Capital Composition limits

exampasserexampasser
in OSFI.MCT

In the source text it says: "In cases where capital instruments qualifying under one of either category B or C exceed the limits, the capital in excess of the limits will not be considered in the calculation of capital available. In cases where capital instruments both under category B and category C are in excess of the prescribed limits, the greater value of the two excess amounts will be excluded from capital available. In doing so, insurers must first fully exclude excess capital under category C, followed by excess capital under category B."

I think what this is implying is that the greater amount of access under category B or C should be excluded, thus insurers must exclude excess capital under C first.

In the battle cards example provided though, it is assumed that the greater of either (B+C) or C excesses should be excluded. I don't think this is what the text means

Comments

  • Staff-T1Staff-T1

    Hi,

    Which BC are you referring to? I believe this is just a rehash of what is mentioned in the earlier paragraph:

    • The sum of capital instruments meeting the qualifying criteria under category B and
      category C will not exceed 40% of total capital available, excluding accumulated other
      comprehensive income;

    • Capital instruments meeting the qualifying criteria under category C will not exceed 7%
      of total capital available, excluding accumulated other comprehensive income

    What it is saying is the greater amount of the 2 aforementioned points should be excluded. I believe there is nothing wrong with the BC and it is in line with the source.
    please see Spring 2015 Q23 for an example of this in action.

  • rlohoidarlohoida

    Hi, for this sentence:
    "...In doing so, insurers must first fully exclude excess capital under category C, followed by excess capital under category B."

    I believe it refers to the case where excess of B and C is greater than excess of C.
    In this case, for example:
    Excess of B and C = 5000
    Excess of C = 3000
    B = 10000
    C = 6000
    We need to exclude 5000 that are coming from capital C without touching capital B at all. Is this what the sentence above refers to?

    Thank you!

  • Staff-T1Staff-T1

    Yes I believe so. Although it is strange that they specifically want to remove capital under category C first. Do you know why this is the case @graham ? I guess if you remove capital under category B first you could still fail the second condition Cap C > 0.07*(total cap - AOCI)?

  • adipelinoadipelino

    I know this would make a difference in practise (whether you're removing category B or Capital), but would the total deduction be the same either way? @Staff-T1 @graham

  • grahamgraham

    I think the total deduction would be the same. The total is just the max of the two separate excess calculations. But I don't know why Category C is excluded first. Maybe because the amount is always smaller. The source text doesn't explain.

    I also think this procedure for Capital Composition Limits may have other unexplained issues. For example, here is an example of an initial calculation:

    The procedure then seems to say to first reduce Category C by 1.50 and then Category C by the remaining excess (10.00 - 1.50) = 8.50. (Note that you would get a different amount of Category C and Category B capital if you had first reduced B and then C.) But in any case, you may end up with a situation as shown in the example below where the capital composition limits are still exceeded. So do you do this procedure iteratively until no excesses remain? If so, does the procedure ever terminate? Could you be left with 0 capital available remaining if you keep having to reduce capital available but then keep ending up with excess capital in B & C?

    I wouldn't overthink this. Just do the first iteration of the procedure as explained in the source.

Sign In or Register to comment.