January 25, 2011 / 2:49 PM / 7 years ago

Canada advances plans to deal with bank failures

OTTAWA (Reuters) - Some big Canadian banks have drawn up “living wills” showing how they would be dismantled in a crisis without the need for a government bailout, the country’s bank regulator said on Tuesday.

In an interview in the Financial Post newspaper, Superintendent of Financial Institutions Julie Dickson said she had made it a “huge priority” for banks to create plans to wind down their operations in case of collapse as part of a general plan to deal with future financial sector meltdowns.

“We have in Canada just updated the resolution system,” Dickson was quoted as saying.

“We’re doing living wills with institutions -- that’s a huge priority -- and these are all designed to see whether you can resolve institutions of any size,” she said.

Global regulators and finance officials have been eyeing living wills as a way to reduce the risk of catastrophic collapses by banks considered systemically important on a global basis, or “too big to fail”.

The Financial Stability Board (FSB), comprised of central bankers, regulators and finance officials from major countries, had hoped to come up with a list late last year of banks around the globe that fill the bill of being “systemically important”.

But it faced pushback from countries opposed to capital surcharges on banks and from investors skeptical of other parts of the plan.

None of Canada’s banks is expected to be on the list of globally systemic institutions, and OSFI officials have said no Canadian banks will be singled out from their peers for tighter restrictions.

But Dickson said Canada was nevertheless piecing together its own domestic remedy for “too big to fail,” a plan that includes a bridge bank, which would take over the obligations of a collapsed bank and oversee possible asset sales.

An OSFI spokesman confirmed the agency is asking all of Canada’s six major banks to come up with a plan.

Dickson said Canada’s big banks were the first to start the process of drawing up living wills, and some have completed the task.

Canada’s banks emerged from the financial crisis without needing government bailouts and without cutting dividends, and one analyst said the progression of such plans is unlikely to have any noticeable impact on their stock valuations.

“I think it’s important to note that these living wills would not have been triggered through the worst of the liquidity crisis, so as we look forward, the probability of them being exercised is still lower,” said Robert Sedran, an analyst at CIBC World Markets.

Reporting by Louise Egan in Ottawa and Cameron French in Toronto; editing by Peter Galloway

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