Order Fixing the Day on which this Order is made as the Day on which Certain Provisions of the Act Come into Force: SI/2018-28

Canada Gazette, Part II: Volume 152, Number 8

Registration

April 18, 2018

BUDGET IMPLEMENTATION ACT, 2016, NO. 1

Order Fixing the Day on which this Order is made as the Day on which Certain Provisions of the Act Come into Force

P.C. 2018-343 March 26, 2018

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 168 of the Budget Implementation Act, 2016, No. 1, chapter 7 of the Statutes of Canada, 2016, fixes the day on which this Order is made as the day on which section 128, subsections 131(6), 133(3) and 139(5) and (6), sections 140, 142, 147, and subsection 148(2) and sections 158, 160 and 162 of that Act come into force.

EXPLANATORY NOTE

(This note is not part of the Order.)

Proposal

This Order in Council, pursuant to section 168 of the Budget Implementation Act, 2016, No. 1 (BIA 1 2016), chapter 7 of the Statutes of Canada, 2016, fixes the day on which the Order is made as the day on which section 128, subsections 131(6), 133(3), and 139(5) and (6), sections 140, 142, and 147, subsection 148(2), and sections 158, 160, and 162 of the BIA 1 2016 come into force.

Objective

The purpose of this Order is to bring into force amendments to the Bank Act and the Canada Deposit Insurance Corporation Act (CDIC Act) necessary for the implementation of the bail-in regime for Canada’s systemically important banks. ^footnote1 The bail-in regime would allow authorities to convert certain liabilities of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating.

Background

To strengthen Canada’s bank resolution toolkit, Budget 2016 announced that the Government would implement a bail-in regime for Canada’s systemically important banks. A legislative framework for the bail-in regime was put in place via amendments to the Bank Act and the CDIC Act as part of BIA 1 2016, which received royal assent on June 22, 2016.

While many of the provisions in BIA 1 2016 relating to the bail-in regime came into force immediately, others were to come into force on a date fixed by the Governor in Council in order to allow the time for supporting regulations to be developed.

The amendments to the Bank Act brought into force pursuant to this Order require systemically important banks to maintain a minimum capacity to absorb losses, to be met through additional regulatory capital and instruments eligible for conversion under the new bail-in conversion power. This requirement is commonly referred to as the “Total Loss Absorbing Capacity” (TLAC) requirement, and is to be set by the Superintendent of Financial Institutions (Superintendent). The amendments also permit the Governor in Council to make regulations — and the Superintendent to make guidelines — respecting (i) the maintenance of the minimum capacity to absorb losses by systemically important banks; and (ii) the disclosure by systemically important banks of information in relation to their capacity to absorb losses.

In order for banks to be able to meet the TLAC requirement that is set out in the amendments to the Bank Act, regulations made by the Governor in Council are required to prescribe the bank shares and liabilities that can be counted towards the requirement. Those regulations — the Bank Recapitalization (Bail-in) Conversion Regulations — will be made concurrently with this Order, but will come into force 180 days after their registration. The Superintendent is also expected to issue orders setting the level for the TLAC requirement for each systemically important bank prior to the coming into force of those regulations.

The amendments to the CDIC Act brought into force pursuant to this Order provide for an updated process for bank shareholders and creditors to seek redress (or “compensation”) should they be left worse off as a result of CDIC’s actions to resolve a failed bank (including, but not limited to, bail-in) than they would have been if the bank had been liquidated. They also permit the Governor in Council to make regulations — and CDIC to make by-laws — respecting the compensation process.

Specifically, the updated compensation process provided for in the amendments to the CDIC Act provides that CDIC shall determine the amount of compensation, if any, to be paid to prescribed persons. In prescribed circumstances, the Governor in Council must appoint an assessor to review a decision by CDIC. As such, regulations made by the Governor in Council are required to prescribe the persons who are entitled to compensation and the circumstances in which the Governor in Council shall appoint an assessor. The amendments to the CDIC Act also include examples of other aspects of the compensation process that may be prescribed by regulation, notably the factors that CDIC and the assessor shall or shall not consider in making their decisions with respect to compensation and procedural requirements.

The necessary regulations pertaining to the compensation process — the Compensation Regulations — will be made and will come into force concurrently with this Order.

Implications

The Superintendent will set the TLAC requirement for systemically important banks. Meeting the requirement is not expected to result in significant changes to the funding structures of these banks. They are expected to be able to meet the requirement primarily by replacing existing long-term senior debt instruments, as they mature, with new debt instruments that are eligible for bail-in.

Meeting the TLAC requirement is expected to result in higher funding costs for systemically important banks, as the debt instruments that are eligible for bail-in (and thus eligible towards the TLAC requirement) are expected to be more expensive for banks to issue than existing debt instruments not subject to bail-in. Market analyst estimates of the expected difference in cost between bail-in debt instruments and equivalent existing debt instruments, banks’ existing funding structures and the level of OSFI’s TLAC requirement suggest that the funding cost impact would likely represent less than 1% of systemically important banks’ net income, and is very unlikely to represent more than 2% of net income.

The revised compensation process in the CDIC Act would apply to any CDIC resolution of a failed member institution going forward. As such, the key implications of updating the CDIC Act resolution compensation process will be to provide clarity to shareholders and creditors of their potential entitlement to compensation in the unlikely event of a failure of a CDIC member institution accompanied by the use of CDIC resolution tools.

Consultation

The Department of Finance Canada has conducted extensive consultations on the bail-in regime, including through the release of a 2014 public consultation paper and the June 2017 publication in the Canada Gazette, Part I, of draft versions of the associated Bank Recapitalization (Bail-in) Conversion Regulations, the Bank Recapitalization (Bail-in) Issuance Regulations and the Compensation Regulations. Participants in these consultations have included banks, investors, legal experts, credit rating agencies, market analysts and industry associations. In general, stakeholders have expressed support for the bail-in regime.

Departmental contact