The Capital Adequacy Requirements (CAR) guidelines for federally regulated deposit-taking institutions are based on the capital adequacy framework set out in the 1988 BIS Capital Accord. The 1988 Accord permitted general allowances up to 1.25 per cent of risk-weighted assets in Tier 2 Capital. This was based on the concept that such “reserves” were freely available to meet losses not currently identified.

A letter to the industry dated November 1999 confirmed that OSFI was prepared to permit general allowances for credit risk to be included in Tier 2 Capital to a maximum of 0.75 per cent of risk-weighted assets. The ceiling of 0.75 per cent recognized in part the impact on capital quality of future income tax assets that arise from anticipated levels of general allowances, without making an explicit deduction for future income tax assets. The ceiling is being increased to 0.875 per cent, effective October 31, 2001, to reflect recent changes in federal and provincial tax rates.

As outlined in Guideline C-5, General Allowances for Credit Risk, the inclusion of general allowances in capital is subject to the prior written approval of OSFI, which is conditional on an institution complying with the requirements of this guideline. Guideline C-5 is available on OSFI's Web site under the Publications section. Please note that institutions that have applied and have been accepted need not apply a second time.