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Canada Starts Public Consultation on Bank Bail-in Policy

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Aug. 1 (Bloomberg) -- Canadian Finance Minister Joe Oliver released regulatory proposals aimed at relieving taxpayers from the burden of potential bailouts if key banks fail.

The proposals, which are open to public consultation until Sept. 12, will create a regime for systemically important Canadian banks that would boost capital of a failing institution by converting some liabilities into regulatory capital, according to a statement released by the finance department.

Moody’s Investors Service reduced the outlooks on Royal Bank of Canada, Bank of Nova Scotia and five other lenders to negative on June 11, citing similar bail-in rules in Europe and the U.S. that would impose losses on bondholders in a crisis.

As part of the new rules, the Canadian government is proposing that senior unsecured debt be subject to conversion into common shares, and that policy makers will have the power to cancel pre-existing common shares.

Deposits are excluded from the proposed system, with insured deposits remaining covered by Canada Deposit Insurance Corp.

The bail-in requirements won’t apply retroactively to instruments that don’t feature contractual conversion terms, according to the statement. The government also proposes systemically important banks be subject to higher loss absorbency requirements of between 17 and 23 percent of risk-weighted assets.

The policies are part of a move by Group of 20 nations to make the world’s financial system safer following the global financial crisis of 2008.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net