Alert December 28, 2010

FDIC’s Supervisory Insights Discusses Role of Trust Preferred Securities in BHC’s Capital Structures

The FDIC’s Winter 2010 edition of its publication, Supervisory Insights, which reviews issues related to bank regulatory supervision, includes an article entitled “Trust Preferred Securities and the Capital Strength of Banking Organizations.” The article analyzes the role of trust preferred securities (“TPS”) during the recent financial crisis and concludes, among other things, that the inclusion of TPS in bank holding companies’ (“BHC”) Tier 1 capital enabled BHCs, “as a group, to operate with substantially less loss-absorbing capital than permitted for [FDIC] insured banks.”  The article in Supervisory Insights notes that Section 171 of the Dodd-Frank Act (the so-called “Collins Amendment”) prohibits BHCs (with certain exceptions) from holding TPS (issued on or after May 19, 2010)  as an element of the BHC’s Tier 1 capital.  The article concludes that “moving away from reliance on [TPS] and toward real loss-absorbing capital will be manageable for most institutions, will challenge some, but will in the end result in a stronger U.S. banking industry.”