Thursday, May 31, 2012

House Panel Approves Legislation Adjusting Date of Asset Test for Banks Counting Trust Preferred Securities as Tier 1 Capital

The House Financial Services Committee approved legislation, HR 3128, amending Section 171 of the Dodd-Frank to adjust the date in which consolidated assets are determined for the purpose of exempting trust preferred securities of smaller financial institutions from Tier 1 capital deductions. The vote was 35-15. Section 171, inserted into Dodd-Frank through an amendment offered by Senator Susan Collins (R-ME), enhances bank capital and ensures that banks have adequate capital cushions.

Section 171 eliminated Tier 1 capital treatment for trust preferred securities for all financial institutions with $15 billion or more in assets. However, financial institutions with less than $15 billion in assets (as of December 31, 2009) were allowed to continue counting trust preferred securities as Tier 1 capital. Trust preferred securities are part equity and part debt and are usually issued by a bank holding company through a special purpose entity

HR 3128 would adjust the date that regulators must use for determining if a bank holding company falls under the exemption in the Collins Amendment which allows them to use trust preferred securities from December 31, 2009 to March 31, 2010. In order to be granted the exemption, the financial institution must have assets under $15 billion on the statutory date. According to Rep. Michael Grimm (R-NY), the sponsor of the legislation, this change will ensure that smaller financial institutions are not needlessly robbed of capital, which would have a direct impact on their lending capacity. Rep. Carolyn Maloney (D-NY), in supporting HR 3128, noted that it does not change any of the substance of the Collins Amendment.

Chairman Spencer Bachus (R-AL) said that HR 3128 is designed to correct an unintended consequence of the Dodd-Frank Act. In supporting HR 3128, Ranking Member Barney Frank (D-MA) said that the FDIC has no position on the bill, nor does any other financial regulator.  Rep. Frank assured that the bill provides a temporary fix, and does work a permanent reduction in capital requirements.

Representatives Maloney and Grimm noted that HR 3128 is designed to ensure that the Collins Amendment does not punish smaller banks that historically had assets under $15 billion but, in an act of prudence, for a brief period during the financial crisis took on extra assets to enhance stability and went over $15 billion. HR 3128 is a minor adjustment of the date for looking at the assets of a financial institution. Rep. Gregory Meeks (D-NY) noted that the retroactive date of the Collins Amendment had an unintended significant consequence on smaller financial institution, and HR 3128 corrects that.