus on risk-adjusted returns at all times.
As for Italy, today was the second time in about three months where they ignored BIS rules/regulations on recapitalizing a DSIB. Although the equity of these two banks was wiped out, Italy dumped about 17 billion euros into these two banks so as to protect senior unsecured bond holders...goes against the new bail-in regime so, hey, who knows, maybe these rules are flexible. It's ok, Italy can afford it...their Debt/GDP ratio is only at 132%...