Standard & Poor’s Ratings Services will not be including hybrid securities that several Canadian banks have recently issued in its calculation of their capital ratios.

In a report published on Thursday, S&P said that the new Tier 1 hybrid securities “fall short of the standards for inclusion as capital in our adjusted tangible equity measure.”

It explained: “We are concerned about the substantial interest rate step-up combined with the high degree of complexity in the coupon payment deferral and subordination mechanisms in the issues. We believe complexity heightens the risk of unforeseen complication. Rate step-ups create an incentive to redeem the issue, which undermines its permanence.”

The decision does not affect the banks’ credit ratings. And, S&P adds, that these securities are not completely excluded from its capital analysis, “particularly to the extent the regulator includes them, as we also look at the regulatory capital levels along with our own metrics of capital.”

“During times of stress in particular, our focus on regulatory capital ratios increases, as ultimately it’s the regulatory ratios that the regulator looks at when deciding whether to take control of a financial institution,” it says.