The Office of the Superintendent of Financial Institutions has released a new draft version of the capital guidelines for Deposit Taking Institutions. Comments are being accepted to November 19, but I won’t bother – OSFI has never shown any good-faith interest in encouraging public debate.
2.1.1.4. Examples of acceptable features
Outlined below are examples of certain preferred share features that may be acceptable in tier 1
capital instruments:
- a simple call feature that allows the issuer to call the instrument, provided the issue cannot be redeemed in the first five years and, after that, only with prior supervisory approval
- a dividend that floats at some fixed relationship to an index or the highest of several indices, as long as the index or indices are linked to general market rates and not to the financial condition of the borrower
- a dividend rate that is fixed for a period of years and then shifts to a rate that floats over an index, plus an additional amount tied to the increase in common share dividends if the index is not based on the institution’s financial condition and the increase is not automatic, not a step-up, nor of an exploding rate nature
- conversion of preferred shares to common shares where the minimum conversion value or the way it is to be calculated is established at the date of issue. Examples of conversion prices are: a specific dollar price; a ratio of common to preferred share prices; and a value related to the common share price at time of conversion.
2.1.1.5. Examples of unacceptable features
Examples of preferred share features that will not be acceptable in tier 1 capital are:
- an exploding rate preferred share, where the dividend rate is fixed or floating for a period and then sharply increases to an uneconomically high level
- an auction rate preferred share or other dividend reset mechanism in which the dividend is reset periodically based, in whole or part, on the issuer’s credit rating or financial condition
- a dividend-reset mechanism that does not specify a cap, consistent with the institution’s credit quality at the original date of issue
These examples have not changed since the November 2007 edition.