March 28, 2013

Canadian banks: 'too big to fail'

In its recent budget proposal, the Canadian government included language that essentially formalizes what already exists as an unwritten rule.

The government first introduces stricter risk controls - e.g. higher capital requirements - but then proposes the following bail-out language:

So now it is on paper.

Of course, the government speaks out both sides of its mouth. While saying that certain Canadian  banks (the big 6, which make up almost the entire banking industry) are systematically important to the economy, it simultaneously claims that they are not 'too big to fail'.

So which is it?