Federal banking regulators have published a letter outlining their views on certain innovative Tier 1 capital vehicles.

The letter, from the Office of the Superintendent of Financial Institutions to the banking and insurance industries, deals with innovative Tier 1 capital in light of recent accounting rule changes and other international developments.

It notes that OSFI has decided that for “loan-based” innovative Tier 1 instruments, special purpose vehicles (SPVs) will no longer be required to be consolidated with the issuing financial institution as a prerequisite for consideration as Tier 1 capital. Although the firm must clearly own and control the SPV. OSFI adds that since it is willing to recognize these special vehicles, more disclosure is essential.

OSFI also confirms that it will not permit new issues that convert into other securities at a market rate based on the firm’s creditworthiness to be considered as innovative Tier 1 capital. And, it notes that it still believes that it’s inappropriate to allow unlimited inclusion of innovative instruments in Tier 2 capital. It has decided to let firms issue innovative instruments up to a maximum of 18% of net Tier 1 capital.