The Federal Reserve Board (the “FRB”) has issued an interim final rule which amends its regulatory capital regulations for bank holding companies to include perpetual preferred stock issued to the U.S. Treasury Department (“Treasury”) under the new Capital Purchase Program as Tier 1 capital. The Capital Purchase Program was recently announced by Treasury under the authority recently granted to it by the Emergency Economic Stabilization Act of 2008 and was the subject of a priorKilpatrick Stockton Legal Alert dated October 14, 2008.

Under the Capital Purchase Program, the Treasury will provide capital to an eligible banking organization, including bank holding companies, by purchasing newly issued senior perpetual preferred stock (the “Senior Perpetual Preferred Stock”) of the banking organization. The Senior Perpetual Preferred Stock will provide for cumulative dividends. Treasury expects the issuance and purchase of the Senior Perpetual Preferred Stock to be completed no later than December 31, 2008.

To be eligible for the Capital Purchase Program, the Senior Perpetual Preferred Stock must include several features which are designed to make it attractive to a wide array of generally sound banking organizations and to encourage such banking organizations to replace the Senior Perpetual Preferred Stock with private capital once the financial markets return to more normal conditions.

In particular, the Senior Perpetual Preferred Stock will have an initial dividend rate of five percent per annum, which will increase to nine percent per annum five years after issuance. In addition, the stock will be callable by the banking organization at par after three years from issuance and may be called at an earlier date if certain conditions are met. In all cases, the redemption of the Senior Perpetual Preferred Stock will be subject to the approval of the banking organization’s appropriate federal bank regulatory agency which, for bank holding companies, is the FRB.

The FRB recognized that some features of the Senior Perpetual Preferred Stock, such as the dividend step-up rate, are inconsistent with the usual requirements for inclusion of cumulative preferred stock in Tier 1 capital. Moreover, the FRB noted that the amount of cumulative preferred stock typically includable in a bank holding company’s Tier 1 capital is limited to 25% of the total Tier 1. However, the newly issued interim final rule provides that the Senior Perpetual Preferred Stock will be includable without limit in a bank holding company’s Tier 1 capital.

The FRB took that position in order to facilitate the purposes of the Capital Purchase Program, including the promotion of the stability of financial markets and the banking industry as a whole. Another factor deemed important was the requirement for FRB approval of any redemption of the Senior Perpetual Preferred Stock.

The FRB noted that it expects bank holding companies that issue Senior Perpetual Preferred Stock to hold capital commensurate with the level and nature of the risks to which they are exposed and to incorporate the dividend features of the Senior Perpetual Preferred Stock into their liquidity and capital funding plans.

The interim rule was effective on October 17, 2008; however, the FRB is accepting comment for 30 days and may amend the rule based on comments received.