As part of the 2013 budget in Canada, the Minister of Finance tabled the Economic Action Plan 2013 which included the newest buzzword 'bail-in'.

Source: budget.gc.ca/.../...
Page 145
“The [Canadian] Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants. Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.
This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are ‘too big to fail’.”

A depositor is an unsecured creditor to a bank. The Canadian government presents its position to be one of shielding the taxpayer from the need to pay for bailing out a failing bank. As a taxpayer that is comforting. 
However as a depositor, the phrase “rapid conversion of certain bank liabilities into regulatory capital” concerns me. My deposit is the bank’s liability. Could depositors’ funds fall under the definition of ‘certain bank liabilities’? 
I searched the entire 442 page document and I cannot find where the term ‘certain bank liabilities’ is defined.
The prudent approach I believe would be to assume that under certain conditions, certain bank liabilities will include depositors’ funds; at least those funds in excess of CAD 100,000 which is our so-called insured amount.
Even if it has noble intentions now, under a credit and derivatives collapse scenario, it is conceivable that the Canadian government could be coerced or bullied by external agents into grabbing depositors’ funds just like what is happening in Cyprus.
I find the newest ‘bail-in’ term being used since the Cyprus debacle quite amusing. It reminds me of the ‘sit-in’ and ‘love-in’ terms of the peace/hippie generation.
We all seem to be floating on the bathwater of fiat currency liquidity. The tub is being drained at the opposite end from where we are floating. The EU is circling the drain. The central banks are feverishly trying to replenish the tub with thimbles full of water, but it appears inevitable that some will go down the drain, whilst others will be left high and dry. The central bankers only have thimbles, not a drain stopper.

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Now, tell me if this looks even remotely familiar... from an article publsihed in the Financial Times on February 10, 2013 which clearly, accurately and timely foretold the events to unfold over the following 45 days or so :

A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.

The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.

By “bailing in” uninsured bank depositors, it would also involve more foreign investors, especially from Russia, some of whom have used Cyprus as a tax haven in recent years. That would answer criticism from Berlin in particular, where politicians are calling for more drastic action to stop the island being used for money laundering and tax evasion.

Labelled “strictly confidential” and distributed to eurozone officials last week, the memo says the radical version of the plan – including a “haircut” of 50 per cent on sovereign bonds – would shrink the Cypriot financial sector, now nearly eight times larger than the island’s economy, by about one-third by 2015.

Senior EU officials who have seen the document cautioned that imposing losses on bank depositors and a sovereign debt restructuring remain unlikely. Underlining the dissuasive language in the memo, they said that bailing in depositors was never considered in previous eurozone bailouts because of concern that it could lead to bank runs in other financially fragile countries.

But the authors warn such drastic action could restart contagion in eurozone financial markets...

Oh, and it can get worse. Zerohedge reports, via Reuters, that there will be absolute wipeouts for some big depositors in Cyprus:

In what appears to be drastically worse than many had hoped (and expected), uninsured depositor in Cyprus' largest bank stand to get no actual cash back from their initial deposit as the plan (expected to be announced tomorrow) is:

• • 22.5% of the previous cash deposit gone forever (pure haircut)
  • 40% of the previous cash deposit will receive interest (but will never be repaid),
  • and the remaining 37.5% of the previous cash deposit will be swapped into equity into the bank (a completely worthless bank that is of course.)

So, theoretically this is 62.5% haircut but once everyone decides to 'sell' their shares to reconstitute some cash then we would imagine it will be far greater. Furthermore, at what valuation will the 37.5% equity be allocated (we suspect a rather aggressive mark-up to 'market' clearing levels).

Critically though, there is no cash. None. If you had EUR150,000 in the bank last week (net of insured deposits which may well be impaired before all is said and done) you now have EUR0,000 to draw on! But will earn interest on EUR60,000 (though we do not know at what rate); and own EUR56,250 worth of Bank of Cyprus shares (the same bank that will experience the slow-burn leak of capital controlled outflows).

In the post "EU Bank Depositors: Your Mattress Is Starting To Look Awfully Attractive - Bank Risk, Reward & Compensation", I offered a way to calculate what return you should expect to receive to take on the risk of a potential 40% haircut. The second tab offers what recent Cyprus bank rates were. Do you see a disparity??? To bring things up to date, up the haircut to 63% and you will find that no bank in the world will compensate you for the risk you assume in banking there. Banco Posturepedico shares: Strong BUY!!!!

The Banks Are Bigger Than Many of the Sovereigns

Ready! Set! Bank Run!!!

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