Collins Pulls Back on Proposal to Ban TruPS Capital After Bankers Complain

In the face of opposition from bankers, U.S. Senator Susan Collins has agreed to ratchet back a proposal that would prevent banks from using so-called trust- preferred securities to appear better capitalized.

The Federal Deposit Insurance Corp. helped craft the language before Collins inserted it in the Senate’s financial- overhaul bill last month, according to a person close to the discussions who spoke on condition of anonymity, and FDIC Chairman Sheila Bair publicly endorsed the amendment in a May 7 letter to Collins.

As originally introduced by Collins, the provision would ban banks from counting trust preferreds, known as TruPS, as Tier 1 capital, a regulatory gauge of a lender’s ability to withstand losses. TruPS are issued after a bank-holding company sells debt to an off-balance-sheet trust; bank supervisors have complained that they’re too weak for capital purposes.

Collins, a Maine Republican, said today that lawmakers may have to grandfather existing TruPS or implement the ban over time.

“Clearly we need some sort of phase-in,” she told reporters.

FDIC officials have said previously that they endorsed a phase-in. “With respect to the Collins amendment, the FDIC supports grandfathering or providing a transition period for TruPS,” FDIC spokesman Andrew Gray said today. “We’ve publicly acknowledged the need for special transition rules.”

Banks couldn’t use their TruPS as capital during the financial crisis because deferring the dividends would have been seen as weakness and could have led to bank runs.

“It contributes to a downward spiral,” said George French, the FDIC’s deputy director for policy in the division of supervision and consumer protection.

600 Banks

About 600 banks with less than $10 billion in assets hold the securities as Tier I capital, said Camden Fine, president of the Independent Community Bankers of America. The amendment should be withdrawn or at the least require that existing trust preferreds be grandfathered, he said.

“This is a raw-nerve issue with any banker that holds trust-preferred securities,” Fine said. “I guarantee you that every banker who holds trust-preferred securities has contacted their representatives and senators on this issue.”

Since last month, lobbyists for the ICBA, a Washington- based trade group representing about 5,000 smaller lenders, have met with House Financial Services Committee Chairman Barney Frank, who is chairman of the committee assigned to negotiate the differences between the House and Senate bills, Senator Tim Johnson, a Democrat from South Dakota and a negotiator, and Representative Luis Gutierrez, an Illinois Democrat whom Frank has recommended to be a negotiator, Fine said.

Collins Staff

They’ve also met with staff for Collins, Senate Banking Committee Chairman Christopher Dodd and Senator Jack Reed, a Rhode Island Democrat.

“Senator Collins will support modifications to address concerns of community banks regarding trust-preferred securities they have issued,” Collins’ spokesman Kevin Kelley said yesterday in an e-mailed statement.

The trust-preferred language is one part of the Collins amendment, which aims to make capital standards uniform for large and small banks.

“The basic principle of requiring bank holding companies to have capital standards that are at least as stringent as those imposed on community banks is one that I remain very firm in supporting,” Collins said today.

The changes Collins is considering are reasonable, said Oliver Ireland, a former Federal Reserve associate general counsel who is now a partner at law firm Morrison & Foerster LLP in Washington.

“I would have been appalled if they hadn’t done something,” Ireland said today in a telephone interview. “Wiping out at any given point in time large amounts of bank capital with the stroke of a pen is very destabilizing.”

The Collins amendment is one of the issues that House and Senate negotiators will need to reconcile as they meet beginning this week to produce a final bill for President Barack Obama’s signature.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

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