The Office of the Superintendent of Financial Institutions is cautioning banks that certain “innovative” capital instruments likely won’t be grandfathered into the new capital adequacy regime to be finalized later this year.

The Basel Committee on Banking Supervision published a set of proposed changes to banks’ capital requirements last December. The details of those changes are expected to be finalized by the end of this year. In the meantime, OSFI says that banks should take the interim guidance, published today, into consideration when issuing capital instruments.

In particular, OSFI says that while banks are not yet required to ensure that their new capital issuances conform to the requirements specified in the Basel proposals, certain kinds of capital likely won’t be allowed under the new regime.

The types of capital instruments that are compliant with the new Basel regime will be eligible for grandfathering when the revised rules come into force (which is to be no later than the end of 2012), but non-compliant instruments issued after Dec. 17, 2009 likely will not be grandfathered, it warns.

The advisory says that innovative instruments “would clearly not be compliant”, and therefore “it is very unlikely that innovative tier 1 instruments issued… after December 17, 2009 will be grandfathered.”

Similarly, subordinated debt will not be compliant where it contains a step-up feature, other incentives to redeem, or provide for redemption in the first five years, OSFI explains.

However, non-cumulative, perpetual preferred shares, as currently structured in Canada, would be compliant, OSFI says, provided they do not contain features which constitute an incentive to redeem.

Comments on the guidance are due by May 21.

IE