Measure Could Eliminate Key Source of Capital for Banks

Financial institutions are sounding the alarm over an amendment to the Senate bill that many initially deemed harmless but now see as threatening a key source of capital: trust-preferred securities. Unanimously approved last week, the amendment would give regulators the power to impose strict risk- and size-based capital standards on banks and their holding companies as well as nonbank financial firms identified as systemically risky. The measure was not debated and few observers paid much attention to it as they focused on other aspects of the bill, such as a controversial interchange amendment. But the provision by Sen. Susan Collins, R-Maine, is fueling uncertainty among investors and others, who argue it would eliminate the use of trust-preferred securities as a form of Tier 1 capital for bank holding companies. "If adopted, the language would force a U.S. capital standard for all banks--not just big ones--far more stringent than that now under discussion," said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. While the language is ambiguous, the amendment defines capital requirements for holding companies by referring to a 1991 law detailing prompt corrective action standards, which do not include trust-preferred securities in the ratio of Tier 1 capital to total assets.