The Federal Reserve Board on Monday ruled that bank holding companies may count a relatively new type of preferred stock as Tier 1 capital.
The securities, which go by the monickers Monthly Income Preferred Stock and Trust Originated Preferred Securities, are issued by special-purpose subsidiaries. The proceeds are then lent to the parent company.
The Fed imposed several constraints. The debt must be long-term and deeply subordinated. Also, the banking company must be able to skip dividend payments for at least five years before the stock holders qualify for rights as creditors of the company.
The market has issued about $25 billion of this cumulative preferred stock during the past several years. Companies prefer this type of security because it qualifies for tax benefits. Banking companies, however, haven't issued these instruments because regulators wouldn't count them toward Tier 1 capital.
The Fed's ruling applies only to holding companies. The Basel Committee's international agreement on capital standards prohibits banks from including a cumulative preferred stock in Tier 1 capital.
Industry officials praised the decision. "We are certainly glad they are extending the alternatives banks have to raise capital," said Robert Strand, senior economist at the American Bankers Association. "Banks have been very aggressive in raising capital as seen by the fact that 98.5% of the industry is well-capitalized."
Tier 1 capital, also known as core capital, includes all common and preferred stock issued by a banking company. Up to a quarter of Tier 1 capital may include perpetual preferred stocks, which means they don't have maturity dates. The cumulative preferred stock qualifies as a perpetual preferred stock.
The Fed urged banks considering this type of security to check first with their reserve bank.
