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Ottawa is expected to introduce a framework that likely includes higher capital requirements and rules for converting liabilities into common equity

By James Langton |

 

The federal government's approach to dealing with the prospective failure of one of Canada's big banks will likely include higher capital requirements and rules for converting liabilities into common equity, according to Standard & Poor's Financial Services LLC's (S&P) global ratings division.

The rating agency published a report on Monday that sets out the expectations for a new bank bail-in framework in Canada. Policymakers around the world have been developing regulations to put an end to taxpayer bailouts of large banks in the wake of the global financial crisis. It's expected the Canada's rules would apply to the Big Six banks that have been designated as systemically important to the domestic banking system.

S&P expects the government will introduce a framework that includes minimum loss absorbency requirements, a process for converting certain liabilities into common shares in order to recapitalize a failing bank, along with assorted disclosure and reporting requirements, the report says.

"Although the finalized policy framework has yet to be disclosed, from official announcements to date, we expect key features of the Canadian bail-in framework to include detailed regulations giving effect to a statutory conversion power that would allow for the permanent conversion of eligible liabilities of a nonviable bank into common shares," says Tom Connell, and analyst at S&P, in a statement.

In addition, S&P expects the new bail-in framework will also include a minimum loss absorbency requirement, "defined in terms of higher loss-absorbency liabilities as a percentage of regulatory risk-weighted assets," the report says.

The firm also indicates that it believes the banks will be able to keep their current corporate structures and won't be required to adopt a holding company structure.

Read: Moody's outlook for Canadian banks remains negative

 

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