OSFI reinforces guidance on Additional Tier 1 and Tier 2 Capital Instruments

OSFI is issuing this statement to reinforce guidance around the design of the regulatory treatment of Additional Tier 1 and Tier 2 capital instruments.

Canada’s capital regime preserves creditor hierarchy which helps to maintain financial stability.

If a deposit-taking bank reaches the point of non-viability, OSFI’s capital guidelines require Additional Tier 1 and Tier 2 capital instruments to be converted into common shares in a manner that respects the hierarchy of claims in liquidation. This results in significant dilution to existing common shareholders.

Such a conversion ensures that Additional Tier 1 and Tier 2 holders are entitled to a more favorable economic outcome than existing common shareholders who would be the first to suffer losses. These capital requirements are administered by OSFI as well as the conversion of the Additional Tier 1 and Tier 2 capital instruments.

Additional Tier 1 and Tier 2 instruments are and will remain an important component of the capital structure of Canadian deposit-taking banks.

Canadians can be confident that we have a sound and effective regulatory and supervisory foundation that works to protect depositors and creditors.