OSFI Enhances Quality of Capital for Deposit Taking Institutions

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In February, 2011, Canada’s Office of the Superintendant of Financial Institutions (“OSFI”) released concurrent draft advisories (the “Advisories”) regarding capital requirements for banks, bank holding companies, and federally regulated trust and loan companies (each, a deposit-taking institution or “DTI”). The Advisories are part of OSFI’s ongoing transition to meet the Basel III rules text published December 16, 20101 and supplemented January 13, 2011.

The Advisories set out OSFI’s expectations with respect to phasing out some $70 billion of bank capital that will no longer qualify as the strongest form of capital (Tier 1 capital) under new international rules. Both Tier 1 and Tier 2 capital are used to determine whether a DTI meets its required capital adequacy standards under OSFI guidelines. Starting in 2013, instruments such as preferred shares, subordinated debt and hybrid bonds will be phased out of Tier 1 capital, losing 10% of their value as bank capital each year until 2023.

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