Last week, the Federal Reserve issued a final rule to permit bank holding companies to treat the senior perpetual preferred stock issued to Treasury under the Capital Purchase Program (CPP) as Tier 1 capital. Under the Federal Reserve’s prior rules, a bank holding company would not be permitted to treat preferred stock with a dividend step-up rate as Tier 1 capital and would be limited on the amount of cumulative perpetual preferred that would qualify as Tier 1 capital. The final rule, however, permits bank holding companies to treat the preferred stock as Tier 1 capital, notwithstanding its dividend step-up term. Additionally, under the old rule a bank holding company would only be permitted to include the cumulative perpetual preferred stock in amounts up to 25 percent of Tier 1 capital. The new rule permits bank holding companies to include the entire amount of cumulative perpetual preferred stock issued to Treasury as Tier 1 capital, without regard to the 25 percent limitation. Additionally, the final rule permits a bank holding company to treat perpetual preferred stock issued to Treasury under the Targeted Investment Program, Capital Assistance Program and Asset Guarantee Program as Tier 1 capital by a bank holding company without limit.
The Federal Reserve also issued an interim final rule and request for comment to permit bank holding companies organized as S corporations or in mutual form to treat “the full amount of any new subordinated debt securities issued to Treasury” under the CPP as Tier 1 capital for purposes of calculating the holding company’s risk-based and leverage ratios. The subordinated securities will count toward the limit on the amount of other restricted core capital elements the bank holding company is permitted to include in Tier 1 capital. Finally, under the interim rule, the holding companies may exclude the subordinated securities from treatment as debt for purposes of complying with the Federal Reserve’s debt-to-equity standard under the Small Bank Holding Company Policy Statement. Comments to the interim rule will be due 30 days after official publication in the Federal Register, which is expected to occur this week.