The Liberal government wants bank shareholders and bondholders to be responsible for bailing out their banks if they fail. But the plan is a long, long way from reality.
Nearly a decade after Wall Street's meltdown wiped out trillions of dollars in value from global markets, Canada and other countries are still trying to implement measures to protect taxpayers from bank bailouts. Ottawa unveiled a so-called "bail-in" plan in Tuesday's federal budget.
Ottawa wants to give regulators authority to convert a bank's long-term debt into shares if the financial institution needs to be recapitalized. The idea is that banks' shareholders and creditors would be on the hook instead of taxpayers.
But legislation has not been introduced, giving the banking community ample time to tweak and delay rules.
Canada's big banks already issue debt – known as non-viable contingent capital, or NVCC – that automatically converts to common shares if a devastating financial crisis threatens the operations of a bank.
But Ottawa's proposal would be more comprehensive because it would potentially apply to all long-term debt issued by a bank and would use a more transparent approach in determining how many common shares are issued.
"This approach would be communicated to all market participants in advance," a 2014 government consultation paper said.
During the 2008-09 financial crisis, Canadian banks were well capitalized and did not require a government backstop such as their U.S. rivals.
The biggest U.S. financial institutions from insurer AIG to Bank of America and JPMorgan Chase were propped up by taxpayer funds. Bailed-out banks eventually paid back their loans but a dangerous precedent was set where financial institutions expect to be backstopped.
The new rules, if introduced and implemented, would apply to Canada's six largest banks: Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.
The American's sweeping Dodd-Frank legislation was supposed to prevent banks from becoming "too big to fail" but those measures have been systematically weakened since becoming law in 2010.
Since the crisis, the Group of 20 industrial and developing countries have tried to plug regulatory holes in the financial system.
With files from David Berman