Our Files: P2215-2-1, P2215-3
January 28, 1999

To: All Banks
Federally Regulated Trust and Loan Companies

Subject: Target Capital Ratios of 7% and 10%

The purpose of this letter is to formally establish risk-based capital targets for deposit-taking institutions (DTIs) in Canada. OSFI's capital rules are meant to provide a cushion for losses from a number of risks, including credit risk, market risk, liquidity risk, concentration risk and operational or business risk. Innovations in the industry, consolidation trends, international developments and recent global market events highlight the need for institutions to maintain a strong capital base. Current capital requirements do not explicitly measure all individual risks undertaken. Therefore, OSFI wants to ensure that DTIs maintain sufficient capital above regulatory minimums to support the risks they undertake.

OSFI believes that all Canadian DTIs should attain a risk-based tier 1 capital ratio of at least 7% and a total capital ratio of at least 10%. For some institutions, however, higher target levels will be appropriate. The 7% and 10% targets for the industry reflect the factors listed above, as well as capital levels of internationally active banks in other jurisdictions and the inclusion of general allowances in tier 2 capital.

OSFI expects that all Canadian DTIs can achieve these targets by their 1999 fiscal year end. Please advise your relationship manager in the event that you anticipate difficulty in achieving these targets within the specified time frame.

John R. V. Palmer
Superintendent