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CAPITAL-RAISING TOOL MAY LIVE AFTER ALL: In the March edition, we warned that accounting rule changes appeared to put the trust-preferred securities that many banks have benefited from at risk. Trust-preferred securities have been attractive because they can be counted as Tier 1 capital (the prime type of capital), like common stock, but are treated like debt, and therefore, the interest costs of offering it are tax deductible.
In early May, the Federal Reserve Board proposed a rule on this, a sort of compromise measure that would retain the Tier 1 treatment for trust preferred. However, the rescue would come with stricter limits and standards. Notably, after a three-year transition period, trust preferred and certain other forms of capital could only be counted for up to 25% of Tier 1, net of goodwill, for community banking institutions. Netting goodwill is expected to make things a bit rougher for institutions that are active acquirors of other institutions. Importantly, bank holding companies would still have to count trust preferred in their regulatory reports as is required by the new generally accepted accounting principles (GAAP).
"The Federal Reserve is not bound by GAAP accounting in its definition of Tier 1 or Tier 2 capital because these are regulatory constructs designed to ensure the safety and soundness of banking organizations, not accounting designations designed to ensure the transparency of financial statements,² the agency commented.
The change in the proposal "won't affect the majority of banks that much," according to Michael Walker, managing director at investment bankers Raymond James Financial, Chicago. "For most community banks, you won't see substantial change in the treatment of trust preferred."
The agency is accepting comments on the proposal until July 11. To read more, click here for the official press release and click here for the actual proposal
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