The Office of the Superintendent of Financial Institutions is releasing a guideline which provides banks and federally regulated trust and loan companies with information on the regulatory framework for general allowances for credit risk. It is also raising the limit on risk exposure.

In a letter from superintendent Nicholas Le Pan, OSFI says it is raising the ceiling on general allowances for credit risk to be included in tier 2 capital from 0.75% of risk-weighted assets to 0.875%.

The ceiling of 0.75% recognized, in part, the impact on capital quality of future income tax assets. The ceiling is being increased to reflect recent changes in federal and provincial tax rates.

The new guideline is effective for fiscal years commencing after Nov. 1, 2001, with the exception of the increase in the ceiling for capital treatment, which is effective immediately.

The guideline replaces the draft policy statement on the issue. It confirms the requirement that banks and trust and loan companies must maintain adequate general allowances to recognize credit losses within their portfolios. It addresses a number of outstanding issues from the 1997 draft, including measurement guidance, disclosure requirements and criteria for assessing supporting methodologies.

Practices in this area are evolving rapidly, so the guideline is seen as transitional and will be revised as necessary to reflect industry best practice and international developments in credit capital requirements, accounting and disclosure.