On December 10, 2012, the Office of the Superintendent of Financial Institutions Canada (OSFI) issued the final version of the revised Capital Adequacy Requirements Guideline (the Guideline). The Guideline has been revised as a result of the Basel Committee on Banking Supervision (the BCBS) reforms to strengthen global capital rules with the goal of promoting a more resilient banking sector, commonly referred to as Basel III. The Guideline will come into effect January 2013 for all banks, bank holding companies, federally regulated trust and loan companies and cooperative retail associations, with the exception of the provisions relating to Credit Valuation Adjustment capital charges which will come into effect on January 1, 2014 to align with the implementation timetable in the United States and the European Union.
In August 2012, OSFI had released a draft Guideline for comment. Other than a few changes in certain limited areas, the final Guideline is substantially similar to the draft Guideline. See our previous Osler Update on the draft Guideline. The full text of the final Guideline is available on OSFI’s website. OSFI has also released a summary of the comments received on the draft Guideline and how they have been addressed. This summary is available on OSFI’s website. As a result of the revisions to the Guideline, a number of previously issued documents communicating OSFI guidance will no longer be applicable. A list of these documents is available on OSFI’s website.
Under OSFI’s existing capital rules, a number of Canadian financial institutions have issued preferred shares and innovative Tier 1 instruments which at the time of their issuance qualified as Additional Tier 1 instruments. Similarly, a number of Canadian financial institutions have issued subordinated debt which at the time of issuance qualified as Tier 2 capital. Under the new rules, these instruments will not qualify as Additional Tier 1 or Tier 2 capital primarily because their terms do not include a clause requiring the full and permanent conversion of such instruments into common shares at the point of non-viability as described under OSFI’s non-viability contingent capital requirements. To see the minimum set of criteria for an instrument issued by an institution to meet or exceed in order for it to be included in Additional Tier 1 capital or Tier 2 capital, see our previous Osler Update on the draft Guideline.