The Office of the Superintendent of Financial Institutions Canada has announced:
In Principle 1 of the Appendix: Principles Governing Inclusion of Innovative Instruments in Tier 1 Capital, “common shareholder’s equity (i.e., common shares, retained earnings, and participating account surplus, as applicable) should be the predominant form of a FRFI’s tier 1 capital. A strongly capitalized FRFI should not have innovative instruments and perpetual non-cumulative preferred shares that, in aggregate, exceed 25% of its net tier 1 capital”.
After taking into account the fundamental characteristics of tier 1 capital and reviewing guidance in other jurisdictions, OSFI has decided to increase this limit to 30%. The maximum amount of innovative tier 1 instruments that can be included in the aggregate limit calculation continues to be 15% of net tier 1.
References to 25% in the April 2003 Advisory Tier 1 Capital Clarifications are amended to 30%. In addition, section 2(b) of the advisory is replaced by the following:
Tier 1 qualifying preferred shares and innovative instruments, at the time of issuance, should not normally exceed 30% of net tier 1 capital. A FRE that wishes to include excess preferred share amounts in tier 1 capital must obtain OSFI’s prior confirmation that this treatment is acceptable. The FRE must provide a supportable plan, acceptable to OSFI, outlining how it proposes to eliminate the excess.
This increase was briefly noted in the CIBC announcement of an equity issue.
When we look at the year-end summary of issuance capacity we see that this really only affects Royal Bank (RY) and, to a limited extent, Commerce (CM) … the others already had tons of unused capacity, and National Bank (NA) has announced a $400-million Innovative Tier 1 Capital issue, which will have soaked up their room.
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