ICBA - Publications - ICBA Urges Fed to Continue Trust Preferred Capital Treatment

ICBA Urges Fed to Continue Trust Preferred Capital Treatment

JANUARY 2, 2004


ICBA Urges Fed to Continue Trust Preferred Capital Treatment

In a recent letter to Federal Reserve Chairman Alan Greenspan, ICBA urged the Fed to continue its policy of allowing trust preferred securities to be part of a bank holding company's Tier 1 capital, despite recent accounting changes.

Since 1996, the Federal Reserve has permitted trust preferred securities to make up 25 percent of Tier 1 capital. However, accounting changes in FASB Interpretation No. 46 (FIN 46), concerning the consolidation of variable interest entities, has raised speculation that the Fed might change this policy.

Under FIN 46, if the trust issuing the securities is not consolidated with the bank holding company, the bank would record the trust preferred securities as junior subordinated debt on the balance sheet rather than as a minority interest in consolidated subsidiaries. As recently as two weeks ago, the SEC reportedly told a bank holding company that trust preferred securities should not be consolidated on the public company's balance sheet.

In July, when FIN 46 was still pending, the Fed issued a supervisory letter directing bank holding companies to continue to report trust preferred securities as a minority interest in consolidated subsidiaries-and count them towards Tier 1 capital-pending further guidance from the Fed.

However, in a Dec. 15 Federal Register notice, the Fed proposed to change the FR-Y9C report and require trust preferred securities to be reported as "other liabilities" to mirror the new GAAP treatment. The same notice says BHCs should continue to include trust preferred securities in Tier 1 capital, but that the Fed will review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further guidance.

Until the Fed makes a determination regarding regulatory capital treatment of trust preferred securities, community bankers face uncertainty.

ICBA Letter. In its letter to the Fed, ICBA stressed that a change in the regulatory capital treatment of trust preferred securities would have an immediate adverse impact on the ability of community banks to expand their capital and on their ability to lend.

ICBA pointed out that despite the introduction of pooled trust preferred offerings, many smaller community bank holding companies have only recently gained access to the trust preferred securities market so that a sudden change in regulatory policy would be unreasonable and unwarranted.

Furthermore, while large banks that have issued trust preferred securities might be able to adjust to a change in policy, community bank holding companies that have already included trust preferred securities as part of their Tier 1 capital may have to reduce their capital and their expansion and lending activities.

ICBA also noted that a change in GAAP accounting treatment for trust preferred securities does not mean that the Fed has to change its regulatory capital standards to make the two consistent. "Trust preferred securities should be included as part of Tier 1 capital because they exhibit the characteristics of preferred stock and not of debt," ICBA said in its letter. "In short, the underlying economics of trust preferred securities are not affected by a technical accounting change."

ICBA also stressed that if there is a policy change, all holding companies that have issued trust preferred securities should be grandfathered so that they may continue treating these securities as Tier 1 capital, or other accommodation should be made for community banks.

Need More Info? ICBA Securities-which has a trust preferred securities program tailored for community banks-has prepared a more detailed advisory on this issue and the state of play with the Fed. It is available on ICBA's Web site, www.icba.org. For more information about the ICBA Securities program, call (800) 422-6442.