The proposed new Basel capital rules should not be a problem for the Canadian banks, says credit rating agency DBRS Limited.

Following the announcement of new minimum capital requirements for global banks, DBRS says it has concluded that there are no credit rating implications for the Canadian banks.

“The new minimum capital ratios are manageable for Canadian banks given their existing tangible common equity ratios, expectation of internal capital generation, extended implementation period of adjustments and the lengthy phase-in period,” it says.

DBRS reports that the tangible common equity to risk-weighted assets ratio for Canadian banks is currently at its all-time high, and that the banks are already have minimum Tier 1 capital and minimum total capital ratios that exceed the new Basel requirements.

While the announcement provided some long-awaited clarity on new global capital standards, DBRS says that other questions remain unanswered including:
> whether there are non-common Tier 1 capital maximums in the Tier 1 capital ratio calculation;
> the capital treatment of non-qualifying instruments that could be called at the earliest date but are not redeemed; and
> what happens with replacement securities that have to be issued?

“One of the more pressing issues is whether a Canadian bank that issued innovative Tier 1 instruments, during the height of the financial crisis, with a par redemption feature triggered by a regulatory event, would redeem the instrument,” DBRS says.

“Investors would also be concerned with having a high-yielding instrument, compared to today’s interest rate environment, called much earlier than expected, and at par, which is lower than the current price of the instrument.”

IE