Tier 2 capital must satisfy the requirement for non-viability contingent capital (NVCC).
Unlike CoCo bonds, the trigger event of NVCC is dependent on the regulators'
announcement, either from OSFI, or federal/provincial government. Though it sounds like
regulators have a lot of discretion, non-viability is determined based on clearly defined criteria
which would mitigate the chance of discretion. Interestingly, this is more like a low trigger
level, gone concern type of contingent capital compared to the high trigger level, goingconcern
contingent capital required for GSIB by BCBS.
(6) Under the Solvency II framework, contingent capital with appropriate feature can be
classified as ancillary own fund9 (AOF). AOF can be used to meet the solvency capital
requirement (SCR) but not the minimum capital requirement (MCR). However, according to
the directive, the total amounts and the amount for each AOF item are subject to supervisory
approval. The recoverability, legal form, and any past exercise need to be taken into account
when determining the amount qualified for AOF.
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(7) In August 2010, National Association of Insurance Commissioners (NAIC) Securities
Valuation Office (SVO) reported on contingent capital securities. Considering that there is no
agreement on the design of the trigger event, the task force did not draw any conclusion but
decided to continue monitoring the development of contingent capital.
It is clear that contingent capital is one of the priorities of regulators regarding regulating SIFI but
there is still work that needs to be done for further assessment and refinement. Regulators under
different jurisdictions may also have different opinions regarding the details.