New regulations on Contingent Capital for banks in Canada

Fitch: Canada Moving Ahead on Bank Contingent Capital Plan

Fri May 17, 2013 11:44am EDT

(The following statement was released by the rating agency) CHICAGO, May 17 (Fitch) Canadian bank regulators have moved ahead of their global counterparts in specifying the terms under which certain types of contingent capital could be converted to common equity in a bank stress scenario. New forms of nonviable contingent capital (NVCC) instruments will be issued by Canadian banks, but Fitch Ratings will continue to look to core equity capital as the primary source of loss-absorbing protection for creditors in a bank stress scenario. Canada's Office of the Supervisor of Financial Institutions (OSFI) has taken the position that explicit triggers for the conversion of subordinated debt and preferred stock to common equity should be incorporated into documents in order to be included in Tier 1 and total capital ratios. These new instruments will include NVCC triggers that make clear the conditions under which "bail-in" debt and preferred stock will be converted when Canadian banks require more capital and regulators deem them "nonviable." Our approach to notching ratings for banks' subordinated bond and preferred stock issues has not been changed as a result of the introduction of these standards. Fitch revised its global criteria on regulatory capital securities in December 2011 in anticipation of banks issuing Basel III compliant capital instruments. Accordingly, we will continue to notch subordinated debt issue ratings, generally by one notch, relative to the bank's stand-alone assessment, which is encompassed in the viability rating (VR), while preferred stock will be rated five notches below the VR. OSFI officials noted again this week at investor conferences that the NVCC regulatory framework offers a clear and unambiguous view of how recapitalization of banks can take place in a distress scenario. By requiring explicit contractual terms detailing triggering events for conversion of "bail-inable" securities, OSFI believes that the need for weakly capitalized banks to receive taxpayer support in such a scenario will be reduced. The Canadian regulator expects to provide final guidance on the size of the resolution buffer to be maintained by banks in the next few months. The amount of outstanding capital that is not NVCC-compliant will be reduced over the next few years as Canada moves toward full implementation of Basel III capital standards. As NVCC-compliant security structures are finalized, Fitch will focus on the potential for unintended consequences resulting from the addition of new types of NVCC-compliant securities in bank capital structures. Contact: Justin Fuller, CFA Director Financial Institutions +1-312-368-0257 Bill Warlick Senior Director Fitch Wire +1-312-368-3141 Fitch, Inc. 70 W. Madison Chicago, IL 60602 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.