Reference: Guideline for Banks, Guideline for Trust and Loan Companies
Our File: P2215-2
July 21, 1999

Subject: Guideline A, Capital Adequacy Requirements

In April OSFI wrote to the industry proposing changes to the capital treatment of investments in unconsolidated subsidiaries and intangible assets. We are now writing to outline the final rules for intangible assets.

Intangible assets in excess of 5% of gross tier 1 capital are to be deducted from tier 1 capital.

Deduction of intangible assets in excess of 5% of gross tier 1 capital as at June 30, 1999 will be phased in equally over 60 months (five years). For example, a deposit taking institution (DTI) with an October 31 year end and with intangible assets that exceed the 5% limit by $100 would deduct the following amounts from tier 1 capital:

Fiscal Year        Amount Deducted
ending in

1999        $7 (4 months)

2000        27

2001        47

2002        67

2003        87

2004        100

Intangible assets that exceed 5% of gross tier 1 capital are being deducted because of questions about:

• the reliability and predictability of any cash flows associated with these assets and the degree of certainty that can be achieved in periodically determining the assets' useful life;
• the existence of an active and liquid market for these assets; and
• the feasibility of selling these assets apart from the DTI or from the bulk of the DTI's assets.

The new rule addresses these concerns and brings Canadian rules more closely in line with capital rules in other jurisdictions.

The final rule for the treatment of investments in unconsolidated subsidiaries will require that these investments be deducted 50% from tier 1 capital and 50% from tier 2 capital. We are planning to put this rule into place but want to coordinate it with the treatment of investments in insurance subsidiaries. A proposal on how to determine the amount of the investment in insurance subsidiaries to be deducted from capital will be sent out shortly under separate cover. Revisions to the relevant pages of Guideline A,Capital Adequacy Requirements will be made once the treatment of insurance subsidiaries has been finalized.

Federally regulated deposit taking institutions should address any questions to the irrelationship managers. Others may contact Aina Liepins, Capital Division at (613) 998-5606 or by fax at (613) 998-8466.

John R. Thompson
Deputy Superintendent