|
Advisory Committee on Banking Policy
Regulatory Capital Limitations on Liability-Based Capital Instruments
- Investment bankers have found numerous ways to creatively structure debt into regulatory capital over the past decade.
- Once limited to the largest and sophisticated financial institutions, innovative capital instruments such as TPS, REIT preferreds, and SKATES are now being issued by banks and bank holding companies of all sizes.
- In addition, banks are actively investing in these instruments because they offer an attractive yield.
- FASB has issued two accounting standards to more accurately reflect the financial condition and risk profile of public companies. In tandem, these standards would likely require public companies to record innovative capital instruments such as TPS as liabilities.
- The FRB issued a Notice of Proposed Rulemaking concerning TPS and other hybrid capital instruments on May 6, 2004 for public comment due July 11, 2004. Under the proposal, the FRB would: 1) allow the continued inclusion of TPS in the Tier 1 capital of bank holding companies, 2) revise the quantitative limits on the aggregate amount of cumulative perpetual preferred stock, TPS, and minority interests in the equity accounts of certain consolidated subsidiaries to 25% of Tier 1 capital, net of goodwill, and 3) revise the qualitative standards for capital instruments included in regulatory capital. All aspects of the proposal would become fully effective as of 03/31/07. FDIC staff is in the process of drafting a written response to the FRB proposal.
- On 05/7/04, the FDIC provided the FRB, OTS and OCC with a first draft of an Advance Notice of Proposed Rulemaking (ANPR) concerning hybrid capital instruments issued at the bank level for their review and comment. The goal of the ANPR is to: 1) more closely align the regulatory definition of Tier 1 capital with prudent accounting standards and economic capital measures, 2) establish more tangible criteria for measuring the extent to which various capital instruments provide meaningful capital support to a banking institution, 3) establish clear and explicit regulatory limits for various hybrid capital instruments, and 4) provide more informative methods of disclosing key attributes of hybrid capital instruments to the investing public. FDIC staff plans on calling a meeting of interagency staff in coming weeks to solicit their views on our draft ANPR.
| Contacts: | George French | 202/898-3929 |
| | Bill Stark | 202/898-6972 |
| | Jason Cave | 202/898-3548 |
|
