Capital Rule Changes Will Affect Some Regional Banks
The combination of TARP and TruPS will cause problems for a few banks.
As a part of the Dodd-Frank Financial Reform and Consumer Protection Act, banks are losing the ability to issue trust preferred securities (TruPS) that qualify as Tier 1 capital for regulatory purposes. The "Collins Amendment" responsible for the change applies only to banks with more than $15 billion in assets and does not begin to phase in until 2013. In our opinion, this change is likely to hit the worst-off large regional banks the hardest.
TruPS are a hybrid form of capital. For regulatory purposes, most TruPS currently qualify as Tier 1 capital. For tax purposes, TruPS are currently treated like debt, allowing a tax deduction for the interest payments. When the rules first changed in 1996 to give the securities Tier 1 status, banks seized the opportunity and issued the long-dated securities. As debt, TruPS are rather expensive, but they are a relatively inexpensive form of regulatory capital. However, once the new rules are in place, TruPS will not qualify as regulatory capital and instead will simply be expensive debt. Consequently, the Collins Amendment will likely spur the banks to call their TruPS and replace them with common or preferred equity, a more expensive form of regulatory funding.
Jaime Peters does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.