Bank Resolution and Deposit Insurance 75. The bank resolution regimes are generally compliant with the Key Attributes of Effective Resolut...
Bank Resolution and Deposit Insurance 75. The bank resolution regimes are generally compliant with the Key Attributes of Effective Resolution Regimes, but there are areas for improvement. At the federal level, CDIC should have greater operational independence in applying resolution tools as certain decisions currently require formal authorization. The resolution regime should be strengthened with additional powers (e.g., interference with contracts, write-down of liabilities and claw-back of remuneration) and extended to cover foreign bank branches and banks’ unregulated subsidiaries. The federal bail-in regime was introduced and is only applicable to D-SIBs, with holders of bail-inable debt at the same ranking as other senior unsecured creditors. Procedures should be put in place to allow the bail-in powers to apply to any bank deemed systemically significant or critical at the point of failure based on the prevailing circumstances.
Given the likelihood of compensation to bail-in-able debt holders, the valuation framework should be further developed to increase certainty about bail-in outcomes. Furthermore, depositor preference should be adopted to facilitate applying certain resolution tools (e.g., bridge bank or purchase and assumption) and minimize the DIS’s losses. The bank liquidation regime is outdated and should be modernized. For Québec, issues related to resolution powers, bail-in and depositor preference are similarly relevant. 76. Early intervention is well-established, but recovery and resolution planning should be expanded to cover all existing gaps. At the federal level, OSFI and CDIC developed a joint Guide to Intervention to set out coordinated guidelines for the use of intervention powers; AMF has a similar framework. Recovery and resolution planning for D-SIBs is advanced, and good progress has CANADA INTERNATIONAL MONETARY FUND 33
been made regarding Québec’s D-SIFI. Cooperation mechanisms with relevant foreign authorities, including crisis management groups, are in place. However, OSFI’s recovery planning should be expanded to all entities, and its guideline on recovery planning should be published. Similarly, CDIC should expand resolution planning to cover deposit-taking institutions that perform critical functions (e.g., custody). Furthermore, the FISC should oversee group-wide resolution planning (still nonexistent) for significant insurance groups with deposit-taking business. 77. The federal DIS is largely aligned with the Core Principles for Effective Deposit Insurance Systems; provincial DISs vary markedly, especially in terms of coverage. Recent changes introduced to the federal DIS are positive, although the increased scope of coverage will likely result in a delay in arriving at CDIC’s targeted ex-ante funding. Québec’s DIS is similar to the federal system. Some provincial DISs provide unlimited coverage of deposits, potentially creating distortions on competition in normal times and undermining provincial public finances during crises. 78. Arrangements for funding in resolution appear robust at the federal level. Beside CDIC’s funding, the authorities have access to other ample funding from the government (under the MoF’s discretion). The BOC can also provide liquidity funding to support effective recovery and orderly resolution. For Québec, arrangements for backstop funding in resolution should be formalized. Indemnity agreements between the BOC and provinces still need to be established to operationalize emergency liquidity assistance (ELA).13 Liquidity Provision 79. The BOC’s framework for managing liquidity during stress is well-defined and transparent, but contingency plans for market-wide liquidity support should be further developed. The BOC can provide bilateral liquidity support, including in foreign currency, to eligible financial institutions and FMIs. The ELA framework was amended to accept mortgages as collateral and clarify the eligibility criteria for provincially regulated entities, including the need for provincial indemnity.
The BOC has also developed a framework to provide market-wide liquidity support to financial institutions. However, contingency plans for intervention in securities markets and provision of foreign-currency liquidity should be further developed. During the GFC, the federal and three provincial governments provided support to securities markets, but the BOC did not purchase assets outright. A unified framework should thus be developed. Given the growing reliance on external, foreign-currency funding of Canadian financial institutions and other entities, the BOC and the DOF should jointly develop a strategy to handle systemic stress in foreign-currency funding, taking into account of readily available foreign reserves and standing bilateral currency swap agreements with other major central banks. 80. Additional preparatory works would help ensure smooth ELA operations. In addition to provincial indemnity agreements (paragraph 78),
MoUs between the BOC and provincial authorities (particularly, British Columbia and Ontario) should be put in place to facilitate information sharing for ELA operations. In terms of preparedness, the BOC should expand its ELA simulation exercises to 13 ELA refers to the BOC’s emergency lending assistance. CANADA 34 INTERNATIONAL MONETARY FUND involve a broader set of financial institutions (including provincially regulated entities) and mobilize non-standard collateral (e.g., mortgages). Such exercises should also feature the interaction among relevant business units within the BOC as well as with inter-agency bodies (e.g., the FISC and the SAC) to ensure effective information sharing and decision-making. Other Safety Net 81. FMIs have developed and tested recovery plans, while the BOC will be responsible for resolution planning. The forthcoming resolution regime (pending adoption of regulations) aims at maintaining FMIs’ critical services and minimizing potential loss of public funds.
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