{"id":1741,"date":"2008-01-25T17:42:02","date_gmt":"2008-01-25T21:42:02","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=1741"},"modified":"2008-01-25T17:42:02","modified_gmt":"2008-01-25T21:42:02","slug":"banks-capital-structure-tier-2a-and-tier-2b","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=1741","title":{"rendered":"Banks' Capital Structure: Tier 2A and Tier 2B"},"content":{"rendered":"

Assiduous Readers will be familiar with Banks Subordinated Debt<\/a>, but perhaps not so much with the difference betwee Tier 2A and Tier 2B Capital.<\/p>\n

\n

2.2.1. Hybrid capital instruments (Tier 2A)
\nHybrid capital includes instruments that are essentially permanent in nature and that have certain characteristics of both equity and debt, including:
\n\u2022 Cumulative perpetual preferred shares
\n\u2022 Qualifying 99-year debentures
\n\u2022 Qualifying non-controlling interests arising on consolidation from tier 2 hybrid capital instruments
\n\u2022 General allowances (see section 2.2.2.)
\nHybrid capital instruments must, at a minimum, have the following characteristics:
\n\u2022 unsecured, subordinated and fully paid up
\n\u2022 not redeemable at the initiative of the holder
\n\u2022 may be redeemable by the issuer after an initial term of five years with the prior consent of the Superintendent
\n\u2022 available to participate in losses without triggering a cessation of ongoing operations or the start of insolvency proceedings
\n\u2022 allow service obligations to be deferred (as with cumulative preferred shares) where the profitability of the institution would not support payment<\/p>\n<\/blockquote>\n

\n

Limited life instruments (Tier 2B)<\/p>\n

Limited life instruments are not permanent and include:
\n\u2022 limited life redeemable preferred shares
\n\u2022 qualifying capital instruments issued in conjunction with a repackaging arrangement
\n\u2022 other debentures and subordinated debt
\n\u2022 qualifying non-controlling interests arising on consolidation from tier 2 limited life instruments
\n…<\/strong>
\nLimited life capital instruments must, at a minimum, have the following characteristics:
\n\u2022 subordination to deposit obligations and other senior creditors
\n\u2022 an initial minimum term greater than, or equal to, five years<\/p>\n<\/blockquote>\n

Limits defined by the OSFI<\/a> are:<\/p>\n

\n

The following limitations will apply to capital elements after the specified deductions and adjustments:
\n\u2022 A strongly capitalized institution should not have innovative instruments and non-cumulative perpetual preferred shares that, in aggregate, exceed 25% of net tier 1 capital.
\n\u2022 Innovative instruments shall not, at the time of issuance, comprise more than 15% of net tier 1 capital. If at any time this limit is breached, the institution must immediately notify OSFI and provide an acceptable plan showing how the institution proposes to quickly eliminate the excess.
\n\u2022 The amount of capital, net of amortization, included in tier 2 and used to meet credit and operational risk capital requirements shall not exceed 100% of net tier 1 capital.
\n\u2022 Limited life instruments, net of amortization, included in tier 2B capital shall not exceed a maximum of 50% of net tier 1 capital.
\n\u2022 Tier 2 and tier 3 capital used to meet the market risk capital requirements must not \u2013 in total \u2013 exceed 200% of the net tier 1 capital used to meet the market risk capital requirements.
\n\u2022 Tier 2 and tier 3 capital cannot \u2013 in total \u2013 normally exceed 100% of the institution\u2019s net tier 1 capital. This limit cannot be exceeded without OSFI\u2019s express permission, which will only normally be granted where an institution engages mainly in business that is subject to the market risk capital charge.<\/p>\n<\/blockquote>\n

As has been noted<\/a>, the limit on non-common-equity elements of Tier 1 Capital has been raised to 30%.<\/p>\n

Update, 2008-2-12<\/strong>: I also note the OSFI July, 2007, Advisory<\/a>\u00a0(an “FRE” is a “Federally Regulated Entity”):<\/p>\n

\n

The maximum amount of innovative instruments that a FRE can have outstanding is being increased to 20% of net Tier 1 capital. A maximum of 15% of net Tier 1 can be included in the innovative Tier 1 category with the balance, a maximum of 5% of net Tier 1 eligible for inclusion in Tier 2B. Any portion of the innovative Tier 1 instruments permissible within Tier 2B can thereafter be transferred to the innovative Tier 1 category as room becomes available.<\/p>\n

In addition, and without limiting the application of the preceding paragraph, subordinated debt issued by Non-Consolidated Financing Entities will be eligible for inclusion in Tier 2B capital provided the conditions set out in Section 5 of this Advisory are met. The sum of this subordinated debt and innovative Tier 1 instruments included in Tier 2B capital of the FRE must not exceed the greater of 5% of net Tier 1 of the FRE or the dollar amount obtained when the 5% limit is calculated at its ultimate controlling FRE (the \u201cinnovative overflow\u201d). Any portion of the \u201cinnovative overflow\u201d composed of subordinated debt issued by Non-Consolidated Financing Entities permissible within Tier 2B cannot, at any time, be transferred to the innovative Tier 1 category.<\/p>\n

Tier 2B capital in aggregate will continue to be limited to 50% of net Tier 1 capital. OSFI\u2019s Interim Appendix to Guideline A-2 (Banks\/T&L\/Life) states that \u201c[a] strongly capitalized FRE should not have innovative instruments and perpetual non-cumulative preferred shares that, in aggregate, exceed 25% of its net Tier 1 capital.\u201d FREs need not include the amounts of innovative Tier 1 instruments that are included in Tier 2B, in the calculation of the 25% limitation on preferred shares and innovative instruments in Tier 1.<\/p>\n

If, at any time after issuance, a FRE\u2019s ratio of innovative instruments (included in a FRE\u2019s innovative Tier 1 category) to net Tier 1 capital exceeds 15%, and\/or if the \u201cinnovative overflow\u201d exceeds the allowable level as described above, the FRE must immediately notify OSFI. The FRE must also provide a plan, acceptable to OSFI, showing how the FRE proposes to eliminate the excess (or excesses if it breaches both limits) as soon as possible. A FRE will generally be permitted to continue to include such excess(es) in the respective category(ies) until such time as the excess(es) is (are) eliminated in accordance with its plan.<\/p>\n

\u00a0<\/p>\n<\/blockquote>\n

\n<\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Assiduous Readers will be familiar with Banks Subordinated Debt, but perhaps not so much with the difference betwee Tier 2A and Tier 2B Capital. 2.2.1. Hybrid capital instruments (Tier 2A) Hybrid capital includes instruments that …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20,25],"tags":[],"class_list":["post-1741","post","type-post","status-publish","format-standard","hentry","category-primers","category-regulatory-capital"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1741","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1741"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1741\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1741"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1741"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1741"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}