With the one-year deadline for implementing new Basel banking rules looming, Canada's model for implementing so-called nonviability contingent capital is attracting widespread interest from global regulators.
Canada's banking regulator, the Office of the Superintendent of Financial Institutions, in mid-August issued its final advisory on how it expects banks here to satisfy new capital rules by the Basel Committee on Banking Supervision. The rules require all banks to be able to absorb losses in the event of a failure, using a cushion of capital mandated by regulators.
The regulator has taken a high-profile role in coming up with ways to practically implement the Basel rules. The OSFI has also been regarded as influential because Canada's banking system emerged from the financial crisis without the need for taxpayer bailouts. "Canada is showing us the leadership," said Benjamin Katz, managing director at HSBC Securities USA Inc. in New York.
Part of the mechanism for dealing with a banking failure is a requirement to eventually convert all of its debt into nonviability contingent capital. NVCC is debt or preferred shares that converts to equity when a bank's capital ratios or other metrics hit certain trigger points.
Basel, which sets international bank capital rules that take effect Jan. 1, 2013, permits Group of 20 countries to require either a contractual or statutory approach to NVCC procedures.
Canada has adopted the contractual approach. In other words, terms and conditions of when NVCC converts to equity are included in a contractual agreement between an issuer of debt and investors.
The statutory approach allows a regulator to impose NVCC conversion. But it is subject to peer review by other jurisdictions, meaning there are more hoops to jump through, analysts said.
Gilbert Menard, the OSFI's senior director, capital division, confirmed that the regulator has spoken with other jurisdictions about its advisory, but declined to comment further. "There are still a number of jurisdictions that aren't sure if they are going to do a contractual or statutory approach, and some of them have been waiting to see what others do," Menard said.
The Bank of England is looking to replicate the Canadian model, people familiar with the matter said. Though it has not yet announced its official position, the U.K. in two speeches by senior central bank officials tipped its hand that it favors the contractual approach, provided that the triggers can be worked out. The Bank of England declined to comment.
China, Spain, the Netherlands and Switzerland are also looking at Canada, people familiar with the matter said.
No G-20 country has yet announced its intention to go down the statutory route. However, the U.S. could well buck the Canadian model. Under the Dodd-Frank Act, the U.S. has the power to take control of failing financial firms and wind them down through an orderly resolution process. The U.S. Federal Reserve is expected to issue soon its proposed rule on enhanced prudential standards that would apply to large bank holding companies and systemically important nonbank financial firms.