Canada: Financial Institutions Experience Slower Activity In Capital Markets

Last Updated: August 25 2010
Article by Blair W. Keefe

Originally published in National Banking Law Review, vol. 29, no. 4 | August 2010

After unprecedented capital raising in 2008 and 2009,1 capital market activity for Canadian financial institutions was slow in the first part of this year.2 There were a number of reasons for the decreased activity. First, Canadian financial institutions already have capital ratios far in excess of historical norms and the minimum requirements of the Office of the Superintendent of Financial Institutions ("OSFI").3 Second, significant uncertainty exists about what instruments will qualify for capital in the future as a result of the proposed new capital rules released by the Basel Committee of Banking Supervision in December of last year (known as the "Basel III capital rules"). Third, no significant merger and acquisition activity requiring new capital raising occurred in the first part of the year, partly because of the uncertainty regarding the Basel III capital rules.

The deadline for comments on the Basel III capital rules was April 16, 2010, and more than 250 submissions were received.4 Although most of those submissions agreed with the need to increase the quantity and quality of capital, many submissions indicated that the proposals went too far and should be substantially relaxed. In April, Canadian banks provided a quantitative impact study to OSFI on the implications of the proposed changes for individual institutions. And OSFI submitted data from the study to the Basel Committee in mid-May. Although the submission is confidential, we understand that the Basel III capital rules would have a significant negative impact on the existing capital ratios of the Canadian banks; the data will be analyzed, together with the results from other jurisdictions, and the preliminary findings will be presented to the Basel Committee in July. It is then proposed that the Basel III capital rules will be finalized by the end of this year and implemented, depending on economic conditions, by the end of 2012.

We expect that capital market activity will increase later in the year and early in 2011 for several reasons. First, as it becomes clearer what will qualify as capital, institutions may be willing to issue capital before the final rules are released. Second, OSFI has advised financial institutions that any material acquisitions must be funded with new equity issuances — and the Canadian banks continue to look at a number of opportunities, particularly in the United States, where many sales of troubled banks are supported by the Federal Deposit Insurance Corporation. Third, OSFI has recently confirmed publicly5 that non-cumulative dividend reset preferred shares as currently structured in Canada would be compliant with the Basel III capital rules because they do not contain incentives to redeem. In addition, Scotiabank's recent successful offering of C$265 million of such preferred shares with a coupon of 3.85 per cent is attractive for Tier 1 capital.6 Similarly, CIBC's recent C$1.1 billion offering of subordinated debt with a coupon of 4.11 per cent is attractive for Tier 2 capital.7 However, as that subordinated debt includes a step-up after year 5, it is unlikely to be compliant with the final Basel III capital rules. As a result, the terms of the offering allow CIBC to call the debt before the fifth-year anniversary8 of the issuance upon the occurrence of a "regulatory event" (defined in the prospectus to mean that CIBC has received a notice or advice from OSFI that the instruments no longer qualify as Tier 2 capital).

However, no new offerings of innovative Tier 1 capital will be made because such instruments will not be permitted under the Basel III capital rules.9 It is uncertain how long the existing innovative Tier 1 instruments will be grandfathered when the new rules come into force. This is significant, since Canadian financial institutions currently have over C$20 billion in innovative Tier 1 instruments outstanding and they were products favoured by institutional investors.

Finally, with the uncertainty over the ultimate definition of capital and the quantity of capital that will be required, OSFI has been advising institutions that any material redemption of capital instruments should be funded with new capital issuances. In that regard, the aggregate amount of innovative Tier 1 capital that is scheduled to be redeemed on June 30 or December 31 of this year is C$2.1 billion.

Blair Keefe, a partner at Torys LLP, is head of the firm's Financial Institutions Group. His practice focuses on corporate and regulatory issues relating to financial institutions, including mergers and acquisitions and corporate finance. Blair is repeatedly recognized as a leading banking and financial institutions lawyer in Canada. © 2010 by Torys LLP. Reproduced with permission from Torys LLP.


1 In 2008, the nine largest Canadian financial institutions raised over C$21 billion in regulatory capital, and in 2009 those same institutions raised another C$13.5 billion in capital, according to the FP Infomart deal database.

2 As of May 31, approximately C$2 billion in regulatory capital had been raised, and over half of that came from one offering by CIBC.

3 OSFI has established a minimum of 7 per cent Tier 1 and a minimum of 10 per cent total capital ratio for Canadian banks and a minimum of 150 per cent MCCSR ("Minimum Continuing Capital and Surplus Requirements") for Canadian life insurance companies. As of the first quarter ending in 2010, Canadian financial institutions had the following ratios: RBC: Tier 1 capital is 12.7 per cent and total capital is 13.6 per cent; TD: Tier 1 capital is 11.5 per cent and total capital is 14.8 per cent; Scotiabank: Tier 1 capital is 11.2 per cent and total capital is 13.5 per cent; BMO: Tier 1 capital is 12.53 per cent and total capital is 14.82 per cent; CIBC: Tier 1 capital is 13.0 per cent and total capital is 17.1 per cent; National Bank Tier 1 capital is 12.5 per cent and total capital is 16.1 per cent; Sun Life: 210 per cent MCCSR; Manulife: 240 per cent MCCSR.

4 Submissions have been posted at

5 Draft advisory, May 2010 "Interim Treatment of Capital Instruments," online: www.osfibsif. advisories/ntrcpnstr_e.pdf.

6 Prospectus supplement dated March 31, 2010.

7 Prospectus supplement filed on April 27, 2010.

8 For the early redemption, investors may receive a premium above par based on the Canada yield price.

9 Supra note 5.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.