OSFI Revises Rules for LRCNs; Finally Provides Information for Insurers

The Office of the Superintendant of Financial Institutions Canada (OSFI) has announced:

OSFI has published an update to its July 18, 2020 capital ruling on the Limited Recourse Capital Notes (LRCNs). The revised ruling now addresses LRCN issuances from institutions of all sizes and across different industry sectors.

The revisions include a number of clarifications to the ruling’s conditions and limitations, which are part of OSFI’s prudent approach to assessing the quality and quantity of financial instruments used as regulatory capital. This is consistent with our mandate to protect the rights and interests of depositors, policyholders and financial institution creditors, while also allowing financial institutions to compete effectively and take reasonable risks.

The ruling continues to conclude that federally regulated financial institutions may recognize the LRCNs as regulatory capital subject to the capital treatment, conditions and limitations set out in the revised ruling. Should you have any questions, please contact CapitalConfirmations@osfi-bsif.gc.ca.

The new limits are set out in the appendix to the new rules:

LRCN Issuance Limitations by FRFI Sector
Note: For life insurers, the following limitations supplement and are subject to any existing capital composition limits set out in OSFI’s capital guidelines. P&C insurers and mortgage insurers should consult OSFI’s Capital Division in respect of the limitations applicable to any prospective LRCN issuances.

FRFI
Sector
Regulatory
Capital
Treatment
LRCN Issuance Cap Floor
Deposit-
Taking
Institutions
AT1 Greater of $150 million, 0.75%
RWA, or 50% of the
institution’s aggregate net AT1
capital
Lesser of 0.30% RWA or 20% of
the institution’s aggregate AT1
capital
Life Tier 1 Capital
other than
Common
Shares
Greater of $150 million or
12.5% of Net Tier 1 capital
5.0% of Net Tier 1 capital

The “Floor” has the following effect:

The Cap may be removed with the prior approval of OSFI’s Capital Division. In seeking this approval, a FRFI must demonstrate that it has issued institutional preferred shares and/or other Additional Tier 1 capital instruments (other than LRCNs) targeted towards institutional investors that, in aggregate, are no less than the applicable limit, or Floor, set out in the Appendix. If the FRFI’s outstanding institutional preferred shares and/or other Additional Tier 1 capital instruments issued to institutional investors were to subsequently drop below the Floor, the FRFI would not be permitted to issue additional LRCNs in excess of the Cap until it has re-established compliance with the Floor. The Floor will not apply where the LRCNs are issued exclusively to a FRFI’s affiliates.

Leave a Reply

You must be logged in to post a comment.