WASHINGTON — 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.
"Prompt corrective action rules bar banks from counting trust-preferreds toward Tier 1. So the inference is that regulators would be able to impose the same limit on holding companies," Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital, wrote in a note to clients.
If trust-preferreds were not counted as Tier 1 capital, publicly owned bank holding companies' capital ratios on average would fall more than 2 percentage points, according to Seiberg. Among the largest banks, Capital One Financial Corp. would see its Tier 1 capital drop from 13.75% as of Dec. 31, to 10.62%, if trust-preferreds were not included, according to statistics from Washington Research Group. Bank of America Corp.'s Tier 1 ratio would drop from 10.4% to 8.81%, and Wells Fargo & Co.'s ratio would drop from 9.25% to 7.37%.
Industry representatives have other concerns as well. Although Collins said after the amendment passed that she intended for the new standards to apply only to systemically important firms and to be phased in over time, her amendment does not include those limitations. As it stands now, the provision would force all bank holding companies to comply immediately once the law was enacted.
In a brief interview Tuesday, Collins said those matters would be addressed before the bill is passed, which could be as early as this week. "There's some technical issues now that it's been adopted," she said. "It would have been more helpful if it would have been raised beforehand. We're working through those."
Still, Collins did not address whether she intended to eliminate trust-preferred securities and her office did not respond to requests for comment on that question.
Some bankers said they were optimistic the amendment would be changed before a final bill is enacted. "We're hopeful that rational heads prevail and that if that does go forward, there would be some grandfathering or some transition period before it would be effective," Daryl Bible, BB&T Corp.'s chief financial officer, said on a conference call with investors Tuesday. "We're hopeful that this trust-preferred piece, best case, is something that's workable and maybe even goes away at some point, but we'll see how that works out."
(BB&T's Tier 1 capital would drop from 11.48% as of Dec. 31 to 8.69% if trust-preferreds were excluded, according to Washington Research Group.)
If enacted, the amendment would force bank holding companies to either quickly raise new capital or dramatically scale back their activities, according to an industry source, who estimates there is close to $130 billion in trust-preferred securities in the market.
Satish Kini, who co-chairs the banking group at Debevoise & Plimpton LLP, said that even if the Collins provision is watered down, another Basel accord is almost certain to force large holding companies to raise capital by issuing more common voting stock or restructuring their activities.
"One alternative is to raise capital, and the other alternate alternative is to sell off assets so the banking organization has less need for capital because it is of smaller size," he said. "Capital-intensive businesses might be the ones that get divested."
Petrou said the amendment is getting ahead of the international effort to update bank capital standards, and could even go beyond the pending Basel III proposals.
The amendment also would ensure than banks with assets of more than $250 billion would need to meet capital requirements at least as strict as those applying to smaller banks. "It makes no sense that the capital and risk standards for our nation's largest financial institutions are more lenient than those that apply to smaller depository banks," Collins said in a statement last week.