Changes made in November 2003 to the Canadian Institute of Chartered Accountants Handbook look to be neutral for financial institutions according to Standard & Poor’s Ratings Services.

Based on its review of the CICA Handbook, S&P will not be making any changes to the ratings or outlooks on the Canadian banks or insurance companies.

With the changes, hybrid securities will need to meet specific accounting requirements before they are given Tier 1 capital treatment by the regulators. Any new regulatory hybrid capital instruments issued by the Canadian banks and life insurance companies will be subjected to a more comprehensive review by S&P, given the change in accounting rules. However, S&P has grandfathered existing Tier 1 hybrid capital instruments and will continue to include them in its calculation of core capital.

These decisions follow an advisory published by the Office of the Superintendent of Financial Institutions. In this advisory, OSFI announced that Tier 1 preferred shares and trust-preferred securities outstanding as of January 31, would be grandfathered. But, the regulator will not likely treat any such instrument issued after January 31, as Tier 1 capital.

S&P says it generally views these securities as equity-like, but given OSFI’s likely position, it will no longer view as equity these types of instruments that are not already grandfathered. S&P says that it continues to view OSFI as the ultimate arbiter for the Canadian bank and life insurance sectors.

For any new preferred shares to be recognized as Tier 1 capital by OSFI, they will need to be accounted for as equity capital under GAAP and meet all other conditions for Tier 1 treatment by the Canadian regulator. S&P’s position on these new instruments is expected to mirror that of the regulators.

Although the new rules represent a significant impediment for Canadian banks and life insurance companies planning to issue cost-effective Tier 1 regulatory capital, most of the companies that were planning to issue hybrid securities have already done so, it says.

OSFI is currently reviewing its criteria for assessing the treatment of any new preferred shares and trust-preferred securities that have conversion features and could be accounted for as liabilities, to determine whether they would be eligible for innovative Tier 1 or Tier 2 capital treatments. In light of these changes, S&P will be reviewing any new Canadian regulatory hybrid capital instruments with a higher level of scrutiny, and will be providing commentary where appropriate, it reports.